The anatomy of an excise tax: indoor tanning services.
Following a protracted and contentious debate, the Patient Protection and Affordable Care Act (ACA) was passed by the U.S. Senate on December 24, 2009, approved by the U.S. House of Representatives on March 21, 2010, and enacted into law with President Obama's signature on March 23, 2010, One of the myriad provisions contained in the ACA is a new 10% excise tax on indoor tanning services, effective for services performed after June 30, 2010.
An excise tax falls in the broad category of a transaction tax. The primary objective of an excise tax is to raise revenue. If demand for tanning services persists, the federal government stands to collect an estimated $2.5 billion in excise taxes from tanning salons during the next 10 years. Tanning session costs can range from $7 to $10 for 20 minutes in certain cities to $15 to $20 for 10 minutes in more expensive locations, plus the 10% excise tax, depending upon the establishment and geographic location.
A secondary objective of an excise tax can be to discourage certain behavior. It is possible the federal government is attempting to influence taxpayer behavior as part of this tanning tax on customers, hoping to dissuade consumers from the adverse health effects of spending too much time in a tanning bed or booth.
The impact of the new tax on owners and employees of tanning salons will unfold in time. One outcome may be the closing of some of these small businesses in the industry and the resulting unemployment of their workers. This could have a disproportionate effect on female business owners, as women own approximately two-thirds of U.S. tanning salons.
Originally, the ACA contained a 5% excise tax on cosmetic surgery as the bill was being drafted in Congress. This tax would have applied to injections and elective surgeries, such as breast implants. Expected to produce approximately $6 billion in tax revenue over 10 years, the tax was replaced with the tanning tax in the final bill.
On June 11, 2010, the IRS issued a temporary regulation providing guidance on applying the tanning tax. Regulation 49.5000B-1T sets forth details on the 10% excise tax on indoor tanning services imposed by the provisions of the ACA.
Taxable services. The new tax targets certain indoor tanning services of salons. It applies to services provided by electronic products designed for individual tanning purposes that utilize one or more ultraviolet lamps with wavelengths ranging from 200 to 400 nanometers. Tanning beds and booths are the equipment of choice.
Exempt services. Other sunless tanning alternatives include spray tans, topical tanning lotions, and creams. The excise tax does not apply to these indoor tanning services and products purchased at tanning salons.
Phototherapy services are exempt from the tax if provided by a licensed medical professional on the medical professional's premises. A phototherapy service exposes an individual to specific wavelengths of light for the treatment of dermatological conditions (e.g., acne), sleep disorders, psychiatric disorders (e.g., seasonal affective disorders), neonatal jaundice, wound healing, or other medical conditions determined by a licensed medical professional to be treatable by exposing an individual to specific wavelengths of light.
Protective eyewear. Generally, protective eyewear is exempt from the indoor tanning excise tax. However, the invoice must separately state the price of the protective eyewear from the price of the indoor tanning services purchased. In addition, the amount charged for the protective eyewear cannot exceed its fair market value. Only the indoor tanning services will be subject to the 10% excise tax.
Qualified physical fitness facility. Payments by customers to a qualified physical fitness facility are exempt from the excise tax. This exemption stands even when such facility offers tanning services.
A qualified physical fitness facility must satisfy the following requirements: The predominant business or activity is providing facilities, equipment, and services to its members for purposes of exercise and physical fitness; indoor tanning services do not constitute a substantial portion of its business (tanning is merely an incidental service for members without a separately identifiable fee); it does not sell indoor tanning services to the public for a fee; and it does not offer different pricing options to its members based wholly or partially on access to tanning services.
All relevant facts and circumstances should be considered in determining the predominant business or activity of a facility. The cost of the equipment, the array of services offered, the actual utilization of services by customers, the revenue produced by various services, and how the facility promotes itself to the public, by advertising or other means, are all factors in the determination.
As noted, some qualified physical fitness facilities provide their members access to indoor tanning services. Membership fees paid to such establishments are not subject to the excise tax.
Tax-exempt entities. Tax-exempt entities are not exempt from the indoor tanning services excise tax. Some tax-exempt colleges and universities assess students an activities fee entitling the students to take advantage of tanning services offered. Such tax-exempt institutions of higher education are subject to the new excise tax.
Collection and payment. At the time a customer remits payment for the indoor tanning services, the provider of such services collects the 10% excise tax. This applies even when a portion or all of the payment will be reimbursed by insurance at a later date. While the tax is levied on the purchaser of the tanning services, the service provider is liable for the tax due in cases whereby the tax is not collected from the customer.
If an invoice for indoor tanning services fails to separately reflect the amount of the excise tax, then the invoice amount (e.g., $20) is assumed to include the 10% tax. In this scenario, the actual tanning service would be valued at $18.18 ($20/1.1) and the tax would amount to $1.82 ($20 - $18.18).
The excise taxes are to be remitted by the provider to the federal government on a quarterly basis along with the filing of Form 720, Quarterly Federal Excise Tax Return. This form was revised by the IRS in July 2010; the new version contains line 140, indoor tanning services, in Part II.
For the first quarter (January, February, and March), the payment and form are due by April 30. The due dates are July 31, October 31, and January 31 for the second, third and fourth quarters, respectively. Providers failing to pay and file in a timely fashion are subject to penalties.
Gift cards. If a customer purchases a gift card from a salon for indoor tanning services and pays me applicable excise tax, and the gift card is never used, the purchaser of the gift card is not entitled to a refund of the tax paid.
A customer may redeem a gift card at a salon but not use it for indoor tanning services. Under this scenario, the excise tax is not applicable to the transaction.
When a customer purchases a gift card that can be used for various services at the salon, including indoor tanning services, no tax is due at the time of purchase of the gift card. At the time the gift card is exchanged for indoor tanning services, the applicable excise tax is due by the person redeeming the gift card. If the salon fails to collect the tax from the customer at the time of redemption, the provider of the indoor tanning services is responsible for the excise tax.
Bundled services. An invoice from a salon can include indoor tanning services along with other goods and services. Consider an invoice that clearly reflects the fair market value or price of each of the goods and services purchased in separate fashion and thus presents the precise dollar amount of each item purchased. In this case, the non-tanning services are not subject to the excise tax; the indoor tanning services are taxable.
Under a bundled services transaction, a customer purchases more than one service for a single price. The package deal includes indoor tanning services at free or reduced rates, plus other (non-tanning) services. The purchase price for the package deal will be allocated among all of the services purchased using a ratio based on the non-bundled price or fair market value of each service. The excise tax will only apply to the amount allocated to the tanning services. The same methodology holds true for bundled services that include unlimited indoor tanning services.
As an example of the above ratio, consider a salon that offers customers a package of bundled services: 10 yoga sessions and three free indoor tanning sessions. The bundled price is $120. The salon normally charges $12 for each yoga session and $10 for each indoor tanning session for a total (non-bundled) regular price of $150. The amount (for indoor tanning services) subject to the excise tax is calculated as $30/$150 x $120 = $24. The tax is computed as $24 x 10% = $2.40.
Adequate records. Indoor tanning service providers are required to maintain adequate records reflecting the dollar amount of revenue related to indoor tanning services. Tax reporting documentation is essential for salons at this time. Reliance on some version of the old Cohan Rule will not suffice.
Present and Future
The ACA will have a significant effect on businesses and individuals. The provisions will be phased in over time. Mandatory health insurance coverage, the centerpiece of the historic legislation, will not become effective until 2014. Nevertheless, some of the more important tax changes are effective prior to the 2014 date. The new 10% excise tax on indoor tanning services is a prime example, with an effective date of July 1, 2010. CPAs advising small businesses should be aware of the tax effects on various industries of any new legislation.
Andrew D. Sharp, PhD, CPA, is a professor of accounting, and Cecilia C. Venker is a research assistant, both at Spring Hill College, Mobile, Ala.
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|Title Annotation:||United States. Congress. House; United States. Congress. Senate; Patient Protection and Affordable Care Act; United States. Internal Revenue Service|
|Author:||Sharp, Andrew D.; Venker, Cecilia C.|
|Publication:||The CPA Journal|
|Date:||Feb 1, 2011|
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