The IRS audits stem from the agency’s interpretation of a regulation in the tax code that governs excise taxes. Excise taxes are the taxes each passenger pays to offset the cost of the air taxi companies. This money does not go to the companies; they merely collect them and pays them to the IRS. This is not something unique only to air taxis. Excise taxes are also imposed on cigarette, liquor and gas sales, among other things.
In Alaska, the government charges 3 types of excise taxes – a tax of $3.70 for any "flight segment" (one takeoff and one landing), another for flights beginning or ending in Alaska or Hawaii ($8.40), and a tax on the cost of a ticket (at 7.5%). But there are some exceptions to this regulation. Some air taxi operators do not have to pay excise tax because the income tax code excludes seaplanes, some sightseeing flights and aircraft weighing less than 6,000 pounds (most Alaska bush planes are) and traveling on "non-established lines."
The trouble starts in the interpretation of the term “non-established lines”. To the IRS, an established line means a route that is "operated with some degree of regularity between definite points. It does not necessarily mean that strict regularity of schedule is maintained; that the full run is always made; that a particular route is followed … The term implies that the person rendering the service maintains and exercises control over the direction, route, time, number of passengers carried etc."
According to the IRS’ definition, almost every Alaskan air taxi plies an established line. For example, an air taxi may specialize in taking hunters to the Alaskan wilderness and drops passengers at the same spot several times a week or month. Such a practice would fall under the IRS’ definition of “established line” and so be liable to excise tax.
Such an interpretation of the tax code has led to many Alaskan air taxis to be billed with back excise taxes per-passenger that is impossible for them to collect retroactively. Some Alaskan air taxi companies have been billed several hundred thousand dollars and one even for over a million dollars according to the 150-member Alaska Air Carriers Association (AACA). Many companies have had to seek financing in order to pay the back taxes.
Joy Journeay, Executive Director of the AACA, said that the IRS has changed the way they interpret the law and this has led to the sudden back taxes in the audits. She said, "The nebulous, ambiguous language is the problem with the IRS codes. For 49 years, they've said charters were exempt, and now they're saying they're not."