Tax Type
Retail Sales and Use Tax
Description
Non Profit Exemption
Topic
Taxability of Persons and Transactions
Date Issued
04-19-1996
April 19, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*************
This will reply to your correspondence in which you request correction of sales and use tax assessed to your clients, ***** (Taxpayer A) for the period September 1990 through May 1993 and *******(Taxpayer B) for the period April 1991 through May 1993.
FACTS
Taxpayer A is an affiliate of a nonprofit hospital. The affiliate and the hospital are part of a corporate structure that includes other nonprofit and for-profit entities. The hospital is entitled to exemption from the sales and use tax under Code of Virginia § 58.1-609.7(4).
Taxpayer A was created to oversee the development and construction of a medical complex, off-site from the nonprofit hospital, which includes a diagnostic center, cancer treatment center, urology center, physical rehabilitation center, medical offices, and a cafeteria. The nonprofit hospital operates the diagnostic center, the cancer treatment center, and the cafeteria. A project fund was created from the sale of municipal bonds to finance the construction costs and the procurement of equipment and furnishings. Purchases for the medical complex were made pursuant to the nonprofit hospital's purchase orders.
As a result of an audit of the corporate structure, the auditor assessed tax to Taxpayer A for untaxed purchases used to construct, equip, and furnish certain facilities within the complex. The purchases that occurred during development are not in dispute. You assert that Taxpayer A has been erroneously assessed for purchases made subsequent to development for use in the diagnostic center and the cafeteria. Further, you argue that the nonprofit hospital is the purchaser but is not subject to the tax because the purchases were for use in the diagnostic center and the cafeteria which are integral parts of the hospital. You refer to Virginia Regulation (VR) 630-1047(D) and P.D. 92-220 (11/4/92) to support your argument.
Alternatively, you argue that kitchen equipment, cabinets, bookcases, carpets, tiles and other permanently attached floor coverings, and floor to ceiling walls made of sheetrock are all taxable to the sellers/contractors because such purchases became real property upon installation. Neither Taxpayer A or the nonprofit hospital would be subject to the tax. You base your argument on the application of the use tax to contractors under Code of Virginia § 58.1--610 and P.D. 92-68 (5/27/92).
Taxpayer B provides information and data processing services and operated as a separate entity prior to October 1991. After that date, Taxpayer B became a division of the nonprofit hospital (entitled to the nonprofit hospital exemption) and during the audit period provided over 90% of its data processing services to the nonprofit hospital. The auditor prorated the tax on purchases by Taxpayer B based on the percentage of services provided to for-profit affiliates. Taxpayer B has paid the assessment; however, you request a refund of a portion of the tax based on the belief that as a division of the nonprofit hospital, Taxpayer B is entitled to the full exemption afforded the hospital.
DETERMINATION
Erroneous Assessment to Taxpayer A
It is established that Taxpayer A was primarily involved in the development and construction of the medical complex. For accounting purposes, purchases and expenses were assigned to Taxpayer A, although such purchases were made pursuant to hospital purchase orders.
The dispute centers on the fact that Taxpayer A carries the same name as a subaccount of the nonprofit hospital and the auditors viewed Taxpayer A as a separate entity making tax exempt purchases for the medical complex in the absence of an exemption. The question to be resolved is which entity is actually the purchaser of the contested property.
The traditional test in making this determination is whose credit is bound by the transactions. It is established that purchase orders were issued in the name of the nonprofit hospital. A review of the trust and loan agreements governing the project fund designates the nonprofit hospital as the contractual participant in the loan agreement. According to additional information submitted, requisitions for payment of invoices were requested on behalf of the nonprofit hospital. Given these facts and the absence of documents indicating Taxpayer A as the purchaser, the credit of the nonprofit hospital was bound and as such, the hospital was responsible for the contested purchases.
Hospital Exemption
Code of Virginia § 58.1-609.7(4) provides an exemption from the sales and use tax for "[t]angible personal property for use or consumption by a nonprofit hospital or a nonprofit licensed nursing home." VR 630-1047 interprets the exemption and provides that a clinic that is an integral part of a hospital conducted not for-profit qualifies for exemption from the tax.
It is now established that several contested purchases were made by the nonprofit hospital for the diagnostic center. The diagnostic center is staffed by hospital personnel and doctors and all services rendered to patients are billed by the hospital. The diagnostic center, clearly functions as a part of the nonprofit hospital and, therefore, the purchases associated with the diagnostic center qualify for exemption in accordance with the above cited statute and regulation. This is consistent with the decision rendered in P.D. 92-220 in which exemption was granted to a nonprofit children's hospital outpatient clinic as part of an exempt hospital, despite the fact that the clinic was located at a different site.
The issue of the cafeteria is unique. The cafeteria, while staffed and operated by the nonprofit hospital, serves the entire medical complex. Generally, purchases for nonprofit hospital cafeterias are entitled to the nonprofit hospital exemption because the cafeteria is an integral part of the hospital and provides services to all areas of the hospital including the patients, staff and medical personnel, within the physical setting of the hospital. In this case, the cafeteria serves individuals who are not served by the diagnostic center or affiliated with the nonprofit hospital. This fact does not negate the exemption, since, in the traditional setting, the general public is not precluded from using the services of a hospital cafeteria.
Purchases Regarding Real Property Installation
Code of Virginia § 58.1-610 provides that a contractor is considered the user and consumer of all tangible personal property incorporated in real property regardless that the contractor purchases the property or the property is furnished to the contractor by the customer. As the consumer, contractors must pay the use tax on such purchases. Code of Virginia § 58.1-610(D) provides an exception for certain items such as cabinets, kitchen equipment, and floor coverings (as distinguished from the floor themselves). The exception applies if the seller of the items maintains an inventory of such items and when floor coverings are not permanently attached to the floor.
The department addressed a similar issue in P.D. 92-68, which dealt with a cabinetmaker who furnished and installed cabinets for a nonprofit hospital. The cabinetmaker did not maintain an inventory but custom made and installed cabinets per order. The use tax was imposed upon the cabinetmaker based on the cost price. Consistent with the ruling and based on the information provided, the use tax, in this case, is imposed on the sellers/contractors as they did not sell from an inventory, but instead are deemed the consumers of tangible personal property incorporated into real property in the diagnostic center and the cafeteria.
Taxpayer B
Based on information provided by Taxpayer B, the auditor assessed tax, on a prorated basis, to purchases by Taxpayer B according to the percentage of data processing services provided to for-profit affiliates after October 1991. This is proper given that the nonprofit hospital exemption applies to purchases for use in the provision of services to the nonprofit hospital only. This assessment is correct and Taxpayer B is not entitled to a refund.
In accordance with the decisions set forth in this ruling, Taxpayer A is relieved of Assessment 1****which will be abated in full. The auditor will revise Assessment 2 *** to remove contested purchases made by the nonprofit hospital and a refund of the tax paid on such purchases will be issued under separate cover. If you have additional questions, please contact **** in the Office of Tax Policy at****************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8362J
Rulings of the Tax Commissioner