When an insurer pays a repair bill on behalf of a tax-exempt hospital but the invoice is billed directly to the hospital, is the repair exempt from Kansas sales tax?

Plain-English summary

A company that sells "technical equipment coverage" (an equipment-repair insurance policy) to health care facilities asked how Kansas sales tax applies to repairs it pays for on behalf of a tax-exempt hospital.

The setup. The hospital holds a tax-exemption certificate. When a piece of equipment breaks, the hospital calls the vendor of its choice to fix it, and "[t]he invoice is billed directly to the hospital." If the repair is covered under the hospital's policy, the invoice is then submitted to the coverage provider for payment. The provider stressed it "does not take any part in the purchase of parts or labor," is "not performing any [of] the repairs," and pays the bill only "acting as agent for hospital" — it is simply trying to "eliminate a step in the payment process."

The exemption. Kansas exempts, under K.S.A. 79-3606(b), "all sales of tangible personal property or service, including the renting and leasing of tangible personal property purchased directly by. . .a public or private nonprofit hospital. . .and used exclusively for. . .hospital. . .purposes," subject to an exception for property used in a separately taxable business.

The holding. Because the repair is billed directly to the hospital and the hospital is the actual purchaser, the Department ruled the transaction "is a direct purchase by the hospital and is exempt from Kansas sales and compensating tax pursuant to K.S.A. 79-3606(b)." That the coverage provider later pays the invoice under its policy does not change who bought the repair.

Bottom line: the exemption follows the direct purchase by the hospital, not the payment mechanics. A third party reimbursing the hospital under an insurance policy does not turn an exempt hospital purchase into a taxable one.

What this means for you

Nonprofit and public hospitals

Repairs and other purchases you make directly — billed to the hospital and used for hospital purposes — are exempt under K.S.A. 79-3606(b). Keep your exemption certificate on file with vendors and make sure repair invoices are issued in the hospital's name, not a third party's.

Equipment-warranty and coverage providers

If you only reimburse the hospital under a policy and the vendor bills the hospital directly, you are not the purchaser and the hospital's exemption applies. But if you were to buy parts or labor in your own name and resell or provide them, the analysis could differ — structure the paperwork so the hospital remains the direct buyer.

Vendors doing hospital repairs

Honor the exemption when the hospital is your billed customer and presents a valid exemption certificate. Do not treat the transaction as taxable merely because an insurer or coverage company ultimately pays the invoice.

Common questions

Q: Does a hospital lose its exemption if an insurer pays the repair bill?
A: No. The Department ruled the repair is an exempt direct purchase by the hospital under K.S.A. 79-3606(b) because it is billed directly to the hospital; the insurer is only reimbursing the hospital.

Q: What makes this a "direct purchase" by the hospital?
A: The hospital selects the vendor and the invoice is billed directly to the hospital. The hospital is the buyer of the repair, so its 79-3606(b) exemption applies.

Q: Would the answer change if the coverage company bought the parts itself?
A: Possibly. The ruling turned on the hospital being the direct purchaser. If a third party purchased and supplied parts or labor in its own name, that would be a different transaction the exemption might not cover.

Citations and references

• K.S.A. 79-3606(b) — exempts tangible personal property and services purchased directly by a public or private nonprofit hospital and used exclusively for hospital purposes; the basis for holding the directly billed repair exempt.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-242

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 29, 1999

XXXXXXXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXXXXX

I have been asked to respond to your letter dated September 15, 1999.

In your letter, you stated:

XXXXXXXXXXXX is a provider of technical equipment coverage for health care facilities. We currently have an account with a hospital in your state for which I have a question.

This hospital holds a tax exemption certificate. When a piece of equipment needs repair, this hospital will call their vendor of choice to fix it. The invoice is billed directly to the hospital. If repair is covered under the policy the hospital has with XXXXXXXX, the invoice is submitted to XXXXXXX for payment. XXXXXXXX does not take any part in the purchase of parts or labor that goes into this transaction. We pay the bill, acting as agent for hospital. Is this a tax-exempt transaction since XXXXXXXXXX is acting as an insurance agent to the hospital, or is XXXXXXX liable for your state sales tax?

Please keep in mind, this is not a maintenance agreement. It is an insurance policy where XXXXXXXXX is not performing any the repairs. We are just trying to let eliminate a step in the payment process.

K.S.A. 79-3606(b) exempts from Kansas retailers’ sales tax: “all sales of tangible personal property or service, including the renting and leasing of tangible personal property purchased directly by. . .a public or private nonprofit hospital. . .and used exclusively for. . .hospital. . .purposes, except when: (1) Such. . .hospital is engaged or proposes to engage in any business specifically taxable under the provisions of this act and such items of tangible personal property or service are used or proposed to be used in such business,. . .”

Based on the facts as contained in your letter, it is the opinion of the Kansas Department of Revenue that the described transaction is a direct purchase by the hospital and is exempt from Kansas sales and compensating tax pursuant to K.S.A. 79-3606(b).

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

Date Composed: 11/03/1999 Date Modified: 10/10/2001

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