Excise taxes

Excise taxes

Problem

Income is often reported under the wrong tax classification on the excise tax return.

Solution

Hospital income is subject to different tax classifications, depending on the:

  • activity/service performed that generated the income
  • source of the income
  • type of hospital (public, for profit, nonprofit, etc.)

To report your income correctly, become familiar with the common tax classifications for hospitals:

For more information, see WAC 458-20-168.

Public or nonprofit hospitals B&O tax

Applies to gross income from personal and professional services to patients by hospitals operated as nonprofit corporations, operated by political subdivisions of the state, or operated but not owned by the state.

Income reported under this classification includes, but is not limited to:

  • L&I self insured plans
  • Educational programs
  • Emergency room physician payments
  • Miscellaneous income from providing classes, data processing, clerical, etc.
  • Professional services contracted out to independent contractors such as pulmonary or EKG

Champus/Tricare income should also be reported under public or nonprofit hospitals B&O tax classifications. However, RCW 82.04.4297 allows a B&O tax deduction for any amounts received from the United States or any of its instrumentalities, the state of Washington, or any municipal or political subdivision of the state as compensation for health or welfare services. The deductible amounts should be included in the gross income reported on the return, then deducted out by taking an "other" deduction and writing in the explanation "Champus/Tricare income.

For more information, see WAC 458-20-168; RCW 82.04.260.

Service and other activities B&O tax

Applies to gross income from personal and professional services of hospitals (except hospitals subject to the public or nonprofit hospital B&O tax), nursing homes, convalescent homes, clinics, rest homes, health resorts, and similar health care institutions.

Also applies to nonprofit hospitals for personal/professional services performed for nonpatients that are not specified as taxable under another classification.

Income reported under this classification includes:

  • Data processing services
  • Accounting, auditing, actuarial, bookkeeping, tax preparation, and similar services
  • Interest on accounts receivable
  • Fees for classes provided
  • Stenographic, secretarial, and clerical services
  • Income from licenses to use real property
  • Vending machine commission receipts
  • Other revenue not specifically classified elsewhere

Retailing B&O tax

Applies to sales by hospitals of tangible personal property that are sold and billed separately from services rendered.

Does not include charges to patients for tangible personal property used in providing medical services to the patient, even if separately billed. Income from medical services is taxable under either the Public or Nonprofit Hospitals B&O classification or the Service and Other Activities B&O tax classification.

Income reported under this classification includes, but is not limited to:

  • Sales of medical records, patient account records, and radiology film copies
  • Sales of meals (other than to hospital patients) (WAC 458-20-119)
  • Sales of meals to employees (WAC 458-20-119)
  • Casual sales (WAC 458-20-106)

Retail sales tax

Applies to sales of tangible personal property by hospitals that are sold and billed separately from services rendered.

Does not include charges to patients for tangible personal property used in providing medical services to the patient, even if separately billed. Charges for medical services are taxable under either the Public or Nonprofit Hospitals B&O classification or the Service and Other Activities B&O tax classification.

Income reported under this classification includes, but is not limited to:

  • Sales of medical records, patient account records, and radiology film copies
  • Sales of meals (other than to hospital patients) (WAC 458-20-119)
  • Sales of meals to employees (WAC 458-20-119)
  • Casual sales (WAC 458-20-106)

Possible exemptions from retail sales tax for sales of (WAC 458-20-18801):

  • Drugs, medicines, prescription lenses and frames, orthotic devices, medical oxygen, or other substances prescribed by medical practitioners where a written prescription with the issuing medical practitioner's signature and the patient's name for whom the items are prescribed are kept
  • Prosthetic devices
  • Hearing aids (as defined in RCW 18.35.010(3))
  • Ostomic items

Use the form Sales Tax Exemption Certificate for Health Care Providers (pdf)

Problem

Retail sales tax is not paid on many items that are subject to sales tax.

Solution

Generally, only items that are purchased for the purpose of being resold to patients may be purchased without paying sales tax. Hospitals should take care to determine those items that they will use themselves, as opposed to those items that will be resold to customers or that are otherwise not subject to retail sales tax at the time of purchase. Certain exemptions for prescription drugs and related items exist (see list above). (WAC 458-20-18801)

Purchases of tangible personal property for resale without intervening use are not subject to retail sales tax. Hospitals purchasing tangible personal property for resale must furnish a reseller permit to the seller to document the wholesale nature of the sale.

Hospitals must pay retail sales tax on items purchased for their own use, including, but not limited to:

  • Medical supplies:
    • Lab supplies
    • Empty tubes, syringes, and vials used for diagnosis
  • Durable medical equipment:
    • Medical gas tanks, pump machines, and related parts, except oxygen delivery systems for patients
    • Reusable delivery syringes
  • Consumables:
    • Masks, synthetic gloves
    • Toilet paper
    • Items sent home with patients
  • Office supplies:
    • Computers, printers
    • Charts, paper

If a hospital purchases items from catalogs, the Internet, or other sources and does not pay Washington sales tax at the time of purchase, they owe use tax on the value of the tangible personal property purchased for use in Washington. (WAC 458-20-178)

Problem

Hospitals report and pay tax on activities or income that are exempt or that may be deducted from the taxable gross income.

Solution

Hospitals should become familiar with those activities that are exempt from taxation or deductible and identify such income so it is properly handled for excise tax reporting. Income from certain activities performed by specific types of health care facilities or organizations and certain types of income are exempt from B&O and retail sales tax, including, but not limited to:

Income exempt from B&O tax for services provided to patient (RCW 82.04.4289)

  • Kidney dialysis facilities operated by nonprofit organizations and nonprofit hospitals if the hospital accurately identifies and accounts for this specific income
  • Nursing homes operated by nonprofit organizations
  • Homes for unwed mothers operated by nonprofit organizations

Other exempt income

  • Amounts received as contributions, donations, or endowment funds, so long as no specific service is performed as a condition for receiving the funds. (WAC 458-20-169)

Grant income is taxable if specific services are performed as a condition of receiving the grant. (WAC 458-20-169)


Problem

Hospitals do not take deductions allowed for payments from certain government programs.

Solution

Hospitals should become familiar with the government program payments that are deductible, so that the amounts may be deducted from the taxable gross income. Receipts from the following must be included in gross income reported for B&O tax, but then may be deducted from the measure of tax.(RCW 82.04.4297)

  • Medicaid Healthy Options
  • Washington Basic Health Plan
  • Medicaid MI/GAU


Problem

Not-for-profit hospitals do not take B&O tax deductions allowed for government payments made to health and social welfare organizations.

Solution

Not-for-profit hospitals whose governing board meets the requirements set for a health or social welfare organization (RCW 82.04.431) should become familiar with which government payments made to health and social welfare organizations are deductible and identify such income so it is properly deducted from the taxable gross income. To determine whether the governing board meets the statutory requirements, review your hospital's charter and bylaws.

Receipts from the following must be included in gross income reported. However, not-for-profit hospitals whose governing board meets the health or social welfare organization requirements may take a B&O tax deduction for income from services rendered when the payment is received from:

  • The federal government or any instrumentality of the federal government, including Champus and Tricare
  • The state of Washington
  • Any city, county or political subdivision of the state of Washington

The hospital or clinic should include the amounts in its gross receipts, then take a deduction under the "other" classification, noting "Champus/Tricare."


Problem

Not accounting for various adjustments made to income.

Solution

Many hospitals perform medical care without making a charge or cancel a portion of the charge. In other cases, medical care is billed to patients at "standard" rates, but later adjusted to reduce the charges to rates established by contract with Medicare, Medicaid, or private insurers.

In these situations, hospitals must report the total amount billed to the patient as gross income, unless their records clearly note the amount of income the hospital is entitled to under contracts with insurance carriers. Adjustments may be taken on future tax returns, after the hospital adjusts it records to reflect the actual amount collected. If the tax rate changes, the hospital must file an amended return for the tax return upon which the income was initially reported.


Problem

Overlooking amounts that should be reported for litter tax.

Solution

As retail and wholesale sellers of certain products, hospitals are subject to litter tax on sales of certain products in Washington. You should become familiar with those items subject to litter tax and identify and track sales of such products, so that the amounts are properly reported on their excise tax return. (WAC 458-20-243) Examples of items subject to litter tax include:

  • Cafeteria "to go" food sales
  • Toiletries
  • Glass, metal, plastic, or fiber containers


Problem

Hospitals do not report in-house printing of invoices, etc., for manufacturing B&O tax purposes.

Solution

If a hospital produces its own invoices, letterhead, envelopes, etc., it incurs a liability for manufacturing B&O tax and use tax on internal printing charges. The value of such items produced in-house must be tracked and reported under the Manufacturing B&O tax classification. The value of the invoices, letterhead, etc., produced is also subject to use tax for printing charges. (WAC 458-20-134)


Problem

Hospitals may not pay brokered natural gas use tax that is owed.

Solution

Hospitals should track any natural gas they purchase through a broker. They are required to pay brokered natural gas use tax based on the full amount invoiced from their broker, including, but not limited to:

  • Agency fees

  • Broker fees

  • Mark-up

Transportation charges upon which Washington public utility tax has already been paid may be deducted from the taxable amount, as well as brokered natural gas taxes paid on behalf of and billed to the hospitals as clients.(WAC 458-20-17902)