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A growing trend in the healthcare industry is the creation of “healthcare systems”. A healthcare system is legal entity or organization made up of several hospitals and other entities. The hospital’s purchasing and AP functions are centralized and done through the healthcare system. Under this system, purchase orders are generated by the healthcare system and invoices are paid by the healthcare system.
The healthcare system is not exempt from state sales/use tax. But some of its hospitals are exempt from state sales/use tax. Under most state laws, sellers are required to directly bill the exempt organization and payment must be made by the exempt organizations’ funds. When a hospital is part of a healthcare system, sellers are billing the healthcare system, the healthcare system is paying on behalf of the hospital, and the goods are shipped directly to the exempt hospital; sellers are not billing or receiving direct payment from the exempt hospital. The healthcare system is usually reimbursed by the exempt hospital or the healthcare system completes an intercompany transfer from the exempt hospital’s account to cover the cost of any invoices paid on behalf of the exempt hospital. Generally, there is no mark up or resale transaction between the two entities; the healthcare system is simply making the purchase on behalf of the exempt hospital. The purchase order is usually in the name of the health system but typically includes the name of the exempt hospital too.
Under these circumstances and assuming the seller obtains a valid exemption certificate from the exempt hospital, would most states deem the exempt hospital the true purchaser and therefore exempt the sale from state sales/use tax? Or would most states deem the healthcare system the true purchaser and subject the sale to state sales/use tax?
Thank you.
The healthcare system is not exempt from state sales/use tax. But some of its hospitals are exempt from state sales/use tax. Under most state laws, sellers are required to directly bill the exempt organization and payment must be made by the exempt organizations’ funds. When a hospital is part of a healthcare system, sellers are billing the healthcare system, the healthcare system is paying on behalf of the hospital, and the goods are shipped directly to the exempt hospital; sellers are not billing or receiving direct payment from the exempt hospital. The healthcare system is usually reimbursed by the exempt hospital or the healthcare system completes an intercompany transfer from the exempt hospital’s account to cover the cost of any invoices paid on behalf of the exempt hospital. Generally, there is no mark up or resale transaction between the two entities; the healthcare system is simply making the purchase on behalf of the exempt hospital. The purchase order is usually in the name of the health system but typically includes the name of the exempt hospital too.
Under these circumstances and assuming the seller obtains a valid exemption certificate from the exempt hospital, would most states deem the exempt hospital the true purchaser and therefore exempt the sale from state sales/use tax? Or would most states deem the healthcare system the true purchaser and subject the sale to state sales/use tax?
Thank you.
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Tax Professional Answers
John Stancil
State laws on sales taxes vary greatly and no answer is likely to be correct for every state. However, there is one scenario which may apply. The purchasing agent is essentially a reseller. Most likely they can avoid the sales tax when the purchases are made for reselling, as goods purchased for resale are not subject to the sales tax in any state that I am familiar with.
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