Are Warren Buffett has chided rich America for not paying taxes. Two companies that he controls not only sued the government claiming that taxes passed by Congress didn’t apply to them, but further seem to be hit with a counterclaim over other unpaid taxes totaling over $300 Million.

The operative Sections of the IRS Code are Sections 4261 and 4262. There is an excise tax on “taxable transportation” assessed in Section 4261. In Section 4262, “taxable transportation” is defined as follows:

“(a) Taxable transportation; in general
For purposes of this part, except as provided in subsection (b), the term “taxable transportation” means –

(1) transportation by air which begins in the United States or in the 225-mile zone and ends in the United States or in the 225-mile zone; and
(2) in the case of transportation by air other than transportation described in paragraph (1), that portion of such transportation which is directly or indirectly from one port or station in the United States to another port or station in the United States, but only if such portion is not a part of uninterrupted international air transportation (within the meaning of subsection (c)(3)).

(b) Exclusion of certain travel
For purposes of this part, the term “taxable transportation” does not include that portion of any transportation by air which meets all 4 of the following requirements:

(1) such portion is outside the United States;
(2) neither such portion nor any segment thereof is directly or indirectly –

(A) between (i) a point where the route of the transportation leaves or enters the continental United States, or (ii) a port or station in the 225-mile zone, and
(B) a port or station in the 225-mile zone;

(3) such portion –

(A) begins at either (i) the point where the route of the transportation leaves the United States, or (ii) a port or station in the 225-mile zone, and
(B) ends at either (i) the point where the route of the transportation enters the United States, or (ii) a port or station in the 225-mile zone; and

(4) a direct line from the point (or the port or station) specified in paragraph (3)(A), to the point (or the port or station) specified in paragraph (3)(B), passes through or over a point which is not within 225 miles of the United States.”

A key rule of tax law interpretation is that unless there is a specific exclusion, an item that is within the definition of a taxable transaction is taxable.

Net-Jet charges for tickets for rides on private jets. The question is what is Net-Jet getting out of the deal. Is it acting as kind of a facilitator (like a travel agent), thus in reality the transporter of the passenger owes the tax. However, the language of the statute is clear that the person who uses the transportation pays the tax. Thus, when Net-Jet collects for the ticket, it was supposed to collect the tax from the ticket purchaser.

Section 4263 reads: “(c) Payment of tax
Where any tax imposed by section 4261 is not paid at the time payment for transportation is made, then, under regulations prescribed by the Secretary, to the extent that such tax is not collected under any other provision of this subchapter, such tax shall be paid by the carrier providing the initial segment of such transportation which begins or ends in the United States.”

Thus, the carrier is supposed to pay the tax.

The word “carrier is defined in 49 USC 41762 as follows:
” In this subchapter, the following definitions apply:
(1) Air carrier. – The term “air carrier” means any air carrier holding a certificate of public convenience and necessity issued by the Secretary of Transportation under section 41102. ”

So the question of fact does Net-Jet hold a certificate of convenience and necessity from the Secretary of Transportation. If it does, then it probably should have collected the tax, if not, then the “carrier” the person who was paid the fare should collect and pay over the tax.

NetJets would counter that it is selling not tickets on a plane but in fact fractional ownership interests in a fleet of planes and that the “ticket” is really just a cost of ownership (like a timeshare). The question is whether NetJets is deemed a carrier by the FAA and the DOT, if it is then passengers would owe the tax. Some NetJets entities have certificates of convenience, others I could not find. But the long and short of it is this. If NetJets does not owe the tax, then this is a huge tax loophole of the type that Buffett has publicly decried. So, perhaps a sign of his magnanimity it would be great if he were to say, that NetJets is willing to work with Congress to ensure there is no loophole here.