A hospital paid sales tax on medical supplies, like sutures, artificial joints and screws, which are exempt from tax. They bought six screws but used only four on a patient. At tax time, do they get a refund on all six or only the four that were actually used?
It's not a riddle. Hospitals across the nation encounter these questions each year. How do you ensure you're paying the correct amount of sales tax and if necessary, maximizing refunds?
What is Sales and Use Tax?
Sales and use tax is complicated, especially for hospitals. Different parts of the hospitals, like flower shops, cafeterias, surgical suites, home health care, etc., are taxed differently, and often, nonprofits and for-profits exist under one umbrella. In addition, states typically have exemptions from sales and use tax allowed for various health care facilities and often have a special exemption for purchases of medical supplies. Refunds may be obtained if a hospital pays tax on exempt purchases.
Sales and use tax are complementary, and only one tax applies to each transaction. They work in harmony so if the retailer fails to charge sales tax, then the use tax laws kick in and require the purchaser (consumer) to pay tax.
For example, if an Oklahoma hospital is buying hospital beds from a manufacturer located in California, the California manufacturer may not have a legal requirement to collect the Oklahoma sales tax because it does not have a presence in the state. In this case, the Oklahoma hospital, as a consumer, is required to pay the tax in the form of use tax.
Generally, but not always, the same laws and tax rates apply whether it's sales or use tax. Different treatments could motivate a hospital to have more control over whether they pay sales or use tax. Because of all these complexities, hospitals should assess the tax paid on an annual basis to determine if they have paid sales or use taxes in areas that are exempt from tax, or if they owe additional tax because they haven't been charged enough.
A sales and use tax review entails evaluating a hospital's entire tax system to look for disparities in the compliance process while determining ways to improve it.
A Case Study
Recently, a 350-bed hospital with nearly 100 clinic and outpatient facilities, more than 4,500 employees and 260 physicians was seeking help to engage in best practices so they could pay the minimal amount of tax and receive the most refunds.
By using a combination of sales and use tax process review, refund study, taxability review, sales and use tax training, and ongoing consulting support, the hospital is maximizing their tax benefits.
Nearly $500,000 in refunds have been identified by the hospital. In many cases, refunds are doubled or even tripled.
By understanding sales and use tax, hospitals can operate more efficiently by minimizing cost and increasing their bottom line.