Note: This article was written using background material excerpted from 2016 Healthcare Reform Facts.

#1: Background of the tanning bed tax

As initially enacted by Section 9017 of PPACA (PPACA Section 9017 Excise Tax on Elective Cosmetic Medical Procedures), the excise tax was aimed at “Elective Cosmetic Procedures” and would have levied a five percent tax on elective surgeries such as breast augmentation, tummy tucks, Botox injections, and other elective surgeries.

However, after a great deal of lobbying from medical and dermatology interests, Section 9017, derisively nicknamed the “Botax” was nullified by Section 10907 (PPACA Section 10907 Excise Tax on Indoor Tanning Services in Lieu of Elective Cosmetic Medical Procedures) which substituted the tax on tanning services.

The tanning bed tax was expected to generate $2.7 billion over ten years, significantly less than the $5.8 billion that the “Botax” was supposed to raise. However, the tanning industry was a weaker target and the “Snooki Tax” (nicknamed after the reality television star) replaced the “Botax.”

Individuals connected to the tanning industry were infuriated, feeling singled out by a tax they argued was directed at the middle-class, and at an industry dominated by women owners which were far less able to absorb the tax than the wealthier individuals who would have been impacted by the cosmetic services tax.

#2: What services are covered

As defined by the code, an “indoor tanning service” is a service that uses any electronic product designed to incorporate one or more ultraviolet lamps, and intended for the irradiation of an individual by ultraviolet radiation, with wavelengths in air between 200 and 400 nanometers, to induce skin tanning.

However, as with most laws, there are certain important exclusions we need to discuss.

Medical exclusions - Phototherapy

The term “indoor tanning service” excludes any phototherapy service performed by a licensed medical professional, on the medical professional's premises (see IRC Section 5000B). These types of phototherapy services are exempt from the indoor tanning services excise tax.

Phototherapy service (26 C.F.R. 49.5000B-1, Treas. Reg. 49.5000B-1 Indoor Tanning Services) is defined as a service that exposes an individual to specific wavelengths of light for treatment of:

• dermatological conditions (e.g., acne, psoriasis, or eczema);

• sleep disorders;

• Seasonal Affective Disorder (SAD) or other psychiatric disorders;

• neonatal jaundice;

• wound healing; or

• other medical conditions determined by a licensed medical professional to be treatable by exposing the individual to specific wavelengths of light.

Qualified physical fitness facilities exclusion

There is also an exclusion for "Qualified Physical Fitness Facilities" (QPFF) (see 26 C.F.R. 49.5000B-1, Treas. Reg. 49.5000B-1 Indoor Tanning Services) that meet specific criteria and offer tanning as an incidental service to members without a separately identifiable fee.

The membership fee to the facility is not taxable if the facility meets the definition below of a “Qualified Physical Fitness Facility.” However, if the facility does NOT qualify as a QPFF, then the membership fee IS taxable, even if the member does not utilize the tanning services.

A “qualified physical fitness facility” is a facility:

1. in which the predominant business or activity is providing facilities, equipment and services to its members for purposes of exercise and physical fitness,

2. indoor tanning services is not a substantial part of its business and,

3. it does not offer tanning services to the public for a fee or offer different pricing options to its members based on indoor tanning services.

To determine the predominant business or activity all facts and circumstances should be considered including, but not limited to, the following:

• The cost of the equipment

• Variety of services offered

• Actual usage of services by customers

• Revenue generated by different services and

• How the entity holds itself out to the public through advertising or other means.

Other exclusions

Indoor tanning services also do not include spray tans or topical creams and tanning lotions (26 C.F.R. 49.5000B-1, Treas. Reg. 49.5000B-1 Indoor Tanning Services).

Also, there are no exemptions from the tax for tax-exempt entities such as education institutions or charities. For example, if a tax-exempt university charges an activity fee that gives students access to indoor tanning services, the university would not be exempt.

#3: Reporting and recordkeeping requirements

As with any other tax information, the tanning service provider must maintain proper books and records showing the amount of revenue received for indoor tanning services.

Collecting the excise tax

Generally the indoor tanning service providers are responsible for collecting the tax from either the person paying for the service or in some situations, from the person receiving the service.

Situations may occur where the tax is not collected at the time of payment, such in the case of gift cards. In this situation, the person receiving the service is liable for the tax on the amount from the card used for indoor tanning services.

If a customer purchases a gift card for indoor tanning services and pays the tax but does not use the card, the tax is not refundable as there have been no provisions in the Code for refunding the tax once it has been collected. The tax applies regardless of whether the services are to be paid for, or reimbursed by insurance.

The tax is imposed at the time of payment for any indoor tanning service and is collected by the service provider. The tax is 10 percent of the amount of the services and is not grossed up.

The indoor tanning service provider who collects the payment must remit the full amount of tax with a timely filed Form 720, Quarterly Federal Excise Tax Return. Excise tax deposits are not required for the tax on indoor tanning services.

Calculating the excise tax

In most instances the calculation of the tax should be simple. For example, for the purchase of $25.00 of tanning services, the tax imposed would be $2.50. However, the regulations have addressed specific instances and how they should be handled:

• Business promotions: If, as part of the course of a business promotion, an indoor tanning service provider offers a FREE tanning session, which is not contingent on the purchase of other goods and services, or part of a purchased bundle of services, the tax does not apply.

• Invoicing: If the tanning service provider separately identifies tanning services and non-tanning services on an invoice, only the tanning services need have the tax imposed upon them as long as the exact dollar amounts for each service and or good are included.

• Gift certificates or gift cards: If the service provider cannot determine how much of the gift certificate will be used for tanning services, then the customer using gift certificate will be charged the applicable tax at the time it is used.

• Receipts without the tax detailed: If an invoice does not include a line item for the 10 percent tax, then it is presumed to be part of the amount shown. To calculate and report the tax in this instance, the service provider must identify the taxable amount by multiplying 0.9091 and the price. For example on a $20 sale, $18.18 would be the price of services and $1.82 would be the amount of tax to remit.

• Bundled services: If a service provider provides an invoice showing a “bundled service”, the tax is calculated using a ratio based on the non-bundled price of each service. If services are included that are not normally charged separately, then Fair Market Value must be used.

• FORMULA: Divide the NON-BUNDLED PRICE for the indoor tanning services by the charge for the TOTAL NON-BUNDLED PRICE OF ALL SERVICES in the bundle and apply that ratio to the bundled charge. This will give the taxable amount. Multiply the Taxable Amount by 0.1 (ten percent) to get the tax.

• EXAMPLE: Tina’s Tanning and Dance offers a bundled price of 10 dance lessons and 5 “free” indoor tanning services for $300. Ordinarily, Tina charges $30 for each dance lesson ($300) and $18 ($90) for each tanning session for a total regular charge of $390.

• The amount subject to being taxed in the bundle is $90 (tanning services) divided by $390 (total non-bundled price) times $300 (bundle price) equals 69.23 times 0.1 (ten percent) resulting in a tax of $6.92

Reporting

All indoor tanning service providers who do not have an Employer Identification Number (EIN) must acquire one in order to file and remit tax due on Form 720. Indoor tanning service providers can apply for an EIN online or by phone, fax, or mail.

The Form 720 is filed quarterly and can be filed on paper or electronically. Service providers who do not file Form 720 and remit the tax by the due date may be subject to a penalty, as will any person who intentionally fails to collect and remit the tax. Quarterly return due dates for the are April 30, July 31, October 31, and January 31.

#4: Effects of the tanning bed tax and its future

In the nearly six years that it has been in effect, the tanning tax has faced serious issues.

As noted, the expected revenue for the tax was projected to be $2.7 billion over ten years. However the actual revenues collected have been substantially less.

The tax was projected to collect $300 million during 2014, but the Office of Management and Budget reports that only $92 million was collected. In fact, in 2012, the Joint Committee on Taxation revised downward the initial ten-year revenue estimates from $2.7 billion to $1.5 billion.

New Office of Management and Budget estimates are even gloomier, projecting that the tax will generate $955 million by 2019, with some industry experts expecting tax revenues of significantly less.

Explanations of what caused the failure of the tax to meet revenue expectations are varied:

• Failure to anticipate the elasticity of the demand for tanning services – The presumption that the tax, levied on an item that wasn’t a “necessity” caused a decline in demand for services. Those suggesting this point to the decline in the number of tanning businesses and the number of tanning service jobs over the past several years.

• Difficulty in forecasting revenue – The presumption that the $2.7 billion estimated revenue was based on an inaccurate sizing of the tanning market.

• Size of the taxable base – Through regulations, the IRS exempted “Qualified Physical Fitness Facilities.” This sliced off the most lucrative part of the tax base – gyms and clubs that offer tanning services as part of a comprehensive package – shifting the burden to the smaller businesses such as hair salons and tanning salons.

• Non-compliance – Some suspect that some tanning businesses simply are not complying with the law, either deliberately or by being uniformed. In fact, the Treasure Inspector General for Tax Administration reported in 2011 that only 11,000 tanning businesses had filed the Form 720 versus the estimated 25,000 businesses in the market.

Industry experts have blamed the decline in the tanning market directly on the tax. The American Suntanning Association estimates that nearly 10,000 tanning salons have closed since the implementation of the tax, resulting in the loss of over 80,000 jobs and reducing the number of tanning businesses from 18,000 to 8,500.

Critics of the tax point out that the tax is aimed at a segment of the economy that consists not only of small-businesses, but small businesses that are dominated by women – with 70 percent of tanning salons owned by women, with women being the bulk of the customer base.

What the future will bring is uncertain. Efforts have been made to repeal the tax, with legislation still pending in Congress--but so far without success.

At this point, it remains part of the funding vehicle, albeit a small one, for PPACA health care reforms.

Note: This article was written using background material excerpted from 2016 Healthcare Reform Facts.