Why do some hospitals lose (or newly qualify for) their Texas sales tax exemption, and does that change anything for businesses that do work for hospitals?

Subject

Hospital — Nonprofit Exemption — Must Provide Certain Amount Of Charity Or Indigent Health Care — New Guidelines Effective 9/1/93

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9312L1274F07

Plain-English Summary

The taxpayer had read the September 1993 issue of the Comptroller's "Legislative Update" and wrote in confused about a change affecting hospital sales tax exemptions. The Comptroller's response explains that the publication "could have been worded better," and clarifies what the legislature actually changed: the criteria a hospital must meet before it can apply for and be granted exemption from sales tax (and other taxes).

Under the new rule, hospitals must provide a certain amount of indigent or charity health care in order to qualify for the sales tax exemption. Whether a given hospital meets that threshold — and therefore whether it qualifies or doesn't qualify — is decided under criteria administered by the Texas Health Department, not the Comptroller. The Health Department is responsible for notifying the Comptroller when a hospital fails to qualify for the sales tax exemption.

Importantly, the letter says this change in how hospitals qualify does not change anything for businesses that do work for hospitals. Vendors and contractors will continue exactly as before: they obtain an exemption certificate from a customer-hospital when that hospital is exempt. The only practical wrinkle the letter flags is that a business may run into a hospital that was exempt in the past but no longer qualifies, or vice versa, since qualification is now tied to the charity/indigent care standard.

What This Means For You

If you are a hospital: Your sales tax exemption is no longer automatic based on nonprofit status alone (as the letter implies was previously understood) — you must also meet a charity/indigent care threshold that the Texas Health Department evaluates, not the Comptroller.

If you sell to, or contract with, hospitals: Your process doesn't change. You still collect an exemption certificate from a hospital customer that is currently exempt, and treat purchases as taxable if the customer isn't. What's new is that a hospital's exempt status can now shift — a hospital that was exempt before might lose its exemption, or a hospital that wasn't exempt might newly qualify — so it may be worth periodically re-verifying a hospital customer's current exemption status rather than assuming it's unchanged from a prior transaction.

If you're trying to determine whether a specific hospital currently qualifies: This letter doesn't say how to check that. It only says the Texas Health Department administers the qualifying criteria and notifies the Comptroller of hospitals that fail to qualify — it doesn't describe a public list or a way for a third party (like a vendor) to verify status other than obtaining an exemption certificate from the hospital itself.

Q&A

Q: What changed for hospitals under the new law described in this letter?
A: Hospitals must now provide a certain amount of indigent or charity health care in order to qualify for exemption from sales tax (and other taxes). Previously, the letter implies, this additional charity-care criterion was not part of qualifying.

Q: Who decides whether a hospital meets the charity-care threshold — the Comptroller or someone else?
A: The Texas Health Department administers the criteria for hospital exemption qualification, not the Comptroller. The Health Department notifies the Comptroller when a hospital fails to qualify.

Q: Does this change affect how businesses that do work for hospitals handle sales tax?
A: No. The letter states plainly that how hospitals qualify for exempt status "will not affect persons who do work for the hospitals." Such businesses continue to obtain an exemption certificate from exempt customers when applicable, just as before.

Q: Could a hospital that used to be tax-exempt no longer be exempt now, or the reverse?
A: Yes. The letter specifically warns that a vendor "may encounter a hospital that was exempt in the past but no longer qualifies or vice versa," because exemption now depends on meeting the charity/indigent care standard administered by the Health Department.

Original ruling text

December 14, 1993

Dear **:

This is in response to your letter dated December 7,1993, regarding
information in the September 1993 publication of the Legislative
Update. The information in the publication could have been worded
better. What the legislature changed is the criteria that a hospital
must meet before the hospital may apply for and be granted exemption
from the payment of sales tax (and other taxes). Hospitals must
provide a certain amount of indigent or charity health care in
order to qualify for sales tax exemption. The hospitals will either
qualify for exemption or not qualify based on criteria administered
by the Texas Health Department. The Health Department is to notify
the Comptroller when a hospital fails to qualify for sales tax
exemption How hospitals qualify for exempt status will not affect
persons who do work for the hospitals. Businesses such as yours
that do work for hospitals will continue as before and obtain an
exemption certificate from exempt customers when applicable. You
may encounter a hospital that was exempt in the past but no longer
qualifies or vice versa.

If you have any questions or need more information, please write
or call me toll free at 1-800-531-5441, extension 50330, or
512-475-0330.

Sincerely,

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9311132L.2 and/or 9311132L