How the IRS is Getting in the Way of Making Travel More Comfortable

The taxation of frequent flyer miles isn’t the only time travel butts heads with the IRS. Taxes on your tickets isn’t the only other place, either.

It turns out that Anchorage airport is being hamstrung by the tax code (HT: Julie D.)

  • It’s striking that the Anchorage airport got audited.
  • The airport has $500 million in tax free bonds outstanding.
  • The terminal that was renovated in part with these bonds is thus bound by IRS rules. And therefore they cannot build sleeping pods.

Here’s the story:

The restaurants, shops and even a beauty salon that already exist don’t violate IRS code because they are for the sole use of airport travelers and employees. It seems obvious that sleeping pods would also be used only by the traveling public, since they would be on the other side of the TSA security screening area. However, IRS code section 142.C.2.a specifically forbids “any lodging facility” from being built when tax-free bonds are still outstanding.

The idea there is that tax free financing shouldn’t create an uneven playing field with private business, in this case private businesses outside the airport. One imagines that the lodging industry explicitly lobbied for this protection. And it was put in place before anyone conceived of putting sleeping pods airside.

You can have them at airports where the concourses don’t have outstanding tax free bond financing attached, but not at ones that do it seems.

Sleeping pods would seem especially well-placed in Anchorage, given the late night operations there. Plenty of flights arriving late, before people can check into hotels, and departing late long after people check out.

And the airport could take a tax position which could accommodate the pods, but they are playing it conservative.

A possible solution to the sleeping pod problem could be in the so-called “bad use” or “dirty use” provision, which allows facilities built with tax-free bonds to dedicate up to 3 percent of their area to uses that would otherwise violate the IRS code. But airport financial managers didn’t want to take the risk that the tax agency could disagree.

“Even the possible penalties are so complex it just taints the debt,” Day said.

Perhaps one of the tax experts out there could weigh in, given their reticence to pursue such a course recommend that they seek a private letter ruling?


About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Reading the complete article it’s not the IRS that’s getting in the way of the pods, it’s the bonds issued by the airport authority.

  2. So the Anchorage airport management is following a conservative application of a law passed by Congress and this is somehow the IRS’s fault? It doesn’t appear that the IRS has anything whatsoever to do with this problem at this point. The IRS has its problems, but knee-jerk blaming them for everything we don’t like about taxes makes it harder to fix the agency, not easier. It’s tough to recruit good people to positions that get them treated like garbage.

  3. Wright, gotta remember that, as I much as I love the blog, Gary sometimes lets his political beliefs (conservative) find their way on the blog.

  4. I’m actually very much not a conservative. And a free market take here might be focused on taxpayer subsidized financing for airports, I’m more interested in how unintended consequences of IRS rules are keeping an airport which used bond financing from providing amenities. Just seemed interesting, to me at least, though not to everyone i suppose!

  5. While it’s true that Congress makes the laws, the IRS does administer the ridiculously complex Tax Code, and it’s common to blame the IRS for anything related to it. I think it’s terrible that that lodging provision exists. Whatever happened to Congress shall make no law impeding free trade?

  6. Hi, I’m a partner at a fixed income hedge fund who buys a lot of tax-exempt bonds. The reason that they don’t want to push the limits with the IRS is to protect their bond holders. The bonds they issued are now federally tax exempt meaning that you don’t pay federal income tax on the interest like you do corporate bonds or US Treasuries. If there was even an IRS investigation into the issue the bonds would fall in price in the fear that they would be ruled taxable. If tax-exempt bonds become taxable people would demand a higher yield to make up for the fact that they are effectively getting less interest after paying taxes. This would cause the bonds to fall in price permanently vs. other comparable tax-exempt bonds.

    I’m sure that in their bond documents the airport has covenanted that they would do everything within their power to keep the bonds tax-exempt status intact and could also open themselves up to lawsuits from bond holders if they were to do something that would cause the bonds to lose their status.

    Finally, if the bonds were to lose their tax exempt status the airport would face higher borrowing costs that would more than offset any revenues from sleeping pods. Not sure why they just don’t have a private hotel come in a run a terminal side hotel?

    As far as if tax-exempt financing is a good idea that’s up for debate. The general infrastructure in the US is poor vs. other first world countries so you could argue this is a relatively cheap way to incentivize building infrastructure. The rule that the post is about is to limit harm to the private sector. I guess you could argue that airports would have an unfair advantage vs. other modes of transportation but almost all other methods of transportation are also either built/maintained by the government in full or part (rails, highways, ports, etc). So you’d probably either need to privatize everything or let them all use tax-exempt financing to level the playing field between modes of transport. There are a lot more crazy things that tax-exempt financings have been used for.

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