Rev. Rul. 63-155

Advice has been requested concerning the applicability of the excise tax on the transportation of persons by air to amounts paid for so-called `package tours' under the circumstances described below.

A hotel which is located in the city of X provides what is designated as `free' round-trip air transportation for its patrons from the city of Y . To provide this transportation, the hotel conducts regularly scheduled airplane flights from commercial airports with its own airplanes, which are operated by uniformed hotel employees. The passengers receive the usual air terminal services, such as a check-in counter, boarding passes, and flight calls.

Patrons are solicited from the general public in the city of Y through advertisements on radio, in newspapers, and by brochures. A flight is advertised as a round-trip `free flight' to and from the city of X and is sold as part of a `package tour.' These `package tours' are sold through the hotel's own ticket offices and through travel and tour agents.

Although the hotel advertises the air transportation as `free,' a patron is not entitled to passage unless he purchases the `package tour.' Upon purchase of the `package tour,' the patron receives a book of coupons which entitles him to the `free air transportation' and the particular goods or services specified on the individual coupons.

The total charge for the `package tour' equals the aggregate prices assigned to the individual coupons for the goods and services other than the transportation service. No amount is assigned to the transportation service. The hotel contends that it is furnishing `free transportation' as a promotional device to stimulate hotel business and, therefore, that no liability is incurred for the excise tax on transportation of persons by air.

The Civil Aeronautics Board has held, under similar circumstances, that a resort hotel is engaged in `the carriage by aircraft of persons or property as a common carrier for compensation or hire.' That classification by the Board has been upheld by the United States Circuit Court of Appeals for the Ninth Circuit in the case of Las Vegas Hacienda, Inc. v. Civil Aeronautics Board , 298 Fed.(2d) 430 (1962), certiorari denied, 369 U.S. 885.

Section 4261(a) of the Internal Revenue Code of 1954 imposes a tax upon the amount paid within the United States for taxable transportation (as defined by section 4262 of the Code) of any person by air.

In the instant case, a patron is not entitled to the `free transportation' unless he purchases the `package tour.' Moreover, the `free transportation' appears to be a principal inducement for the purchase of the `package tour.' Furthermore, the manner in which the air transportation is conducted brings it within the scope of the taxable transportation service contemplated by section 4261(a) of the Code.

Thus, the payment for the `package tour' includes an amount paid for taxable transportation. It is immaterial that such transportation also serves as a promotional device to stimulate the normal business activities of the hotel. Accordingly, it is held that the tax imposed by section 4261(a) of the Code applies to that portion of the amount paid for the `package tour' which is reasonably attributable to taxable transportation. Illustratively, a method of allocation which will be acceptable to the Internal Revenue Service is as follows:

Example: The tax base may be determined by applying to the total amount paid for the `package tour' the ratio which (1) the tax-excluded standard transportation charge made by regular certified airlines for a comparable flight within the area bears to (2) such tax-excluded standard transportation charge plus the fair market value of the goods and nontaxable services sold. In this manner, the tax base may be computed by applying the following formula:

Standard transportation charge (tax-excluded)/Standard transportation charge (tax-excluded) plus the fair market value of the goods and nontaxable services x Total amount paid for the `package tour' = TAX BASE

Once the tax base has been computed by an acceptable method, the amount of tax may be determined by applying to the tax base the tax rate in effect at the time the flight begins.