Extras on Excise: Washington Keeps Coffers Closed, Denies B&O Tax Refund to Health Care Providers

Washington health care providers appealing the rejection of their refund requests for business and occupation (B&O) taxes were turned back again in a decision by the Appeals Division of the Washington Department of Revenue. The group of hospitals and nursing homes claimed to be due refunds for B&O tax paid on receipts from insurance carriers who participate in certain federal healthcare programs – Federal Employee Health Benefits(FEHB), Medicare Advantage and TRICARE – arguing that the imposition of B&O tax is preempted by federal law. Washington disagreed.   

The federal statutes creating the FEHB, Medicare Advantage and TRICARE programs each contain preemption provisions that prohibit state taxation of payments made by the programs to the private insurance carriers that are program participants. As the Washington Department of Revenue noted in its decision, the health care providers do not receive payments directly from the program funds and instead are paid by the recipients of program funds.  However, utilizing an economic pass-through theory, the taxpayers argued that Washington’s B&O tax is an indirect tax on the insurance carriers because they could pass the tax costs to the carriers by setting fees that incorporate those costs.    

The Appeals Division rejected this argument, noting that similar theories had been rejected by the courts, specifically in United States v. West Virginia, 339 F.3d 212 (4th Cir. 2003). That court held that a tax on the gross income of a business receiving payments from an insurance carrier that participates in the FEHBA program was not an indirect imposition of tax on the carrier with respect to payments from the FEHBA fund. The court wrote that the holding in United States v. Fresno, 429 U.S. 452 (1977) established the rule that an economic pass-through of a generally applicable tax does not constitute a tax, direct or indirect, of the pass-through recipient. While the Fresno case concerned constitutional preemption of state taxation of the federal government, the West Virginiacourt found the constitutional and statutory prohibitions to be quite similar and determined that Fresno’s rule was applicable to its case.  

If Washington had accepted the taxpayers’ economic pass-through theory argument, the federal preemption from state taxation for insurance carriers participating in these programs could apply not only to the receipt of federal program funds by the carriers but to the disbursement of those monies by the carrier to Washington health care providers and also to monies disbursed from provider to provider.  Any health care service provider that sets its costs could pass on its tax burden, and the impact could potentially reach the protected carrier. At what level would the connection to the federal funds be too attenuated for the taxation preemption to apply to Washington B&O tax, and who would decide? 

Rather than attempt to navigate such muddy waters, Washington Department of Revenue determined that the plain language of the relevant preemption provisions clearly identified the protections and the protected parties. Unfortunately for the petitioning taxpayers, they were left uncovered.  

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn : Do you think Washington health care providers who receive payments for health services from state tax exempt insurance carriers should be exempt from Washington B&O tax with respect to those payments?

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