What the Airline Tax Holiday and the Tax Reinstatement Mean for Your Wallet

The short answer: probably nothing.

On July 22, 2011, Congress failed to extend the Federal Aviation Administration’s (FAA) budget and, along with it, airlines’ authority to collect taxes to fund the FAA, leading to a lot of questions and concerns about air travel in the US. Among these were whether this would bring furloughs for employees in the FAA (yes); if this would affect traffic control (supposedly no); and what would happen to ticket prices and who would be responsible for the uncollected taxes.

The third question was answered by each airline: most airlines raised fares by the amount of the taxes, so that consumers faced the same prices as before the tax expiration. Notable exceptions included Alaska Airlines, Hawaiian, and Spirit, which maintained their fares and passed the tax savings onto consumers. There were serious concerns, however, that once Congress reinstated the airlines’ authority to collect taxes, customers who didn’t pay taxes may be required to pay them anyway – perhaps the airlines that increased their fares to compensate for the tax expiration were doing customers a favor by effectively collecting the taxes preemptively?

Photo credit: Alaskan Dude (Creative Commons)

This confusion was finally solved last week, when Congress passed a retroactive reinstatement of the FAA’s budget from July 23rd.

The bad news: By making the reinstatement retroactive, Congress stated that taxes were technically applicable to the suspension period, July 23-Aug 8. Before the reinstatement, there had been talk that passengers who paid taxes on their tickets (because they purchased them before July 23rd) but flew during the suspension period might be due a refund on the taxes collected. The retroactivity has dismissed this possibility. No matter when you purchased your tickets or flew, you cannot get an airline tax refund.

The good news: The IRS is giving a relief for passengers who did not pay and airlines that did not collect taxes during the FAA budget lapse. This news may be better for airlines than for you, but is good nonetheless.  Since airlines collect about $200 million in taxes per week for the FAA, this two-week suspension generated almost $400 million in cumulative profits for the airlines that raised their tickets to match the expired FAA taxes – which they now get to keep.

For you, the relief means that if you managed to snag a ticket during that the suspension, at least you don’t owe any taxes on the ticket either. That would have been a savings of 7.5% on the base fare plus $3.70 if flying domestically, $8.20 if flying internationally to/from Alaska or Hawaii, or $16.30 for international flights to/from anywhere else, but since most airlines increased fares accordingly, you likely did not feel any difference in your wallet. On the plus side, with the reinstatement of taxes, at least airlines are lowering ticket prices back to pre-July 23rd levels.

So, unless you are one of the lucky few who scored tickets with an airline that did not raise prices during the suspension, this FAA budget story should not affect your wallet: ticket prices have stayed the same throughout since most airlines raised ticket prices (earning several millions along the way) when taxes expired and lowered them now that the taxes are back.

Sales Tax Holiday 2011 is Underway

This post comes a little late, but we are right in the middle of Sales-Tax-Holiday Season! Many states had their sales tax holidays this past weekend, but Connecticut, Florida, Maryland, Massachusetts, and Texas still have theirs coming up. Take a look at the table below and mark your calendars if you are a resident of any of these states or live close enough to one that it may be worth the trek.

Virginia’s tax holiday has already passed and DC did not have one this year, but if you’re a resident of either of these two places, Maryland’s tax holiday next week may be worth a visit. Likewise, New Yorkers may want to take a trip to Connecticut, and those living New England may find next weekend to be the perfect time to visit Massachusetts.

This year was Arkansas’ first year hosting a tax holiday, while Illinois residents will notice that their usual holiday has been canceled for 2011.

Also note that although the 17 states that are having a tax holiday this year scheduled it to coincide with the back-to-school shopping season, you do not have to be a student or have children going to school to take advantage of the offer. As long as you are buying a qualifying item (see the list below), be it clothing or computer supplies, your purchase should be tax free.
 

State Tax Holiday Dates Tax-Exempt Items
Alabama Aug 5-7 Clothes priced at $100 or less. School supplies priced at $50 or less. Books priced at $30 or less. A single purchase of up to $750 for computers, computer software and computer school supplies.
Arkansas Aug 6-7 Clothing and footwear priced at $100 or less. Accessories and equipment priced at $50 or less. School supplies, art supplies, and instructional material – no price limit.
Connecticut Aug 21-27 Clothing and footwear priced at less than $300. *Note: until very recently, clothing and footwear under $50 was tax-free year round; this was repealed on July 1, 2011, making this tax holiday an even better deal than usual.
Florida Aug 12-14 Clothing, footwear, and certain accessories priced at $75 or less. School supplies priced at $15 or less.
Iowa Aug 5-6 Clothing and footwear priced at less than $100.
Louisiana Aug 5-6 The first $2,500 on the purchase price of most “tangible property” for personal use, excluding vehicles, meals, and services.
Maryland Aug 14-20 Clothing and footwear priced at up to $100.
Massachusetts Aug 13-14 Most tangible items priced at $2,500 or less, excluding vehicles, motorboats, meals, utility services, and tobacco.
Mississipi July 29-30 Clothing and footwear priced at less than $100.
Missouri Aug 5-7 Clothing priced at up to $100. School supplies under $50 per purchase. Computer software priced at up to $350. Personal computers and computer peripheral devices priced at up to $3,500.
New Mexico Aug 5-7 Clothing and footwear priced at less than $100. School supplies priced at less than $15. Computers priced at up to $1000 and computer hardware priced at up to $500.
North Carolina Aug 5-7 Clothing, footwear, and school supplies priced at up to $100. Sports and recreational materials priced at up to $50. School instructional materials priced at up to $300. Computers priced at up to $3,500 and computer supplies priced at up to $250.
Oklahoma Aug 5-7 Clothing and footwear priced at less than $100.
South Carolina Aug 5-7 Clothing, footwear, computers, printers, computer software and printer supplies, and various bedding and bath items – no price limit.
Tennessee Aug 5-7 Clothing, footwear, and school supplies priced at up to $100. Computers priced at up to $1,500.
Texas Aug 19-21 Clothing, footwear, backpacks, and school supplies priced at less than $100.
Virginia Aug 5-7 Clothing and footwear priced at less than $100. School supplies priced at less than $20.

Take-Out May Help You Save Money

“Take-out or eat in?” “Sliced or not?” At a café, we usually answer these questions with an eye to convenience: Do I want to go home and eat on my couch in front of my TV or should I just eat here since I’m already here anyway? And should I have them slice the bagel for me, or do I want to make this a quick stop and can deal with the slicing myself? In some states, your decision will also determine the tax rate and, ultimately, how much you actually spend.

I first found out about the ‘take-out’ tax exemption a few months ago, while ordering some frozen yogurt at a Pinkberry in California. The cashier asked if we would be eating in or out, and when my friend and I hesitated for a moment, he explained that if we ate in, the standard food tax (of at least 7.25%, but higher depending on the county) would apply while if we ate out – including at the benches just a few steps out the door – our yogurts would be tax-free. It wasn’t unbearably hot, so we decided to eat out.

In California, while groceries are tax-free, food served at restaurants, bars, and other places with seating in the premises or close by (e.g., food court seating) is taxable. However, if you order food from these places to go, they may or may not be taxed. Generally, if (1) a business makes at least 80% of its sales through food and (2) it is a drive-in restaurant or at least 80% of its sales are consumed in its premises and/or are hot food items, the business can choose whether to tax certain take-out items or not. Specifically, cold food products (e.g., ice cream and cold sandwiches), hot bakery goods (e.g., fresh from the oven bread), and hot beverages (e.g., hot coffee, tea, and cappuccino) ordered to go may be exempt from sales tax if the business so chooses. Keep in mind, though, that this decision is per establishment, so that, even if one of the stores in a chain makes these sales tax-free, you cannot assume all their other stores do the same.

Starbucks Receipt

As you can see in my receipt for a recent purchase at Starbucks in NY, the 8.875% sales tax was applied to my iced mocha (3.65 x .08875 = 0.32), but not to my marble loaf, since the marble loaf is cold and was not prepared on the premises for my consumption.

Californian food establishments that do not satisfy the two requirements above, such as most ice-cream stores and coffee shops, should always waive sales taxes on these items if ordered for take-out: hot beverages, non-carbonated cold beverages (e.g., juice and iced tea), cold food products, and hot bakery items. Note that soda and alcoholic beverages are always taxable in California, even if ordered to go.

If this break-down seems confusing or arbitrary, consider New York’s tax-exempt food categories, which are different if sold at a “food store” or at a restaurant, deli or similar establishment. Just as in California, hot food items, food sold for consumption in the premises, and carbonated drinks sold at food stores are taxable in New York State. But all sandwiches (hot and cold), candy and confectionery, and “prepared” items are also subject to sales tax, whether ordered to-go or not. “What is a ‘prepared item’,” you ask? Anything that has been handled by the seller or at the establishment so that it is ready to eat as is, such as food on a plate, ice-cream, or self-serve food from a deli. This key description, in fact, earned the Brugger’s Bagels chain an audit last year: while regular bagels are tax-free, sliced bagels are taxable in New York, since slicing makes them ready to eat (I assume none of the tax collectors tear their bagels for eating).

At restaurants, diners, food carts, and similar establishments in New York, the only food items that are tax-exempt when ordered to-go are food and drinks that are unheated and sold in “the same way (in the same form, condition, quantities, and packaging)” as in a supermarket or grocery store. That is, coffee is not tax exempt since it is not cold, iced coffee is not exempt since it does not come the same way as it would at a grocery store (unless you are buying one of those bottled or canned Starbucks drinks), and bagels are only exempt if you’re buying them packaged as they would be in a store.

To sum up, in California, if you want to avoid taxes on bakery items, non-alcoholic and non-carbonated drinks, or cold food products, always choose take-out. If this is a store that mostly serves take-out or cold items, your purchase will be tax-free. If it isn’t, it’ll vary by store but there’s still a chance you won’t have to pay taxes on it anyway. In New York, on the other hand, getting your take-out food purchase to be tax-free may be harder, but, generally, avoid soda and sandwiches, and slice bagels yourself.

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May 15: Mark Your Calendar for a Visit to the IRS

Next Saturday, May 15th, the IRS will be hosting open houses in about 200 locations throughout the country to help tax payers with their tax issues.  The event is open for questions from both individual filers and small businesses.
 
The last open house held by the IRS was in late March, mainly to help with tax filing.  But even with the filing deadline now long gone, the IRS has made it clear that the upcoming open house can still help you file if you missed the deadline or got an extension.  Those who already filed their 2009 tax return may also find the open house useful, as IRS professionals will also be available for one-on-one talks about repayment options for those struggling to pay their taxes as well as about audits and other notifications.
 
For a list of IRS locations that will be open next Saturday for the event, click here.  The open house will run from 9am to 2pm, and the IRS estimates that in the last event 88% of those who went to the open house had their problem solved the same day.
 

A Look into the Tuition and Fees Deduction (vs. the Education Credits)

April 15th is fast approaching, and you still haven’t figured out which deductions or credits you can take for education?  Here at Money Under Your Futon you can find the summarized, cramming-two-days-before-the-exam version of the IRS publication 970, which explains in detail each of the education benefits available for 2009 income taxes.

Last week we wrote about the three education tax credits offered this year: the American Opportunity, the Hope, and the Lifetime Learning credits (to read the article click here).  Today, we add to it a break-down of the Tuition and Fees deduction.  The general rules for this deduction, in terms of what qualifies as an educational institution and payments on whose behalf can be deducted are the same as for the credits.  As explained in the previous article:

An eligible educational institution [is defined as an] institution eligible for the Federal Student Aid (FSA) program administered by the Department of Education. 

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DC Area: Today, Get a Little More for Donating Your Clunker

If you are in or close to Washington, DC, today might be the perfect day to donate your clunker and get a little bit more for that.  In general, donating your car can be a good deal, as it should ideally lower your gas and maintenance cost and offer a hefty tax deduction through itemizing.  But today, Zipcar is offering a little more to boost the incentive.  From 6 to 8:30pm tonight, Zipcar will be hosting an event in DC to collect car donations for WAMU 88.5 – the American University Radio that airs NPR every weekday morning, – and will be giving a free membership for one year and $75 in driving credit in exchange.  Also, if you refer a friend to donate a car, you get $50 in driving credit as well. 

The event will be held at WestEnd 25 (1255 25th St, NW) tonight, April 8, 2010, and the email address to get more information or RSVP is rsvpdc (at) zipcar (dot) com.  If you do not live in the DC area or can’t donate your car today, it might still be worth asking about other events or visiting Charitable Auto Resources, who will be coordinating the donation processing in this event and works to help charities nation-wide receive cars.