Did a hospital owe Tennessee business tax on durable medical equipment rented to patients after discharge, even though its medical services were excluded?

Plain-English summary

Tennessee concluded that a hospital's rentals of durable medical equipment to discharged patients were subject to business tax.

The hospital's dominant business activity was providing medical services to human beings, an activity excluded from business tax. Equipment rentals produced only about 1.5% of its revenue, so they did not change that dominant activity.

But the exclusion did not shelter a separate taxable activity. The ruling said business tax applied whenever an entity engaged in an activity covered by the Act, even if its dominant activity was excluded. Because a statutory "sale" included a lease or rental, the durable-medical-equipment receipts were taxable under Classification 2.

What this means for you

Hospitals and healthcare providers

An excluded medical-services business may still owe business tax on a separate line of taxable sales or rentals.

Medical-equipment rental programs

Track rental receipts separately from clinical-service revenue. A small revenue share did not make the rental activity nontaxable.

Businesses with mixed activities

Dominant activity determined classification, rate, and due date, but did not erase tax on other activities expressly covered by the Act.

Common questions

Q: Were the hospital's ordinary medical services subject to business tax? A: No. The ruling described medical services provided to human beings as an excluded activity.

Q: How much revenue came from equipment rentals?
A: Approximately 1.5%.

Q: Did that small percentage avoid business tax?
A: No.

Q: Which classification covered the rentals?
A: Classification 2, for tangible personal property not otherwise specifically classified.

Citations and references

• Tenn. Code Ann. §§ 67-4-701 through 67-4-709
• Westinghouse Electric Corp. v. King, 678 S.W.2d 19 (Tenn. 1984)
• Hermitage Memorial Gardens Mausoleum and Memorial Chapel, Inc. v. Dunn, 541 S.W.2d 147 (Tenn. 1976)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/business/05-14bus.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING # 05-14

WARNING
Revenue rulings are not binding on the Department. This presentation of the ruling in a redacted form is information only. Rulings are made in response to particular facts presented and are not intended necessarily as statements of Departmental policy.

SUBJECT
Application of business tax to durable medical equipment (DME) leased by hospitals to patients who have been discharged from the hospital. SCOPE Revenue rulings are statements regarding the substantive application of law and statements of procedure that affect the rights and duties of taxpayers and other members of the public. Revenue rulings are advisory in nature and are not binding on the Department. FACTS The taxpayer is a hospital which, in addition to providing standard medical services, leases DME to patients for their use after they have been discharged from the hospital. The taxpayer derives approximately 1.5% of its revenues from renting DME. The taxpayer does not pay business tax on the standard medical services it provides. QUESTION Is the taxpayer’s rental of DME to discharged patients subject to the business tax found in Tenn. Code Ann. § 67-4-701 et seq.? RULING Yes. ANALYSIS The Business Tax Act, Tenn. Code Ann. § 67-4-701 et seq., is a component of Tennessee’s privilege and excise taxes. It allows counties and incorporated municipalities to tax the privilege of engaging in any of the business activities enumerated in the Act. Tenn. Code Ann. § 67-4-

704(a); Westinghouse Electric Corp. v. King, 678 S.W.2d 19, 23 (Tenn. 1984). Businesses are classified in Tenn. Code Ann. § 67-4-708 according to their dominant taxable business activity, and these statutory classifications determine the rate and due date of the tax. Hermitage Memorial Gardens Mausoleum and Memorial Chapel, Inc. v. Dunn, 541 SW2d 147 (Tenn. 1976). Once the classification is established for rate and due date purposes, the tax base is determined by the total amount of sales made by the business. Tenn. Code Ann. § 67-4-709(b). Under Tenn. Code Ann. § 67-4-708(3)(C), all services other than fifteen specific exceptions are subject to business tax. One of those exceptions is medical services provided to human beings. If the rental of tangible personal property represents only 1.5% of the taxpayer’s revenues, those rentals are not generally the taxpayer’s dominant business activity. The taxpayer’s dominant business activity of providing medical services to human beings is specifically excluded from business tax under Tenn. Code Ann. § 67-4-708(3)(C)(i). Nonetheless, the Tennessee Supreme Court has made it clear that business tax applies to any business activity included under the act. Hermitage Memorial Gardens Mausoleum and Memorial Chapel, Inc., 541 S.W.2d at 149. The Court stated as follows: There is no language limiting the incidence of the tax to those entities whose dominant business activity is one of the activities enumerated in
§ 67-5805 (now § 67-4-708), no language excluding entities whose dominant business activity is one not enumerated in § 67-5805. All entities who make sales by engaging in any of the business activities enumerated in § 67-5805 are subject to tax. Id. Accordingly, any entity that engages in an activity subject to business tax is required to remit the tax. Its application is not limited to those businesses whose dominant activity is subject to tax. Id. Classification 2 applies the tax to sales of tangible personal property not specifically enumerated or described in the statute. Tenn. Code Ann. § 67-4-708(2)(F). “Sale” is defined in Tenn. Code Ann. § 67-4-702(a)(15) to include lease or rental. Thus, revenues generated by the taxpayer from renting the DME are subject to business tax under the provisions of Classification 2. Craig A. Jenkins Tax Counsel

APPROVED: Loren L. Chumley
Commissioner of Revenue
DATE: 6/9/05

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