25th Annual Health Sciences Tax Conference

Transcription

1 25th Annual Health Sciences Tax Conference December 9, 2015

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. This presentation is 2015 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Presenters Candice Bartle Ernst & Young LLP Dallas, TX Ben Pitchkites Ernst & Young LLP Indianapolis, IN Page 3

4 Agenda Sales and use tax Exemption analytical hierarchy Overview and developments Entity-level exemptions Product and use-based exemptions Income and franchise tax Property tax Developments Trends Page 4

5 Sales and use tax Page 5

6 Sales and use tax exemptions Analytical hierarchy Nonprofit and charitable entity exemptions Applies to most purchases by qualified organizations Simpler to administer Health care entity exemptions Applies to most purchases by qualified organizations Simpler to administer Product-based exemptions Based on what product is being purchased Requires knowledge of state s laws regarding product Use-based exemptions Based on how the product is used Requires knowledge of product usage and state s laws Less burdensome More burdensome Page 6

7 Entity-level exemptions Overview Approximately 29 states have nonprofit or charitable organization exemptions and 22 have health care entity exemptions Typically, only applies to purchases made by nonprofits Must look at jurisdiction s definition and requirements to qualify Sometimes requires more than just an Internal Revenue Code (IRC) 501(c)(3) tax-exempt status Application process with documentation requirements, such as financial statements, articles of incorporation, Internal Revenue Service determination letter, etc. Consider what exclusions apply to the exemption (e.g., construction) Some states have a renewal or expiration period, such as annually or every five years, etc. recommend tracking sheet Need to effectively manage exemption certificates Page 7

8 Entity-level exemptions Charitable and nonprofit developments Illinois An administrative law judge for the Illinois Department of Revenue denied a research academy supporting those who create health care environments a sales tax exemption identification number for charitable or exempt entities, finding that the academy s charter did not show that the academy existed for a primarily charitable purpose in Illinois. (The Department of Revenue of the State of Illinois, v. ABC Foundation, ST 14-30, Illinois Decisions in Department of Revenue Hearings. Date issued: December 7, 2014) Indiana The Indiana Department of Revenue ruled that a nonprofit corporation s purchases, storage, use and consumption of tangible personal property and services, such as blood testing equipment and supplies, are exempt from Indiana gross retail tax and use tax when the organization itself makes the purchases and the items and services are used to primarily carry on its nonprofit purpose. (Revenue Ruling No ST, June 3, 2015) Page 8

9 Entity-level exemptions Health care developments Arizona The Arizona Department of Revenue (ADOR) has issued a transaction privilege tax procedure with respect to the annual recognition of exempt status for certain nonprofit health care organizations and the documentation they need to claim their exemptions. The procedure, which supersedes a previous transaction privilege tax procedure on these issues, provides information about the transaction privilege and use tax exemptions available to qualifying hospitals, qualifying health care organizations, rehabilitation programs for mentally and physically disabled persons, and qualifying community health centers recognized as such by the ADOR as well as the application process for them to obtain an annual exemption letter from the ADOR. It also details the documentation needed to claim the exemptions when dealing with vendors, lessors and utilities. (Arizona Transaction Privilege Tax Procedure No. 15-1, June 22, 2015, released October 14, 2015, and superseding Arizona Transaction Privilege Tax Procedure 99-5, July 29, 2015) Page 9

10 Entity-level exemptions Health care developments Washington The Washington Department of Revenue has proposed an expedited rule for the health care facility industries to remove expired language on exemptions for health care providers medical equipment. Rule 168 removes language for RCW , which allowed hospitals to take a business and occupation (B&O) tax credit for the cost of purchasing mechanical lifting devices and other equipment meant to minimize patient handling by health care providers. This exemption expired December 30, 2010, and is now past statute. (August 13, 2015) South Dakota The South Dakota Department of Revenue has issued a tax fact sheet explaining which state and local sales and use tax requirements apply to nonprofit hospitals. (South Dakota Tax Facts No. 05/01/2015 (Nonprofit Hospitals), May 1, 2015) Page 10

11 Product and use-based exemptions Overview Requires established processes within organization to review purchase invoices on a monthly and quarterly basis Demands more resources be spent on tax administration Must keep current on changing state laws regarding these exemptions Can utilize a tax engine to assist in taxability determinations For use-based exemptions, organization must generally know in advance how the item will be used when purchased to take advantage Record-keeping to provide under audit Streamlined sales tax states with uniform definitions can be useful in correctly capturing taxability Page 11

12 Product and use-based exemptions Developments innovation Tennessee A manufacturer s purchases of reagents related to the processing of blood products qualify for the state s manufacturing exemption from sales and use tax if certain conditions are met. (Tenn. Dept. of Rev., Private Letter Ruling No , November 6, 2014) New York Computer software devices primarily used to allow disabled persons to control a computer and its accessories are exempt from New York sales and use taxes because they are deemed non-taxable prosthetics. (NY Dept. of Taxn. and Fin., TSB-A-14(28)S, August 20, 2014) Georgia The Department of Revenue (DOR) said that a business engaged in providing medical equipment to Georgia hospitals and other health care institutions is liable for state and local sales and use taxes on replacement parts the business purchases in-state or out-ofstate and subsequently uses to repair a Georgia customer s equipment. (GA LR SUT ) Page 12

13 Product and use-based exemptions Developments Missouri The Missouri Department of Revenue ruled that a nonprofit that operates medical facilities is not subject to sales tax for sales of prescription and non-prescription alternative medicines and other merchandise and supplies sold for health care purposes, but that products sold at its therapeutic spa are not related to medical care and are taxable. (LR 7527, April 7, 2015) Washington In 33 WTD 2014, dated August 28, 2014, the Department of Revenue addressed the applicability of the medical products sales tax exemption to drug infusion pumps. Denying the taxpayer s appeal, the Department of Revenue explained that the sales of programmable drug infusion pumps are not exempt from retail sales tax as a device used to deliver prescription drugs because they are not disposable and are instead reused. The Department of Revenue further held that they are also not exempt as a prosthetic device because they are specifically excluded from the definition of prosthetic devices as durable medical equipment, and further, they are not wearable by patients. Page 13

14 Product and use-based exemptions Developments Minnesota An updated fact sheet released by the Minnesota Department of Revenue explains the sales and use tax treatment of durable medical equipment and notes that all drugs and medical devices paid for or reimbursed by Medicare and Medicaid are tax exempt effective January 1, (Sales Tax Fact Sheet 117B) Connecticut The Department of Revenue Services issued guidance on the sales and use tax exemption for certain nonprescription drugs and medicines, which took effect on April 1, (Conn. Dept. of Rev. Services, SN 2015(1), April 1, 2015) Page 14

15 Product and use-based exemptions California update Medicare Part A sales to federal government Nortel refunds Manufacturing and research and development (R&D) exemption issues Page 15

16 State income and franchise tax Page 16

17 State issues affecting exempt organizations with alternative investments Alternative investments generating unrelated business income (UBI) Private equity, hedge funds, real estate funds, etc. Structured as partnerships generating UBI to exempt organizations Three ways that a fund organized as a partnership may generate UBI: i. Operation of a trade or business ii. iii. Example: a timber partnership, oil and gas, real estate Borrowing to make investments Example: a commodities fund that borrows 9X capital to make large investments in future contracts Flow-through from other investments Example: a fund of funds that invests in other partnerships Reported to investor on K-1 Page 17

18 State issues affecting exempt organizations with alternative investments Exempt organizations affected Hospitals with endowments Colleges and universities Private foundations Pension trusts Voluntary employees beneficiary associations (VEBAs) State UBI reporting issues Almost all states claim nexus over all partners of a business entity doing business in their state. One K-1 may trigger filings in the 41 jurisdictions that tax UBI. Apportionment allocation methods vary by state. Page 18

19 State UBI reporting issues States taxation of UBI for corporations State UBI State UBI State UBI Alabama Taxable Kentucky Not taxable North Dakota Taxable Alaska Taxable Louisiana Taxable Ohio Not taxable Arizona Taxable Maine Taxable Oklahoma Taxable **Arkansas Possibly taxable Maryland Taxable Oregon Taxable California Taxable **Massachusetts Taxable Pennsylvania Not taxable Colorado Taxable Michigan Taxable Rhode Island Taxable Connecticut Taxable **Minnesota Taxable South Carolina Taxable DC Taxable Mississippi Taxable South Dakota Not taxable Delaware Not taxable Missouri Taxable Tennessee Taxable Florida Taxable Montana Taxable Texas Not taxable Georgia Taxable Nebraska Taxable Utah Taxable Hawaii Taxable Nevada Not taxable Vermont Taxable Idaho Taxable **New Hampshire Possibly taxable Virginia Taxable Illinois Taxable New Jersey Not taxable **Washington Possibly taxable Indiana Taxable **New Mexico Taxable **West Virginia Taxable Iowa Taxable New York Taxable Wisconsin Taxable Kansas Taxable North Carolina Taxable Wyoming Not taxable ** Difference in tax treatment between pension trusts and corporations Page 19

20 State UBI reporting issues States taxation of pension trusts State UBI State UBI State UBI Alabama Taxable Kentucky Not taxable North Dakota Taxable Alaska Taxable Louisiana Taxable Ohio Not taxable Arizona Taxable Maine Taxable Oklahoma Taxable **Arkansas Not taxable Maryland Taxable Oregon Taxable California Taxable **Massachusetts Not taxable Pennsylvania Not taxable Colorado Taxable Michigan Taxable Rhode Island Taxable Connecticut Taxable **Minnesota Not taxable South Carolina Taxable DC Taxable Mississippi Taxable South Dakota Not taxable Delaware Not taxable Missouri Taxable Tennessee Taxable Florida Taxable Montana Taxable Texas Not taxable Georgia Taxable Nebraska Taxable Utah Taxable Hawaii Taxable Nevada Not taxable Vermont Taxable Idaho Taxable **New Hampshire Not taxable Virginia Taxable Illinois Taxable New Jersey Not taxable **Washington Not taxable Indiana Taxable **New Mexico Not taxable **West Virginia Not taxable Iowa Taxable New York Taxable Wisconsin Taxable Kansas Taxable North Carolina Taxable Wyoming Not taxable ** Difference in tax treatment between pension trusts and corporations Page 20

21 State UBI reporting issues K-1s lack uniformity of state UBI information in footnotes no requirement for state UBI reporting since it s a federal form State UBI footnote frequently missing If organized as a trust, e.g., pension trust or VEBA, consideration of passive loss rules at the state level Withholding taxes filing to claim where no UBI reportable Filing for withholding exemptions where possible Page 21

22 State allocation and apportionment Direct allocation vs. apportionment Business income generally apportioned Generally three-factor formula payroll, property, sales; trend is toward single sales factor, e.g., Illinois Except for a handful of states, partnership income is deemed to be business income Nonbusiness income generally allocated Nonbusiness income is typically defined as everything other than business income includes proceeds from sale of investment assets and sales of business property, passive investment income, etc. Nonbusiness income generally allocated to state of domicile Sale of real estate held for investment allocated to state where located Page 22

23 State K-1 example Page 23

24 Practical K-1 state UBI reporting issues From the sublime to the ridiculous state UBI footnotes UBI by line item by state sublime but rare UBI apportionment information for each factor by state again, very rare, cumbersome, but very accurate No state UBI footnote common State K-1s are generally sent to partners If no state UBI footnote, use state K-1 and apply federal UBI percentage to corresponding line items Some state K-1s do not break down state source income by line may be able to apply a composite federal UBI percentage to state source income but not an ideal solution Where no state K-1 provided, apportionment factors need to be calculated and applied to business income Page 24

25 State K-1 footnote prime example state UBI by line item Page 25

26 State K-1 example state-specific apportionment Page 26

27 Practical K-1 state UBI reporting issues Nonresident withholding on partners income Required in about 40 states Flow-through entity withholds and remits tax based on investor s distributive share For exempt investors, this may be excessive since only a portion of distributive share may be taxable as UBI Need to attach withholding certificates to state returns to support claim Best practice to file as many withholding exemptions as possible to avoid excessive withholding Tax can still be withheld in states where the partnership did not incur UBI or in states where UBI is not taxed at all Investor will need to decide whether it is cost effective to file to recover tax Page 27

28 Practical K-1 state UBI reporting issues Determination by investor on which states to file in Risk management decision What to do about states with minimal taxable income States with losses file to preserve net operating loss carryforward? Running statute of limitation or not Once filing in a state, will commit to future year filings Miscellaneous compliance issues Unlike corporate tax forms, state-specific UBI forms only exist in about 13 states Remainder of states use corporate form or fiduciary form for exempt organizations taxed as trusts For non-state-specific UBI forms, reporting UBI does not fit with corporate or UBI line items whitepaper attachments are required showing state UBI by K-1 Page 28

29 Property tax Good, bad and ugly Page 29

30 Property tax The bad New Jersey The New Jersey Tax Court denied a nonprofit hospital s property tax exemption, finding the taxpayer entangled its activities and operations with those of for-profit entities, provided subsidies in the form of loans to for-profit entities, paid its executives excessive salaries, and used the property at issue substantially for profit. (AHS Hospital Corp. v. Town of Morristown, Docket Nos ; ; , June 25, 2015) Pennsylvania A nonprofit organization that operates group homes for intellectually disabled individuals is not entitled to an exemption from real property taxes because the organization failed to prove that it met all of the requirements under Hospital Utilization Project (HUP) v. Commw. (1985) 507 Pa 1, 487 A2d (Fayette Resources, Inc. v. Fayette County Board of Assessment, Pa. Commw. Ct. Dkt. No. 405 C.D. 2014, December 23, 2014) Page 30

31 Property tax The good Wisconsin The Wisconsin Court of Appeals, District IV, held that some hospital personal property located in rental and sleep centers was tax exempt under the nonprofit hospital exemption because the taxpayer met its burden of proof to show that the centers were not doctors offices but were instead used to expand hospital space to provide for the sick. (SSM Health Care of Wisconsin, Inc. v. City of Fitchburg, Wis. Ct. App., Dkt. No. 2015AP429, September 24, 2015 (not for publication).) Tennessee An administrative judge for the Tennessee State Board of Equalization ruled that a cancer treatment center and its associated therapy equipment are entitled to a property tax exemption, finding the subject cannot be distinguished from a licensed, nonprofit health care facility and the charity care provided to its cancer patients was substantial. (In re: Proton Therapy Center, Exempt Nos ; 84251, August 17, 2015) Page 31

32 Property tax Updated regulations Washington Exemptions for nonprofit organizations regulations amended: The Washington Department of Revenue has amended the following regulations effective April 10, 2015, to reflect legislative changes: Wash. Admin. Code (conditions under which nonprofit organizations, associations or corporations may obtain a property tax exemption) Wash. Admin. Code (nonprofit organizations or associations organized and conducted for nonsectarian purposes) Wash. Admin. Code (nonprofit child day care center, libraries, orphanages, homes for the sick or infirm, hospitals, outpatient dialysis facilities) Changes include providing that the non-exempt use of exempt property does not nullify the exemption where such non-exempt use is not more than 50 days in each calendar year and the property is not used for pecuniary gain or to promote business activities for more than 15 of the 50 days Additional changes related to certain leases and due dates as well Page 32

33 Property tax The ugly Connecticut Proposed a bill (SB 945) to restrict hospital property tax exemptions and payment-in-lieu-of-taxes program reimbursements to nonprofit hospitals that operate in the same location as emergency departments or federally qualified health centers Supporters Democratic Governor Dan Malloy s budget chief Benjamin Barnes Opposition The Connecticut Hospital Association Removing the exemption for properties not part of a nonprofit hospital s main campus would threaten hospitals financial ability to maintain community benefits HB6965, companion bill, was passed by the Democratic-controlled House in May 2015 fiscal impact was unknown Maine Republican Governor Paul LePage s tax reform proposal plan would significantly modify the exemption from real property taxes for nonprofit organizations, except houses of worship. It would reduce by half the 100% exemption for the real property of nonprofit organizations with a fair market value of over $500,000. The state projects the change would generate at least $60 million in annual revenue to local governments. Page 33

34 Questions? Page 34

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