Paul Schaedel opened his wallet and removed a plastic case filled with frequent-flyer cards issued by a half-dozen airlines.
“These things are like money in the bank for me,” said Schaedel, a sales manager for a New York glass manufacturer. “They are one of the few perks I have left, and anybody who tries to take them away from me or attempts to tax me for using them will have a hell of a fight on their hands.”
Sitting next to Schaedel in a Southwest Airlines waiting area at Midway Airport, Marla Zucker was equally emphatic.
“The frequent-flyer miles I earn traveling for my company are almost as important to me as my civil rights,” said the design engineer from Boston.
Since they were introduced in 1981 by American Airlines as a gimmick to engender passenger loyalty, frequent-flyer programs have grown into an industry worth $35.7 billion in trips, merchandise and other perks, according to research conducted by Inside Flyer Magazine.
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More important, they have become the underground currency of the 1990s–a vast reservoir of dollars used by 40 million frequent flyers.
So maybe it shouldn’t surprise anyone that the government last week again raised the possibility of someday taxing that “currency,” regardless of how abhorrent the idea may be to U.S. companies and consumers.
Americans have stockpiled more than 2 trillion miles–worth roughly 76 million free round-trip domestic flights–in their frequent-flyer accounts, industry numbers show.
“This is not just an issue involving business travelers,” said Winston Helwig, a former IRS auditor who runs his own tax counseling business in Miami, Fla. “It’s like the old song that goes: `Everybody’s doing it, doing it.’ “
Indeed. As a result of an avalanche of marketing deals between the airlines and credit card companies, banks, stock brokerages, hotels, telephone companies, rent-a-car agencies and other businesses, frequent-flyer mileage points can now be earned for just about any kind of purchase.
In fact, it’s estimated by Inside Flyer magazine that frequent-flyer program members now earn about 40 percent of their mileage points for things other than flying. And that figure almost surely will grow as the list of ways to earn points keeps expanding.
American Airlines, for example, is signing up banks that would award mileage points to people acquiring home mortgages. And most airlines already have linkups with long-distance telephone partners like AT&T, MCI and Sprint that allow callers to pile up miles for every long-distance call they make.
Other consumers are buying cars and computers and paying for college educations with frequent-flyer program-connected credit cards just so they can quickly accumulate large amounts of mileage points.
In fact, to reduce the huge amount of points that have been accumulated, some airlines have gone to zany lengths trying to entice their biggest frequent-flyer accountholders to unload large chunks of their largess.
United Airlines, for example, recently offered to paint the name of frequent-flyer accountholders on a jet fuselage for one year in exchange for a minimum of 500,000 frequent-flyer miles. There were no takers.
The phenomenon is akin–though on a much larger scale–to the Green Stamps many retailers issued in the 1950s and ’60s that customers redeemed for products and services. But today, with budgets stretched thin and with paltry annual pay increases, consumers are more aggressive in seeking every edge they can.
Doreen Hayes, a field coordinator for a San Jose firm that organizes fundraisers for schools, is typical of Americans who have joined an average of four frequent-flyer clubs. She uses her Citibank Visa credit card that’s linked to American Airlines’ frequent-flyer program to buy just about everything these days–food, clothing, cosmetics, furniture, airline tickets and gasoline.
She even used the card to pay her dentist for some bridge work.
“I’m a real zealot,” said Hayes as she waited last week to board an American Airlines flight from Chicago’s O’Hare International Airport to Dallas. “I’ve walked out of stores that don’t accept Visa and have gone elsewhere to make purchases just to get those points.”
Since signing up with American’s frequent-flyer program in the mid-1980s, Hayes says she also managed to bank enough mileage points some years to take trips overseas. Last summer, she took a vacation to London. In addition to the cost of the flight, she also had enough points to cover a couple of nights worth of lodging and the use of a rental car to tour the English countryside.
Airlines have always maintained the awards are “rebates” for consumer loyalty and not “benefits” or additional “income” that should be taxed.
The IRS, meanwhile, has insisted–albeit quietly–that frequent-flyer miles earned on business trips and converted to personal use were taxable, said Dick Wintrode, former district director of the IRS in Chicago and now a principal in Ernst & Young’s tax department.
The problem has been in figuring out a way to audit and enforce a tax on what IRS officials consider a “shadow income” for millions of Americans.
“It may be possible to do it, but it would be an absolute nightmare,” said Wintrode. “That’s why the IRS has always backed off from this issue.”
But last week millions of Americans who earn frequent-flyer miles got a scare when the Internal Revenue Service wrote a “technical advice memorandum” to one unidentified company saying that said individuals using frequent-flyer miles earned on company travel could face a tax liability.
The response was predictable. Consumers coast to coast issued cries of “foul” and accountants predicted chaos.
The issue was resolved for the time being when the IRS announced that it was not planning an assault on the perk. But IRS officials say that doesn’t mean they won’t revisit the issue.
Industry officials say if the IRS were to begin taxing frequent-flyer awards, the promotions would, like Green Stamps, become only a memory.
“I, for one, would be devastated if the IRS began taxing awards,” said Robert Monk, a computer systems analyst for a small Massachusetts-based computer consulting firm.
Like most business travelers, Monk, Hayes, Schaedel and Zucker work for firms that allow their employees to keep the frequent-flyer miles they accumulate on company business.
In fact, less than 10 percent of U.S. companies require their employees to surrender their travel awards, according to a recent poll by the Bureau of National Affairs Inc., a publishing firm.
Most companies consider the awards a kind of “combat pay” for traveling employees who are required to spend weeks and even months each year away from their families and friends.
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Companies that do reclaim the awards generally do so as a cost-saving measure. The free tickets their employees get are used to “pay” for future business trips.
One company that does reclaiYm awards–Target Stores, a unit of Dayton Hudson Corp.–estimated it saved about $500,000 last year in travel expenses out of a total travel budget of $8 million.
It used to be that in order to earn frequent-flyer points one had no choice but to purchase airline tickets. Furthermore, the mileage or points earned could only be exchanged for airline tickets on a future flight or used to upgrade one’s seating on an airplane, usually from coach to first-class status.
Today, about 10 percent of mileage points are used for things other than airline tickets, according to research by Inside Flyer.
Frequent-flyer members are growing increasingly agitated with the restrictions airlines keep adding to the awards and with the limited number of seats they make available for frequent-flyer awardees, especially on flights to popular vacation destinations, such as those in Hawaii and Florida.
Today, the cost of one coach round trip within the continental United States is 25,000 frequent-flyer miles at most airlines. Last year only 20,000 miles were needed for that trip.
Consumer Reports magazine recently pointed out that a frequent-flyer award is worth about 2 cents a mile. “With that in mind,” the magazine wrote, “it makes little sense to choose your airline based on how many miles you’ll earn. The savings from a very low fare on another carrier could be worth far more.”
In addition, most airlines have put time limits on how long frequent-flyer members can bank their miles. Some, like United and American, will redeem them up to three years, while others such as Kiwi and Southwest allow just one year. Only a few, such as Continental and TWA have no time limits.
For frequent flyers like Paul Schaedel who travel more than 100,000 miles a year, that is not a concern.
“I rack up so many miles and turn them over so fast with so many free trips I don’t think I’ve paid for a personal airplane ticket in five years,” Schaedel said. “Without this perk my family and I probably couldn’t have afforded to take a vacation the past couple of years. If the IRS decides to tax these miles, I think it would start another revolution.”