A host of taxes and revenue enhancers are part of the fundingpackage for the health care reforms provided by thePatient Protection and Affordable CareAct.

Some are large, some are small, and some have generated greatmedia attention. One of the funding vehicles for PPACA which hasnot shared much of the limelight is the “tanning bed tax.” This articleexplores what it is, how it works, and how it affects health carereform.

Effective July 1, 2010, through the provisions of PPACA and theamendments made through the Health Care and EducationReconciliation Act of 2010, a 10 percent tax was imposed on tanningsessions at indoor tanning salons. This excise tax has beencodified in the Internal Revenue Code at section 5000B (26 U.S.C.5000B).

What the tax requires is that recipients of any indoor tanning service are responsiblefor paying an excise tax equal to 10 percent of the amount paid forthe tanning services.

Note: This article was written using backgroundmaterial excerpted from 2016 Healthcare Reform Facts.

#1: Background of the tanning bed tax

As initially enacted by Section 9017 of PPACA (PPACA Section9017 Excise Tax on Elective Cosmetic Medical Procedures), theexcise tax was aimed at “Elective Cosmetic Procedures” and wouldhave levied a five percent tax on elective surgeries such as breastaugmentation, tummy tucks, Botox injections, and other electivesurgeries.

However, after a great deal of lobbying from medical anddermatology interests, Section 9017, derisively nicknamed the“Botax” was nullified by Section 10907 (PPACA Section 10907 ExciseTax on Indoor Tanning Services in Lieu of Elective Cosmetic MedicalProcedures) which substituted the tax on tanning services.

The tanning bed tax was expected to generate $2.7 billion overten years, significantly less than the $5.8 billion that the“Botax” was supposed to raise. However, the tanning industry was aweaker target and the “Snooki Tax” (nicknamed after the realitytelevision star) replaced the “Botax.”

Individuals connected to the tanning industry were infuriated,feeling singled out by a tax they argued was directed at themiddle-class, and at an industry dominated by women owners whichwere far less able to absorb the tax than the wealthier individualswho would have been impacted by the cosmetic services tax.

#2: What services are covered

As defined by the code, an “indoor tanning service” is a servicethat uses any electronic product designed to incorporate one ormore ultraviolet lamps, and intended for the irradiation of anindividual by ultraviolet radiation, with wavelengths in airbetween 200 and 400 nanometers, to induce skin tanning.

However, as with most laws, there are certain importantexclusions we need to discuss.

Medical exclusions - Phototherapy

The term “indoor tanning service” excludes any phototherapyservice performed by a licensed medical professional, on themedical professional's premises (see IRC Section 5000B). Thesetypes of phototherapy services are exempt from the indoor tanningservices excise tax.

Phototherapy service (26 C.F.R. 49.5000B-1, Treas. Reg.49.5000B-1 Indoor Tanning Services) is defined as a service thatexposes an individual to specific wavelengths of light fortreatment of:

• dermatological conditions (e.g., acne, psoriasis, oreczema);

• sleep disorders;

• Seasonal Affective Disorder (SAD) or other psychiatricdisorders;

• neonatal jaundice;

• wound healing; or

• other medical conditions determined by a licensed medicalprofessional to be treatable by exposing the individual to specificwavelengths of light.

Qualified physical fitness facilitiesexclusion

There is also an exclusion for "Qualified Physical FitnessFacilities" (QPFF) (see 26 C.F.R. 49.5000B-1, Treas. Reg.49.5000B-1 Indoor Tanning Services) that meet specific criteria andoffer tanning as an incidental service to members without aseparately identifiable fee.

The membership fee to the facility is not taxable if thefacility meets the definition below of a “Qualified PhysicalFitness Facility.” However, if the facility does NOT qualifyas a QPFF, then the membership fee IS taxable, even if the memberdoes not utilize the tanning services.

A “qualified physical fitness facility” is a facility:

1. in which the predominant business or activity is providingfacilities, equipment and services to its members for purposes ofexercise and physical fitness,

2. indoor tanning services is not a substantial part of itsbusiness and,

3. it does not offer tanning services to the public for a fee oroffer different pricing options to its members based on indoortanning services.

To determine the predominant business or activity all facts andcircumstances should be considered including, but not limited to,the following:

• The cost of the equipment

• Variety of services offered

• Actual usage of services by customers

• Revenue generated by different services and

• How the entity holds itself out to the public throughadvertising or other means.

Other exclusions

Indoor tanning services also do not include spray tans ortopical creams and tanning lotions (26 C.F.R. 49.5000B-1, Treas.Reg. 49.5000B-1 Indoor Tanning Services).

Also, there are no exemptions from the tax for tax-exemptentities such as education institutions or charities. For example,if a tax-exempt university charges an activity fee that givesstudents access to indoor tanning services, the university wouldnot be exempt.

#3: Reporting and recordkeepingrequirements

As with any other tax information, the tanning service providermust maintain proper books and records showing the amount ofrevenue received for indoor tanning services.

Collecting the excise tax

Generally the indoor tanning service providers are responsiblefor collecting the tax from either the person paying for theservice or in some situations, from the person receiving theservice.

Situations may occur where the tax is not collected at the timeof payment, such in the case of gift cards. In thissituation, the person receiving the service is liable for the taxon the amount from the card used for indoor tanningservices.

If a customer purchases a gift card for indoor tanning servicesand pays the tax but does not use the card, the tax is notrefundable as there have been no provisions in the Code forrefunding the tax once it has been collected. The tax appliesregardless of whether the services are to be paid for, orreimbursed by insurance.

The tax is imposed at the time of payment for any indoor tanningservice and is collected by the service provider. The tax is 10percent of the amount of the services and is not grossed up.

The indoor tanning service provider who collects the paymentmust remit the full amount of tax with a timely filed Form720, Quarterly Federal Excise Tax Return. Excise taxdeposits are not required for the tax on indoor tanningservices.

Calculating the excise tax

In most instances the calculation of the tax should besimple. For example, for the purchase of $25.00 of tanningservices, the tax imposed would be $2.50. However, theregulations have addressed specific instances and how they shouldbe handled:

• Business promotions: If, as part of the course of a businesspromotion, an indoor tanning service provider offers a FREE tanningsession, which is not contingent on the purchase of other goods andservices, or part of a purchased bundle of services, the tax doesnot apply.

• Invoicing: If the tanning service provider separately identifiestanning services and non-tanning services on an invoice, only thetanning services need have the tax imposed upon them as long as theexact dollar amounts for each service and or good are included.

• Gift certificates or gift cards: If the service providercannot determine how much of the gift certificate will be used fortanning services, then the customer using gift certificate will becharged the applicable tax at the time it is used.

• Receipts without the tax detailed: If an invoice does notinclude a line item for the 10 percent tax, then it is presumed tobe part of the amount shown. To calculate and report the taxin this instance, the service provider must identify the taxableamount by multiplying 0.9091 and the price. For example on a $20sale, $18.18 would be the price of services and $1.82 would be theamount of tax to remit.

• Bundled services: If a service provider provides aninvoice showing a “bundled service”, the tax is calculated using aratio based on the non-bundled price of each service. Ifservices are included that are not normally charged separately,then Fair Market Value must be used.

• FORMULA: Divide the NON-BUNDLED PRICE for the indoor tanningservices by the charge for the TOTAL NON-BUNDLED PRICE OF ALLSERVICES in the bundle and apply that ratio to the bundledcharge. This will give the taxable amount. Multiply theTaxable Amount by 0.1 (ten percent) to get the tax.

• EXAMPLE: Tina’s Tanning and Dance offers a bundled price of 10dance lessons and 5 “free” indoor tanning services for $300. Ordinarily, Tina charges $30 for each dance lesson ($300) and $18($90) for each tanning session for a total regular charge of$390.

• The amount subject to being taxed in the bundle is $90 (tanningservices) dividedby $390 (total non-bundled price) times $300 (bundle price)equals 69.23 times0.1 (ten percent) resulting in a tax of $6.92

Reporting

All indoor tanning service providers who do not have an EmployerIdentification Number (EIN) must acquire one in order to file andremit tax due on Form 720. Indoor tanning service providers canapply for an EINonline or by phone, fax, or mail.

The Form 720 is filed quarterly and can be filed on paper orelectronically. Service providers who do not file Form 720 andremit the tax by the due date may be subject to a penalty, as willany person who intentionally fails to collect and remit thetax. Quarterly return due dates for the are April 30, July 31,October 31, and January 31.

#4: Effects of the tanning bed tax and itsfuture

In the nearly six years that it has been in effect, the tanningtax has faced serious issues.

As noted, the expected revenue for the tax was projected to be$2.7 billion over ten years. However the actual revenuescollected have been substantially less.

The tax was projected to collect $300 million during 2014, butthe Office of Management and Budget reports that only $92 millionwas collected. In fact, in 2012, the Joint Committee on Taxation revised downward the initialten-year revenue estimates from $2.7 billion to $1.5billion.

New Office of Management and Budget estimates are even gloomier,projecting that the tax will generate $955 million by 2019, withsome industry experts expecting tax revenues of significantlyless.

Explanations of what caused the failure of the tax to meetrevenue expectations are varied:

• Failure to anticipate the elasticity of the demand fortanning services – The presumption that the tax, levied onan item that wasn’t a “necessity” caused a decline in demand forservices. Those suggesting this point to the decline in the numberof tanning businesses and the number of tanning service jobs overthe past several years.

• Difficulty in forecasting revenue – Thepresumption that the $2.7 billion estimated revenue was based on aninaccurate sizing of the tanning market.

• Size of the taxable base – Through regulations,the IRS exempted “Qualified Physical Fitness Facilities.” Thissliced off the most lucrative part of the tax base – gyms and clubsthat offer tanning services as part of a comprehensive package –shifting the burden to the smaller businesses such as hair salonsand tanning salons.

• Non-compliance – Some suspect that some tanningbusinesses simply are not complying with the law, eitherdeliberately or by being uniformed. In fact, the TreasureInspector General for Tax Administration reported in 2011 that only11,000 tanning businesses had filed the Form 720 versus theestimated 25,000 businesses in the market.

Industry experts have blamed the decline in the tanning marketdirectly on the tax. The American Suntanning Association estimates thatnearly 10,000 tanning salons have closed since the implementationof the tax, resulting in the loss of over 80,000 jobs and reducingthe number of tanning businesses from 18,000 to 8,500.

Critics of the tax point out that the tax is aimed at a segmentof the economy that consists not only of small-businesses, butsmall businesses that are dominated by women – with 70 percent oftanning salons owned by women, with women being the bulk of thecustomer base.

What the future will bring is uncertain. Efforts have beenmade to repeal the tax, with legislation still pending inCongress--but so far without success.

At this point, it remains part of the funding vehicle, albeit asmall one, for PPACA health care reforms.

Note: This article was written using backgroundmaterial excerpted from 2016 Healthcare Reform Facts.