November 23, 2015

By Joe Haberzetle, JD, LLM

Should retirement communities, assisted living facilities, and the like charge sales tax on the meals provided to their residents? The answer is not a simple yes or no, as guidance posted recently by the Washington Department of Revenue (DOR) on its website shows.

This guidance states that the taxability of meals provided by a senior living or care facility depends first and foremost on whether the facility provides healthcare services. It confirms that meals provided by “licensed boarding homes, hospitals, nursing homes and assisted living facilities” are not subject to sales tax. However, the posting states that meals provided by an independent senior living residence that is not a licensed boarding home and that does not provide healthcare services are subject to sales tax.

Generally, sales of prepared meals (such as those served at restaurants, cafeterias, etc.) are subject to sales tax in Washington. The DOR has historically acknowledged that meals served to residents or patients by assisted living facilities, nursing homes, hospitals and other health care facilities are nontaxable, as they are simply part of the service those facilities provide. The new guidance draws a bright line between those facilities licensed to provide healthcare services and those that are not – and clarifies that any facility that is not a licensed healthcare provider must charge sales tax on all prepared meals.

Furthermore, the guidance provides that even where the facility does not itemize a separate charge to residents for the meals, tax will still be imposed. Unless records are kept showing the fair selling price, the DOR states that it will compute tax on double the cost of the meals served. Such cost would include not only the direct amounts paid for food and beverages, but also the costs of preparing and serving meals, plus any incidental costs and a reasonable overhead charge.

Although this may be new information to some senior living facilities, it is not based on any change to the underlying statutes or regulations. Thus, not only will the DOR apply this tax treatment to current and future periods, but it will likely also apply it to past periods as long as they remain open for audit (currently most taxpayers are open for audit back to the beginning of 2011).

The only exception would be if the taxpayer obtained previous written advice from the DOR that is contrary to this position. It should be emphasized that it is the legal obligation of the seller to collect and remit sales tax on taxable transactions, and the DOR can enforce this obligation against the seller regardless of whether it actually collected tax from its customers. As a result, a senior living facility could be held liable for tax it never collected it from its residents or guests.

On the plus side, the guidance seems to support the notion that as long as a facility qualifies as an assisted living facility, nursing home or licensed boarding home under Washington law, all meals provided to residents are non-taxable. Thus, even if such a facility has an independent living section or wing and a restaurant or cafeteria to serve those residents, the meals will served to those residents will be non-taxable, just as would the meals served to the assisted living or nursing care recipients.

There is some ambiguity regarding meals provided by assisted living facilities, nursing homes and hospitals to those who are not residents or patients of the facility. The guidance recently posted on the DOR’s website suggests that such meals are not subject to sales tax. However, the DOR’s regulation on these facilities states that meals they sell to “doctors, employees and visitors” are subject to sales tax. Since the regulation controls over any informal guidance provided on the DOR’s website, it appears that such sales of meals to non-residents remain taxable. If there is no separate charge to the nonresident for the meal, it is unclear whether the facility is obligated to calculate and report use tax on the value of the meal provided.

Contact Clark Nuber or your tax provider for assistance in understanding how Washington sales/use laws apply to your specific facts or to discuss any other matters relating to state or local taxes.

© Clark Nuber PS, 2015.  All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.