Ticket Tax Expires, But Airlines Raise Prices, Punt to IRS on Refunds

July 28, 2011 — -- Airlines seem to be taking a "it's not our problem" approach to refunding passengers for taxes that are no longer authorized to be collected after Congress failed to pass legislation funding the Federal Aviation Administration.

Thus far, only one major airline has announced it will directly offer a refund of the 7.5 percent excize tax and a per-segment flat fee. On a $500 round-trip connecting ticket, a customer would be due $42.30. If the flight leaves the U.S., add another $32.60 for a total of $74.90.

After the midnight Friday deadline passed for re-authorization of the FAA, almost 4,000 FAA employees have reportedly been furloughed and federal air transportation excise taxes have expired.

The IRS clarified on Wednesday that tickets purchased on or before July 22 for travel on or after July 23 may be entitled to the tax refund.

Jetblue is the only major airline accepting requests for ticket tax refunds. A message on its website instructs customers who are flying within the next seven days to contact the company while all others should check back at a later time. Other major airlines are directing customers to the IRS.

The IRS' announcement came after the major airlines acknowledged they increased their fares concurrent with the expired taxes, preventing fliers from reaping any savings on tickets purchased on or after July 23. Virgin America used the so-called "tax holiday" for an email marketing campaign on July 23 despite reportedly increasing its fares in lockstep with the other airlines.

That Virgin America email marketing campaign stated, "Take a tax holiday. Grab a seat with fewer federal taxes for a limited time only."

Virgin America said it immediately passed on the exact equivalent discount as soon as the expiration happened at 11:59pm on Friday night through Sunday night and promoted the discount to guests during that time.

"But, given the dynamic nature of fares, with the Monday morning fare changes, some fares held the discount, some went up and some went down," Abby Lunardini, Virgin America spokeswoman, said.

On Thursday, Sen. Jay Rockefeller IV, D-W. VA, chairman of the committee on commerce, science and transportation, said Congress needs to pass a FAA extension bill.

"Now, there is no funding coming in and the agency has no authority to issue grants for important airport infrastructure and safety projects," Rockefeller said in his prepared remarks. "The airlines are not paying for their use of the National Airspace System. The carriers also do not appear to care about the impact on the dedicated FAA workforce that serves them—nearly 4,000 have been furloughed. And, most of the airlines are not even passing any savings on to the customers they serve."

Rockefeller and Sen. Maria Cantwell, D-Wash., aviation operations, safety and security subcommittee chairwoman, wrote a letter on Tuesday to the Air Transport Association (ATA) chairman, Richard Anderson, who is also CEO of Delta Airlines, saying they were "deeply perplexed by the industry's pocketing of passenger tax revenue."

"Most of ATA members have elected not to pass the savings along to consumers through reduced ticket prices, but rather have decided to increase the base fare of airline tickets," the senators wrote. "We urge the nation's airlines to put all of the profits that they are making from the lapse of the aviation taxes into an escrow account so that they can be transferred back into the Airport and Airway Trust Fund when Congress reinstates the taxes."

Despite the request from the tax agency and the senators, most airlines are directing customers to the IRS to request a refund. The IRS said that "passengers who are unable to obtain a refund from the airline may obtain a refund by submitting a claim to the IRS."