Could a medical supplier keep refunded tax on newly exempt feeding tubes when Medicare and other payers had reimbursed tax-included charges?

Plain-English summary

A medical supplier sought a sales-tax refund after feeding-tube sales became exempt. It argued that it need not return tax reimbursement received from Medicare B, Medi-Cal, private insurers, or patients.

The Board could condition the refund on repayment to whoever bore the tax's economic burden, preventing unjust enrichment. If Medicare alone reimbursed the tax, repayment could go to Medicare. If Medicare and another payer shared the charge, the supplier could be required to return the appropriate amounts to both. The supplier could retain only the portion corresponding to tax it paid without reimbursement.

Medicare rules prohibited separately billing Medicare B for tax and instead required including tax in the item charge. In the memorandum's $150 billing example, $11.43 was included tax and taxable gross receipts were $138.57. Gross receipts were based on the amount actually received, not a higher list price.

Counsel said a lower Medicare payment was less clear, but likely still tax included because Medicare treated the billed amount that way and the supplier itself had consistently treated Medicare payments as including tax.

What this means for you

Medical suppliers, reimbursement teams, auditors, and tax advisers

A refund claim needs payer-level records. Identify how much each payer funded, whether the remittance was tax included, and what amount the supplier itself bore. A tax refund is not automatically retained by the seller when customers or benefit programs funded the original tax.

Common questions

Q: Could the supplier keep tax reimbursement paid by Medicare?

A: No. The Board could require it to return that portion to Medicare.

Q: What if another insurer or the patient paid part?

A: The refund could be allocated among the parties that bore the tax.

Q: What portion could the supplier keep?

A: Only tax it paid without being reimbursed.

Q: Were Medicare payments tax included?

A: The memorandum concluded they likely were, while acknowledging uncertainty for some lower-billing facts.

Citations and references

• California Revenue and Taxation Code §§ 6011(a), 6012(a), and 7053
• California Civil Code § 1656.1
• California Sales and Use Tax Regulation 1591
• Decorative Carpets, Inc. v. State Board of Equalization, 58 Cal.2d 252 (1962)
• Paine v. State Board of Equalization, cited in the opinion

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 505.0865
• Original supporting opinion: 505.0865 PDF

Original ruling text

State of California

Board of Equalization
Legal Department-MIC: 82

505.0865

Memorandum

To :

Mr. Vic Anderson
Supervisor, Spec. Proj. Sec. (MIC:40)

Date:

From :

John L. Waid
Senior Tax Counsel

Telephone:
CalNet

Subject:

SY -- XX-XXXXXX
S--- - C--- H--- C--- C--- [S---]
Refund of Tax Reimbursement

July 16, 2002

(916) 324-3828
454-3828

I am responding to your memorandum dated March 28, 2002, to assistant Chief Counsel Janice L. Thurston. I apologize for the delay. You attached a copy of a memorandum to Program Planning Manager Charlotte Paliani dated December 6, 2001, from Van Nuys District Principal Auditor Jack Infranca. According to Mr. Infranca, the Board has received a Claim for Refund from S--- for sales tax paid on feeding tubes, the sales of which have been made exempt by a recent change to Regulation 1591. S--- avers that it is not required to refund the sales tax reimbursement it has received from Medicare B, Medi-Cal, or private medical insurer. Mr. Infranca attached several copies of Medicare billings to his memorandum. As you note, there appears to be two different billing situations. In the first, Medicare B reimbursed the taxpayer for the sales of the tubes. In the second, Medicare B reimbursed the taxpayer for only a portion of the sale, and the taxpayer received reimbursement for the remainder from either a private insurer, Medi-Cal, or the patient. Apparently Medicare B set the price contractual allowance in both cases. You indicate that S--- considers reimbursements from Medicare to be tax included. S--- computed the tax as it was included on the total amount of reimbursement received and remitted that amount to the Board. S--- separately bills the tax reimbursement to second parties according to your information. You indicated in your memo that, based on your review of the billings attached to Mr. Infranca’s memo, S--- did not always increase its billing amount to include sales tax. I am not sure what that means. I presume from what you have said that S--- did not always bill Medicare B an

Mr. Vic Anderson

-2-

July 16, 2002
505.0865

amount that was the full tax-included price but that S--- did consider the Medicare payment to include tax reimbursement. You ask three questions. One, “Is S--- entitled to a tax-included deduction for sales to Medicare?” Two, “Of the amount of tax refunded to S--- for the exempt feeding tubes, must S--refund the tax to Medicare, or may it retain the refund?” Third, “If S--- received partial reimbursement from a second party, must it pro-rate the refund among the parties who reimbursed it for the tax?” OPINION It is well established that the Board may condition its granting of a claim for refund of sales tax on the taxpayer remitting any amount of a refund to the customers that bore the economic burden of the tax. Otherwise, the claimant is unjustly enriched. (Decorative Carpets, Inc. v. SBE (1962) 58 Cal.2d 252.) Also, a taxpayer must demonstrate from his own records that he is entitled to a refund. (§ 7053; Paine v. SBE (1982 137b Cal. App. 3d 438.) Based on these principles, the answer to your two latter questions is simple. The Board may condition any refund on S--- returning the reimbursement to the persons who paid it -either Medicare alone or Medicare in combination with the second parties who paid the portion of the billing that Medicare did not pay. Collecting sales tax reimbursement is, of course, not mandatory. (See, Civ. Code § 1656.1.) To the extent it was not reimbursed, S--- is the direct taxpayer (not merely a conduit for money from the patient to the Board) and may keep the refund. The answer to your first is a little trickier. Mr. Infranca and you both quoted a portion of the Medicare Manual stating that suppliers may not separately bill Medicare B for tax but should add the tax into the item billing. S---’s apparent position is that, as Medicare B did not reimburse it for the full retail selling price of the items, then none of the payments is for tax. From this, and the reference to S--- treating all Medicare B payments as including tax, we conclude just the opposite. Using the example in your memorandum, the tubes cost $200 and the Medicare contract allowance was $150. If S--- billed the full amount of $150, it reported $11.43 as sales tax. S--- would be entitled to a tax-included deduction for these sales billed to Medicare. As a result, S--- would report $138.57 as taxable gross receipts. Of course, that would mean S--was reimbursed for tax on 100% of those sales and could not keep any of the refund. What is not clear is what happened if S--- billed Medicare some lesser amount for the tubes. Would the reimbursement also be on a tax-included basis or did Medicare add the tax to the billed amount? The language you quote indicates that Medicare B would assume that the amount it was billed included the tax since tax could not be added separately. Therefore, it is likely that if S--- billed, say, $135, and the contract allowance was $150, Medicare B reimbursed S--- $135, part of which was the included tax.

Mr. Vic Anderson

-3-

July 16, 2002
505.0865

“Gross receipts” is the total amount received, not the amount billed. (§§ 6011(a) & 6012(a).) If, as seems likely, Medicare considered any billed amount as including tax, then the payments it made also included tax. Indeed, S--- treated its Medicare B payments as including tax. Therefore, the amount of gross receipts derived from these sales is the amount it actually received. In your example, the amount of S---’s gross receipts is $138.57, not $200. While it is not entirely clear, it appears that S--- was reimbursed for 100% of the tax.

JLW:ef
cc:

Van Nuys District Administrator (AC)