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Are the airlines' extra fees cheating the U.S. out of tax dollars?

The airlines might have found a tax loophole, and you're it. The travel consultancy firm T2 recently published a worrisome blog post that is gaining traction. The airlines' extra fees, it says, aren't just costing consumers more. They're also enabling the airlines to dodge tax to our government.

Until a few months ago, checking a bag was considered a service that came with the base fare that you paid when you bought your plane ticket. That was taxed at a rate of 7.5%. But now many airlines are charging up to $50 for each bag each way, and because it's not part of the base fare, that fee isn't subject to tax. T2 says that cash belongs to the airlines, free and clear.

So a carrier like United, T2 writer Timothy O'Neil-Dunne calculates, would be cheating Uncle Sam out of tax income of $7.5 million for each $100 million it makes on extra fees. Given that United recently surmised that it stood to make $700 million on its extra fees, that's a lot of cash that won't be going to our schools, our roads, our veterans programs, and our elaborate Wall Street bailouts. Not only do consumers get screwed by these extra fees, they get screwed out of the greater good of tax revenue.

It has now been estimated that United, by itself, has created a revenue shortfall for Americans that amounts to more than $20 million. Add to that the shortfall created by all the other airlines, and we're talking some serious tax money that these carriers could be avoiding because, as O'Neil-Dunne points out, if "the charge is directly related to the ticket then it is not taxable." That might make it fully legal, although as we all know, just because it's legal doesn't make it right.

Count this as just one more way that companies have managed to shift the burden of daily expenses squarely onto the shoulders of the common consumer. First, the extra fees started coming out of business travelers' personal funds, and now it turns out the airlines might be getting away with 100% of the fees' proceeds, untaxed. Could it be true?

By the way, the airlines aren't the only travel companies being dodgy about dodging taxes. Atlanta recently joined the list of American cities that are suing 17 Web hotel bookers such as Orbitz, Travelocity, Expedia, Priceline, and Hotels.com. Here, the issue seems a little murkier: The websites pay tax on the rate charged to them by the hotels, but not on the higher price the customer ends up paying. The cities want tax based on the whole price paid by the guest, not by the price paid by these online middle-men.

The websites don't want to do that, partly because it will mean they will have to reveal the trade secrets of just how little they pay for those rooms and how much they jack up the rates we see. (Yeah, I'd be worried about looking like a rip-off, too. Hotels.com, I'm looking at you.) Los Angeles, Philadelphia, Miami, San Antonio, and Chicago also want a piece of the tax action, and cases are wending their way through the courts there, too.

So far, though, no one has challenged the airlines on this one. Perhaps that moment will be arriving soon. Unlike many of their scheduled flights.

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