Sept. 4, 2019

Recent IRS audits of Part 135 charter operators highlight the importance of developing and implementing best practices for collecting and remitting federal excise tax (FET) on brokered charter flights.

“The IRS does not provide specific guidance related to which party is responsible for collecting and remitting FET on air transportation when a broker is involved,” said Scott O’Brien, NBAA’s senior director of government affairs. “We often receive questions from the industry about the lines of responsibility for FET when a charter operator is working with a broker, and these questions have become more frequent with the rise of new online booking platforms.”

During recent audits, the IRS has cited Section 4263 of the Internal Revenue Code and elected to strictly enforce those guidelines. Under that section, when air transportation tax is imposed, and not paid at the time payment for transportation is made, the carrier providing the initial segment of the taxable transportation must remit the FET.

According to the recent audits, even if a charter broker is involved, the actual operator of the flight is viewed as providing the transportation, and thus ultimately responsible for remitting the tax.

Mark Dennen, chief financial officer of Solairus Aviation, explained how challenging it can be for a Part 135 charter operator to collect and remit FET, since many brokers want to deal directly with the customer on the final invoice for a flight. While the charter operator quotes the broker a price for the flight, the operator often does not know the final cost to the broker’s customer, which creates the challenge in terms of FET collection and remittance.

While some Part 135 operators believe they aren’t involved in brokering, any time an aircraft or pilot is unavailable for a planned trip and that operator outsources the trip to another Part 135 operator, the first operator is acting as a broker.

Dennen recommended specifying in any agreement with a broker (or agreement between two charter operators in which one of the operators acts as a broker) which party is responsible for FET collection and remittance. Individual invoices for brokered flights should also indicate which party is responsible for FET.

As an alternative measure, Nel Stubbs, vice president and tax expert at Conklin & de Decker, recommended that the Part 135 air carrier collect FET on air transportation for several reasons, not the least of which is that during audits, the IRS will first look to the operator to determine if FET was properly collected and remitted.

“The reality is if the FET was not collected by the broker or carrier/broker on the amounts paid by the passenger for air transportation, then the entity that provided the flight could be held primarily liable for the FET if there is no clear delineation as to who has responsibility for collecting the FET. Part 135 air carriers must conduct due diligence on the brokers with which they do business,” said Stubbs. “This is especially true if a broker insists on collecting and remitting the FET. A reputable broker should be willing to provide documentation [Form 720] about past tax payments.”

And if you’re audited by the IRS, don’t go it alone. “Always consult with legal counsel before talking with the IRS,” suggested Dennen.