WASHINGTON — Did you hear the one about private jets getting a special break in the Senate tax package?
This one has it all: rich folks, privilege, a Republican bill, a Senate Democrat who once pushed the measure and a Republican who may get it over the finish line — both of them from Ohio. There’s outrage on the left and the right.
The left says this proves Republicans, giving tax cuts to corporations, are tone deaf. Liberals who look into how the jet exemption got in the tax bill point to Ohio Republican U.S. Sen. Rob Portman.
The right has a different twist. Ohio Democratic U.S. Sen. Sherrod Brown, a leading liberal, tried to get this very tax break passed last year with a freestanding bill, and yet here he is in 2017, complaining about tax cuts for the rich and corporations. Even the campaign of Josh Mandel, a Republican who hopes to challenge Brown for his seat next year, chimed in, with a spokeswoman telling cleveland.com, “In Ohio, Sherrod Brown says he’s against corporate handouts, but in D.C. he sneaks in tax breaks for corporate jets.”
There’s just one problem. Much of what you may have heard about the jet provision is wrong.
Yes, there is a carveout for private jets in the Republican tax package. It clarifies what the law was already before it got tangled up in court and within the IRS’s changing whims. The new provision changes nothing, according to industry experts and lawmakers — and passengers on private jets still will pay taxes.
Here’s what it’s all about.
The tax in question:
The federal government operates a complex network of air traffic control. It takes money to do this.
So airline passengers pay a 7.5 percent federal tax on their ticket prices, often called a seat tax or a ticket tax, plus $3 for each flight segment. Private jet owners don’t pay it because they don’t buy tickets. But if they charter out their jets for others to use or offer a seat for a price, the seat tax is assessed for those passengers, says Bill Deere, executive vice president of the National Air Transportation Association.
All jet owners or passengers directly or indirectly pay another federal tax, this one on jet fuel. Whereas commercial jets are charged 4.4 cents a gallon for the tax, private jets pay a much higher tax of 21.9 cents a gallon. The airlines and private jet operators have had a longstanding disagreement over whether private jets pay too little or too much, but that’s beside the point here.
There is a third tax, paid on jet fuel by operators of fractional jet-ownership companies such as NetJets, based in Columbus, Ohio. Fractional ownership is to jet travel what timeshares are to vacations: You own a share in a private jet or a fleet of private jets and can use it as terms of your ownership dictate. Fractional aircraft pay a surtax of 14.1 cents per gallon on top of the 21.9 cents per gallon assessed to jet fuel.
This might seem straightforward, or so Congress members who authored this tax structure said. But in early 2012, the IRS independently decided to charge the 7.5 percent seat tax on payments that private jet owners make to third-party companies that maintain, manage, schedule and fly their jets. These are called aircraft management companies, and fractional jet companies are structured this way since their owners — people who own a fraction — don’t tend to have their own hangars and pilots.
But the thing is, the IRS decided not just to charge the tax when a customer paid for a seat. It wanted to apply the tax for payments the firms got for upkeep, storage, cleaning, training, weather-forecasting and nearly everything else.
How the IRS saw it:
The IRS decided to do this after thinking through what, exactly, constituted “taxable air transportation” and the way in which aircraft management companies allocated those costs. The IRS legal counsel’s office decided that taxable air transportation should include all the things necessary to prepare and fly a jet with passengers, according to an IRS guidance memo in February 2012.
“Costs covered by the monthly management fees are reasonably necessary to the air transportation itself because without maintenance, and administrative services like weather information and flight planning, management could not provide air transportation services to [the] owner,” the memo from the chief counsel’s office said.
How could maintenance and cleaning be taxed like a seat? Don’t airlines only charge the tax on actual seat sales?
The IRS said airline customers might not know it, but they are actually paying taxes for those services, too, when they pay a 7.5 percent tax on their tickets.
“For example, embedded in the purchase price of a passenger ticket on a commercial air carrier or chartered flight are essentially similar indirect costs that make up the monthly management fees,” the IRS memo said. “Amounts paid for air transportation do not escape taxation merely because they are split from direct costs of the transportation and paid separately by the person purchasing the services.”
NetJets, owned by billionaire Warren Buffett’s Berkshire Hathaway, said that was an unfair and improper change in tax practices, and it sued in federal court. Other companies challenged the IRS as well, and in 2013 the IRS put its attempts to collect — but not its audits — on hold.
NetJets then won a court ruling in 2015, saving it from having to pay hundreds of millions in what it called unfair assessments, penalties and interest for past jet-fleet management taxes. The judge in the case, U.S. District Judge Edmund Sargus, said NetJets had relied on earlier IRS guidance that exempted the costs, and should not be retroactively penalized for the IRS changing its mind on whom and what to tax.
Finally, earlier this year, the IRS announced it would stop auditing aircraft management companies altogether for the tax.
But let’s skip back a year, to 2016.
How Congress tried to deal with it last year:
Despite what seemed like clarity by this point, members of Congress said last year they wanted to make absolutely sure there was no question on what was or wasn’t taxable, since the IRS had not independently issued clear guidance. So lawmakers introduced bills to make clear that when the jets were on the ground or weren’t being fueled, there was nothing to be taxed.
The 7.5 percent tax was never intended to be applied to on-the-ground maintenance, cleaning and similar services, lawmakers said. The IRS may have been briefly confused, they said, but the FAA and the laws governing FAA taxes were fairly clear. Congress intended ticket taxes to be collected, they said, when tickets or seats were sold.
Rep. Pat Tiberi, a Columbus-area Republican, introduced the bill in the House of Representatives to make this clear, and the House Ways and Means Committee approved it unanimously last year.
“This bipartisan bill simply clarifies that the tax on commercial air transportation, also called the ‘ticket tax,’ does not apply to aircraft management services for general aviation flights that do not use tickets,” Tiberi said last year. “For decades it has been clear, and Congress has specifically noted, that commercial aviation is required to pay the ticket tax, while general aviation pays the fuel tax.”
Brown, the Democratic senator, introduced a version in the Senate with Portman, the Republican, as a cosponsor. But that bill did not advance.
How this led to the tax bill:
So in the tax package now being debated, Portman offered an amendment to do what the Brown-Portman bill would have done on its own. Then last week Senate Finance Committee Chairman Orrin Hatch, a Utah Republican, said he would add the provision to the package, so there was no need for an amendment vote.
This is the so-called giveaway for private jet owners that has people excited.
Their excitement seems to be misguided, since nothing is being given away.
Brown voted against the overall tax package — which contains $1.5 trillion in tax cuts — in the Senate Finance Committee last week, but the private jet provision has nothing to do with his opposition. Rather, he says the tax cuts will benefit corporations while not doing enough to help lower-income and middle class Americans.
“The bill he introduced in no way cuts taxes for private jet owners,” said Brown’s communications director, Jennifer Donohue. “It simply protects Ohio employers, made up of mechanics and service workers, from abuse by the IRS.”
Portman spokeswoman Emily Benavides said, “The IRS ignored the law, and this bipartisan proposal clarifies what the law already says and stops a specific IRS abuse.”
What it all means:
If private jet owners were about to get a special tax break thanks to Brown, Portman or some other lawmaker, it would cost the government money. This provision won’t, because the tax wasn’t supposed to be collected and, in fact, is not collected.
That’s why the congressional Joint Committee on Taxation says the cost of this provision to the government would be negligible.
“This isn’t a tax break,” Deere said. When a jet gets fuel, it will still pay taxes — and private jets will pay a higher tax, as they always have. When a jet takes customers who wish to charter a flight, it will pay another tax, as it always has. These taxes have always related to a plane’s movement, Deere said, not its on-the-ground maintenance or weather forecasts.
“This is a clarification that aircraft management companies are not movement,” he said of the provision in the Senate tax package. “If the plane moves, the tax is paid.”
NetJets said it merely wants existing law applied, and the Senate tax package would do that. The Senate tax bill “simply confirms the longstanding precept that whole aircraft management services do not constitute commercial transportation and therefore are not subject to the ticket tax,” NetJets said in a statement. “Leaders from industry trade organizations have been vocal about the fact that wholly owned aircraft have never been subject to the ticket tax.”
If the Senate tax package passes, it will have to be reconciled with the House version, and it is unclear if the private jet language will go into the final bill.
NetJets has gotten a lot of attention in this matter because of its litigation with the IRS. NetJets employs 2,000 people in Ohio. But the jet provision would also apply to Lane Aviation in Columbus, Reynolds Jet in Cincinnati, Jet Select Aviation in Columbus and Sky Quest in Cleveland.