Healthcare organizations across the United States face unique complexities regarding state taxes when doing business in Washington. Unlike most states, Washington does not impose an income tax on businesses. Businesses are, however, subject to the Washington business and occupation (B&O) tax. The B&O tax is a tax on gross receipts for the privilege of doing business in the state. The tax is imposed on every legal entity with activities in Washington. Washington does not exempt nonprofits from the B&O tax, nor does it exempt them from sales and use tax as many states do. As a result, nonprofit healthcare, religious, and other organizations in Washington are generally subject to the same taxes as for-profit businesses.
In the healthcare industry, there has been an increase in the number of acquisitions and mergers, reorganizations, and strategic alliances among healthcare providers. These recent trends will likely continue as providers find ways to reduce healthcare and administrative costs that the market is demanding. Many of these arrangements can create significant state and local tax consequences for hospitals in Washington.
Washington State Tax Issues and Opportunities for Hospitals
Clark Nuber assists our healthcare clients in addressing a wide variety of state and local tax issues. The list below includes a few of the most common opportunities for hospitals to reduce their tax burden and avoid unnecessary overpayments.
Sales and Use Tax
Generally, hospitals and other nonprofit entities are subject to sales and use tax on purchases of tangible personal property and select services in Washington. However, Washington law provides several exemptions from the tax for specified medical products and select technology and data processing services. Clark Nuber can help your organization understand the exemptions that may apply to your business activities and determine if your organization has significant sales and use tax overpayments for which refunds are available.
B&O Tax Classifications
The B&O tax is imposed at different rates, depending on the classification of a taxpayer’s activities. The most common B&O tax classifications that hospitals report under include:
- Public or nonprofit hospital B&O tax classification,
- Service and other activities B&O tax classification, and
- Retailing B&O tax classification.
Differentiating between classifications can be difficult depending on the activities a healthcare organization performs. Clark Nuber can help your organization determine which B&O tax classification applies to each revenue stream to ensure the correct tax rate is applied on the return.
B&O Tax Deductions
Generally, all Washington gross incomes are subject to B&O tax and are reportable on the Washington combined excise tax return. Washington law permits nonprofit hospitals to deduct certain income when computing the B&O tax liability. These include payments from selected government sources, provided the hospital meets certain organizational requirements. Our clients often struggle differentiating between revenue received from state and federally subsidized programs and identifying which revenue types are deductible, excluded, or exempted from the B&O tax base. Clark Nuber can help your organization determine if it meets the requirements to claim B&O tax deductions and how the law applies to each payment source.
When hospitals undergo reorganizations and contract to collaborate together, they often enter into intercompany agreements that have B&O tax consequences (regardless of whether the transactions are formally documented). It is common to see services and/or goods provided between related or aligned entities. Transactions between related parties are generally subject to tax in Washington as are amounts that are normally thought of as pass-throughs or reimbursements in joint operating arrangements. Clark Nuber can help your organization determine if it is engaged in taxable intercompany or cooperative transactions and if any additional B&O tax obligations result from such arrangements.
Navigating Washington state and local jurisdiction excise tax rules and regulations is especially complex for healthcare entities with operations in Washington. Our state and local tax team at Clark Nuber would love to learn more about your particular business and identify if there are strategies we can help implement to reduce B&O and sales and use tax overpayments and reporting errors for your business.
To schedule an introductory call with us, please contact any member of the Clark Nuber State and Local Tax group.
Yoandra Cortez is a senior in Clark Nuber’s State and Local Tax Services Group.
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