Trends in Taxation: Hospital Exemptions under the Microscope

August 2017

By Steven Shill

Tom Smith, partner in BDO’s State & Local Taxation (SALT) practice, has more than 20 years of experience, specializing in state and local taxation within healthcare. We interviewed him about state and local taxation issues that are top-of-mind for healthcare providers.

What is your practice’s focus?
Our team provides sales and use tax consulting services for large for-profit hospital groups that operate multiple facilities in multiple states. Issues arise for them because products are taxed differently by jurisdiction—items subject to sales and use tax in one state are not necessarily subject to sales tax in others. We help hospitals navigate the varying tax laws around supplies and devices purchased.

Our goal is to establish preventive measures to mitigate risks around state audits, but we also manage numerous audits. Right now, we are reviewing an acquisition of a large for-profit group to determine whether it has exposure in past periods and providing compliance training for the local account staff.

Tell us about BDO’s Recurring Refund practice. What factors do hospitals often overlook when it comes to overpaying taxes?
The practice started in Oklahoma in 2001, and we now file refund claims on a regular basis for more than 10 hospitals statewide. What led to the practice’s development was the discovery of a rule unique to Oklahoma, whereby all implants are taxable. If a patient has an implant put in, the hospital pays sales tax on it. But hospitals can receive a tax refund if they can prove the implant was put into a Medicare-Medicaid patient, and we help them keep track of such procedures so they can claim refunds.

The biggest reasons hospitals end up overpaying taxes is because of two factors: the sheer volume of goods they purchase, and confusion around what those products are and how they’re being used.

Accounts payable clerks process new products even if they are never actually used, and hospitals are still (often unknowingly) paying taxes on those products.

Hospitals have such a high volume of products that it becomes difficult to keep track of everything that is being taxed. Often, we’ll first ask hospitals how many items they have in their master list, and if they say more than 3,000, we know they need to trim that list down. We help identify ways they can do so.

What are some emerging trends hospitals should keep an eye on when it comes to state and local taxation?
On a state and local basis, governments are hungry for revenue, with many facing budget crises. One way they look to boost revenue is by increasing taxation, specifically through property taxes.

The issue of whether state and local jurisdictions can tax nonprofit hospitals is still a big one. As nonprofit hospitals are allowed numerous federal and state tax benefits, to the tune of an estimated total annual value of $12 billion, many local and state jurisdictions are calling for a return benefit to qualify for the property tax exemption. At the very least, some jurisdictions require a certain amount of charity care or community benefit to justify property tax exemptions, while others enter agreements called “payments in lieu of taxes,” where nonprofits pay back local governments for some of their foregone property tax revenue.

Most recently, Connecticut’s House of Representatives approved a bill that would allow communities greater flexibility in revising tax bills to reflect changes in state aid ordered later this year. Connecticut Gov. Dannel P. Malloy has separately recommended allowing communities to tax nonprofit hospitals’ real property, which his office estimates would result in about $212 million revenue annually for cities and towns. Going forward, I think we’ll see an increase in state and local audits of hospitals, and more local governments re-examining exemptions for nonprofit hospitals.

How do these trends intersect with your work at BDO?
It’s no secret that rural hospitals, especially not-for-profit ones, have struggled in recent years for numerous reasons; hospitals with less than 100 beds in 2013 had an occupancy rate of just 37 percent, reflecting a 5.6 percent drop from 2006, according to the Medicare Payment Advisory Commission. And as governments look to tax them at greater rates, that will only compound their financial risk.

Our practice’s clients are oftentimes the larger, for-profit hospital networks that enter joint ventures with not-for-profit rural hospitals. The larger, for-profit hospitals need the patients from the rural ones to feed into their bigger medical centers, and the smaller, rural hospitals need the larger ones to remain financially viable. And as hospitals—for-profit and not-for-profits alike—see their taxes increase, that trend is only going to grow.

Steven Shill is the national co-leader of The BDO Center for Healthcare Excellence & Innovation. He can be reached at sshill@bdo.com.

Tom Smith is a partner in BDO’s State & Local Taxation (SALT) practice. He can be reached at tasmith@bdo.com.

 
Return to the BDO Knows Healthcare Newsletter - Summer 2017