Could a hospital purchasing cooperative exclude membership fees when member facilities bought supplies only as consumers?

Plain-English summary

A cooperative that standardized products, bought hospital supplies in volume, warehoused them, and distributed them to member health-care facilities could qualify as a consumer cooperative. Legal entities such as hospitals could be consumers for this purpose when they acquired medicines, supplies, devices, and appliances for their own use or were treated as the consumers under their patient-billing method.

The member facilities could not buy anything through the cooperative for resale, issue resale certificates to the cooperative, or resell an item before using it. While those conditions were met, the cited statutes allowed exclusion of initial or periodic membership fees and labor performed in place of, or as part of, monthly membership fees. Violating the consumer-only conditions would lose the exclusion.

The letter cautioned that Board staff could not issue a tax ruling; it provided only an opinion on the stated facts.

Citations and references

• California Revenue and Taxation Code sections 6011.1, 6012, and 6012.1 (as cited)
• California Sales and Use Tax Regulations 1503 and 1591 (as cited)
• Legislative history of sections 6011.1 and 6012.1 rejecting a proposed natural-person limitation — described; bill, session, proposal, committee materials, and history documents not identified or reproduced in the official PDF
• Requester's Apr. 14, 1994 letter seeking reconsideration and a new ruling based on added facts, plus prior staff correspondence with cooperative representatives and a prior opinion — quoted or described; complete request, attachments, correspondence, opinion, representative and cooperative identities beyond redaction, and prior record not reproduced in the official PDF
• Product standardization, cooperative purchasing, central warehousing/distribution, supplies at cost, patronage and membership fees, overhead, vendor discounts, hospital and health-care member consumption, patient billing, medicines/supplies/devices/appliances, resale restrictions, certificates, and member labor — facts supplied; organizational documents, membership agreements, fee schedules, purchase and vendor records, inventory, distribution records, patient bills, resale certificates, labor records, returns, and tax computations not reproduced in the official PDF
• Official Annotation 295.0315's hospital service cooperative, consumer-only participation, no-resale condition, and legal-person consumer-cooperative summary, dated May 31, 1994 — annotation omits the reconsideration and prior-opinion provenance, staff-ruling limitation, specific operations and fee exclusion, authorities and legislative-history basis, patient-billing and resale-certificate details, source wording defects, missing records, and later outcome and supplies no additional organizational or transaction record
• Possible later Board ruling, cooperative qualification, membership or patronage fee, supply purchase or distribution, resale-certificate issue, member resale, return filing, audit, assessment, payment, refund claim, appeal, or other agency action — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-0315.pdf

Original ruling text

295.0315

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

May 31, 1994

Re:
Consumer Cooperative
Dear
I am answering your letter to me dated April 14, 1994. You are following up on my previous correspondence with --- and--- on its status as a consumer cooperative (Rev.
& Tax. Code §§ 6011.1 and 6012.1). You request reconsideration of my previous opinion and for a new ruling based on new facts. We note that t he Board staff cannot issue tax rulings; only the Board itself may do that. We can, however, give you our opinion regarding the correct application of tax to a given set of facts. You offer the following additional facts: "In summary, --- function is to provide advanced leadership and cost containment to the members through product standardization, cooperative purchasing, and centralized distribution. Consumable supply items and tangible personal property, which member institutions are the consumers of, are provided by the cooperative to respective member institutions at cost. Patronage fees are charged by --- to the member hospitals and health care facilities to cover wages, employee benefits, rent, insurance, accounting, utilities, and other overhead costs which are incurred by the cooperative and which had previously been incurred separately by the member health care facilities. Cost savings are obtained though cooperative purchasing of health care and hospital supply items on a collective basis, obtaining greater quantity discounts from vendors, and by centralizing warehousing and distribution functions to reduce operating costs.

"… is purchasing tangible personal property for which the member hospitals and health care facilities are the consumers of, in accordance with Revenue and Taxation Code Sections 6011.1 6012 and Sales and Use Tax Regulations 1503 and 1591. Specifically, --- purchases medicines and medical supplies, devices, and appliances for which sales tax does not apply when sold directly by the member hospital and/or health care facilities. Under this circumstance, the member is the consumer of the property and sales tax applies with respect to the sale of the property to the member itself. Furthermore, --- purchases tangible personal property for

which the members are considered consumers because of the member's method of charging for administration of the property when providing health care services. A bill is rendered for health care services, which includes the administration of supplies to the patient." OPINION As you note in your letter, in my previous correspondence with representatives, I concluded that the term "consumer cooperatives" as used in sections 6011.1 and 6012.1 did not include cooperatives formed by retailers on the grounds that a cooperative formed by "consumers" could not include persons who sold tangible personal property in the regular course of business. You accept that conclusion, but aver that the new facts which you present above would support reconsideration of my previous conclusions regarding -- We agree. As noted in my previous correspondence, the word "consumer" as used in the statutes at issue is not limited to natural persons. The legislative history indicates that the suggestion was made to so limit their scope but that it was rejected. Thus, we conclude that a "consumer cooperative" may be formed by legal, as well as natural, persons. The only proviso is that the legal persons must participate in the cooperative only as consumers. If they purchase tangible personal property through the cooperative and then resell it prior to use, the exemption is lost. As you make clear in your letter, --- member hospitals will purchase through the cooperative tangible personal property, like, central medical supplies, of which they are the consumers, either because they are the end-purchaser or, due to their billing policies, they are deemed the consumer of items that must be administered. They will not purchase items for resale. Under such conditions, then, --- would qualify as a "consumer cooperative" under sections 6011.1 and 6012.1. This means that the member facilities will not be able to purchase anything through the cooperative for resale and may not issue resale certificates to --- for their purchases. While these conditions are observed, --members may exclude from their gross receipts the value of initial or periodic membership fees and the value of any labor performed in lieu of, or as part of, monthly membership fees under the authority of these statutes. If, however, they attempt to issue resale certificates or resell any item purchased through the cooperative prior to use, then this exclusion will be lost. I hope the above discussion has answered your question. If you need anything further, please do not hesitate to write again. Sincerely, John L. Waid Tax Counsel JLW:es cc: Mr. Travis Fullwood (MIC:77)