Up in the Air Over Taxing Frequent Flyer Benefits: The American, Canadian, and Australian Experiences

Abstract

Since frequent flyer programs first appeared in the early 1980s, the agencies charged with the administration of their nations’ income tax laws have struggled with the question of whether – and if so how – to tax employees who earn frequent flyer points (or “miles”) on employer-paid business trips, and who eventually redeem those points for personal travel rewards (or other personal consumption services or goods). This article describes and evaluates the ways in which three agencies – the Internal Revenue Service (IRS) in the United States, the Canada Revenue Agency (CRA), and the Australian Taxation Office (ATO) – have responded to the tax administration challenge presented by frequent flyer programs. The rather disheartening end of the story (in all three countries) is that no significant amount of tax is being collected on frequent flyer benefits, even though the benefits are clearly taxable in theory (at least in the United States and Canada), and that respect for the rule of law (on the part of both taxpayers and the agencies themselves) has been eroded. The article analyzes what features of frequent flyer programs are responsible for the tax agencies’ difficulties, and explains that taxing benefits involves serious problems of timing, valuation, enforcement, and public acceptance. Finally, the article considers how, in light of those problems, an agency (or legislature) could go about designing an effective system for taxing frequent flyer benefits. The task is not easy, but it is also not impossible.

Keywords: frequent flyer programs, tax administration, comparative law