IRS Considering Change in Tax Treatment of Travel Loyalty Points

May 23, 2014

Gary Leff of the View from the Wing blog digs into hints that something is coming soon from the IRS on taxation of loyalty points. Currently, airline and hotel companies award miles and points to their customers and record it on their books as a liability. Tax is not due until the transaction is finalized when the customer redeems them (or the points expire).

Leff speculates that the IRS will want to change the timing to move the taxation earlier, perhaps when the points are awarded. He’s not sure, though, because although the IRS has talked about “changes to loyalty program accounting methods” as a priority for 2014, it has not offered any details about what it is thinking. The travel industry for their part sent a pre-emptive letter to the Treasury Department urging caution.

There are two reasons the IRS should be cautious here. The first is that the negatives of such a rule (potential chilling effect on successful marketing programs) outweigh the positives (the IRS gets the same amount of tax revenue, just earlier).

Second, and more problematically, taxing points and coupons when they are awarded rather than when they are redeemed means taxing revenue from transactions that have not actually happened (yet). If they never happen – if the points or coupons are lost or expire or are simply never used – it means a tax was paid on a transaction that never occurred. That’s not exactly unlikely – for example, with no disrespect to Bed Bath & Beyond, I can never possibly use all the coupons they send me. We don’t tax capital gains or income or sales or estates or pretty much anything else until the income is actually realized. We shouldn’t make an exception to this common sense rule for coupons or other advance payments.

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