Was a nonprofit hospital service corporation exempt from California use tax on out-of-state purchases?

Plain-English summary

A nonprofit health-service provider bought capital assets and expense items from out-of-state vendors. It argued that, because it was regulated by the Department of Insurance, collected premiums, paid claims, and qualified as a nonprofit hospital service corporation, Insurance Code section 11493.5 exempted it from California use tax.

The hearing officer disagreed. The organization did not claim to be an insurer filing returns or paying gross-premiums tax. Although section 11493.5 described a nonprofit hospital service corporation as charitable and exempted its funds and assets from specified taxes, Hospital Service of California v. City of Oakland interpreted that protection as a property-tax exemption, not an exemption from excise taxes.

Because use tax was an excise tax triggered by buying tangible personal property for use in California, the officer recommended that the determination be redetermined without adjustment. The September cover letter gave the petitioner 30 days to seek reconsideration or an oral Board hearing; otherwise, the recommendation would be presented to the Board for final consideration.

Common questions

Did nonprofit or charitable status alone eliminate use tax?

No. The recommendation distinguished protection for the corporation's funds from an exemption for the transaction-based use tax.

Was this the Board's final ruling?

Not in the reproduced document. It is a hearing officer's recommendation accompanied by procedural options before final Board consideration.

Citations and references

• California Insurance Code section 11493.5 (nonprofit hospital service corporation exemption language, as cited)
• California Revenue and Taxation Code sections 6201-6207 (use tax, as cited)
• Hospital Service of California v. City of Oakland (1972) 25 Cal.App.3d 402 (property-tax versus excise-tax distinction, as cited)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/135-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/135-0272.pdf

Original ruling text

135.0272
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
916-327-5428

September 26, 1990
REDACTED TEXT
Dear REDACTED TEXT:
Re:

REDACTED TEXT

Enclosed is a copy of the Decision and Recommendation pertaining to the petition for redetermination in the above-referenced matter. I have recommended that the determination be redetermined without adjustment as explained in the Decision and Recommendation. There are three options available to you at this point. 1. If, after reading the Hearing Decision and Recommendation, you believe that you have new evidence and/or contentions, you should file a Request for Reconsideration. No special form is required to file the Request for Reconsideration, but it must be filed within 30 days from the date of this letter and clearly set forth any new contentions. If new evidence is the basis for filing the request, the evidence must be included. Direct any such request directly to me, with a copy sent to the State Board of Equalization, P.O. Box 942879, Sacramento, CA 942790001, Attn: Principal Tax Auditor. I will subsequently notify you whether the request has been taken under review or whether the request is insufficient to warrant an adjustment. If I conclude that no adjustment is warranted, I will then notify you of the procedure you can follow to request an oral hearing before the Board. 2. If, after reading the Hearing Decision and Recommendation, you find that there is no basis for filing a Request for Reconsideration, but nevertheless desire to have an oral hearing before the Board, a written request must be filed within 30 days with Ms. Janice Masterton, Assistant to the Executive Director, Board of Equalization, P.O. Box 942879, Sacramento, CA 94279-0001.

REDACTED TEXT

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September 26, 1990
135.0272

3.
If neither a request for Board hearing nor a Request for Reconsideration is received within thirty (30) days from the date of this letter, the Hearing Decision and Recommendation will be presented to the Board for final consideration and action. Very truly yours, Susan M. Wengel Hearing Officer SMW:te Enc. cc:

Ms. Janice Masterton
Assistant to the Executive Director (w/enclosure)
Mr. Glenn Bystrom
Principal Tax Auditor (file attached)
Van Nuys – District Administrator (w/enclosure)

135.0272

STATE OF CALIFORNIA
BOARD OF EQUALIZATION
APPEALS UNIT
In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:

HEARING

DECISION AND RECOMMENDATION

REDACTED TEXT
Petitioner

The above-referenced matter came on regularly for hearing before Hearing Officer Susan M. Wengel on March 20, 1990, in Van Nuys, California. Appearing for Petitioner:

REDACTED TEXT
REDACTED TEXT

Appearing for the Department
of Business Taxes:

Gerald Dunlay
Senior Tax Auditor
Ira Anderson
Supervising Tax Auditor
Protested Item

The protested tax liability for the period January 1, 1985 through December 31, 1987 is measured by: Item

State, Local and County

Transit

$

143,848

A. Ex-tax purchases from out-of-state
vendors, subject to use tax:
Capital assets, actual basis
Expense items, test basis

143,848
1,067,712

$

1,088,199

REDACTED TEXT

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August 29, 1990
135.0272

Contentions of Petitioner
1.
REDACTED TEXT is exempt from use tax under Insurance Code Section 11493.5 as it is a nonprofit hospital service plan. Summary of Petition Petitioner is a corporation which began business in California in 1982 as a non-profit health service provider. During petitioner’s first audit, a review was made by the Department of Business Taxes (Department) of bills paid by petitioner which involved purchases of tangible personal property from out-of-state vendors. Due to the vast number of bills involved, the Department reviewed every other drawer of bills for an entire year. The results of this test were projected over the entire audit period and a use tax was assessed. Petitioner’s sole contention is that it is a nonprofit hospital service corporation as it is regulated by the Department of Insurance, collects premiums, pays claims and is allowed by the Internal Revenue Service to deduct “claims reserves” on its federal income tax returns. As such petitioner claims to be exempt from the California use tax under Insurance Code Section 11493.5. Analysis and Conclusions Initially, it is noted that petitioner does not contend that it is an insurance company. It is not an insurer which files tax returns with the Insurance Commissioner or pays a gross premium tax. Petitioner’s position is that it is exempted from use tax because of Insurance Code Section 11493.5 which provides: “Every nonprofit hospital service corporation organized or admitted under this chapter is hereby declared to be a charitable and benevolent institution and all of its funds and assets shall be exempt from all and every state, county, district, municipal and school tax and other levies other than taxes on real estate and office equipment. The provisions of this section prohibit the imposition of a tax on the transfer of tangible assets to a nonprofit hospital service plan, licensed on or after July 1, 1982, under Chapter 11a (commencing with Section 11491) of Part 2 of Division 2, from another nonprofit hospital service plan. This prohibition is applicable only to transfers concluded before January 1, 1983.” It is not disputed that petitioner is a nonprofit hospital service corporation operating under the authority of the Insurance Commissioner. The sole issue is whether, as a nonprofit hospital service corporation, it is exempt from California’s use tax. We must conclude that it is not.

REDACTED TEXT

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August 29, 1990
135.0272

Although petitioner contends that the case of Hospital Service of California v. City of Oakland (1972) 25 Cal.App.3d 402 is distinguishable from the present case, we cannot agree. This case, which deals with an excise tax, clearly holds that section 11493.5 only exempts hospital service corporations from a property tax on their funds. It does not exempt these corporations from excise taxes, such as California’s use tax. Petitioner, by purchasing tangible personal property for use in this state and using it here, has voluntarily and properly subjected itself to California’s Use Tax (see Revenue and “Taxation Code Sections 6201-6207). Recommendation It is recommended that the tax be redetermined without adjustment.

August 29, 1990
Susan M. Wengel, Hearing Officer

Date