Dark Clouds Hang Over 8% Airline Ticket Tax : Airlines: People who don’t fly after purchasing a ticket should get back the 8% domestic tax they paid, either from the airline or from the Internal Revenue Service.

If you buy a discount airline ticket with a cancellation penalty and then don’t fly, you would get a refund minus the penalty.

But what about the 8% domestic tax? Is it refunded in full or do you get back the tax that is the same percentage as the cancellation penalty? Or do you lose the tax?

Actually, it depends on the cancellation penalty and the airline. And industry observers believe that there should be a full tax refund, with the cancellation penalty only applying to the fare.

Despite an IRS ruling to clarify the situation, there still seems to be industry-wide differences among the airlines on refund policies concerning this tax.

An Internal Revenue Service spokesman said an airline can refund the same percentage of the tax as used for the cancellation penalty.

“It’s up to the airline to ask for the refund, as the code doesn’t require it,” the spokesman said. “The refund should be in proportion to the cancellation penalty, and whatever amount isn’t funded to the passenger has to be given to the IRS.”

For example, however, what if you purchase a nonrefundable ticket and then don’t fly.

“The whole amount of the tax is due the government,” the IRS spokesman added.

The IRS made a ruling (No. 89-110) in September because of queries made by passengers, airlines and its own representatives.

But not all airlines have the same policy.

USAir refunds the entire tax if someone cancels on a fare with a penalty, plus the appropriate amount of the ticket.

“If it were a $100 fare with a 50% cancellation penalty, the passenger would get back $58. If it were a nonrefundable fare, the entire tax would go to the IRS, and it would be up to the passenger to file the appropriate claim for it,” a spokesman said.

Delta Air Lines, however, refunds the same proportion of the tax as called for by the cancellation penalty on the ticket. “Passengers would get back, for example, half of the tax, if the cancellation fee was 50%. But if it’s a nonrefundable fare, we turn the entire amount over to the IRS. It doesn’t pay for us to issue checks for these amounts,” a Delta spokesman said.

Passengers, however, can always apply to the IRS for a refund of the tax on a nonrefundable fare, the Delta spokesman added. “The tax on fares is a user tax, and if the passenger doesn’t use the service, the tax is no longer due.”

However, the IRS spokesman said that refund of the 8% domestic air tax would have to come from the airlines.

The Delta spokesman also said that the airlines could argue the tariffs filed by the carriers governing the contract between the airline and the passengers have language that indicates the amount paid for the fare will include any applicable tax. “This has been a very gray area.”.

A Chicago law firm, Block & Levy Associates, has filed separate class-action suits going back to 1985 against United and American Airlines, alleging that these two carriers did not make proper refunds of the 8% domestic air tax to passengers. The firm is seeking recovery for affected passengers, according to Alvin Block.

Block said his firm had also filed a class-action suit against Western Airlines on the same issue, which was settled earlier this year by Delta, which absorbed Western.

“Delta gave passengers who had not received the proper refund of the 8% tax a choice of a cash refund or some options with frequent-flier credits,” Block said. He added that the cases with United and American are still pending.

“Most airlines except these three have offered the right refund of the tax in the past,” Block said. “But previously, the IRS had been silent on this issue and some airlines simply held on to the tax money or portions of it, depending on the specific fare, without refunding any part of it to passengers who canceled their flights on discount fares with penalties.”

Millions of dollars have been collected by the airlines on these cancellation penalties since those types of fares came into usage, according to Block. “Now the tax law has been amended so that if the airlines keep any part of this 8% tax, they have to turn it over to the IRS. There’s no more windfall or unjust enrichment of the airlines.”

Where does all this leave consumers? “Still fending for themselves, unless they’re protected by a class-action suit,” Block said. “If you don’t fly, there should be no tax due, and consumers should be able to get back the entire amount of the tax paid, even with nonrefundable fares.”

Marsha Scott of Glendale Travel said: “As agents for the airlines, we follow their policy, which is generally to refund the same percentage of the domestic air tax as applies to the cancellation penalty on that fare.

“The domestic tax is quoted as part of the fare, so most passengers aren’t really that conscious of it, but a great deal of money is involved when you consider all of the tickets written with cancellation penalties and the number of passengers who actually cancel these flights.”

The system permits agents to refund some of the tax amount on other fares with cancellation penalties, said Scott, so there should be no problem doing it with nonrefundable fares as well.