Category Archives: IRS
When is sales tax due on your DME-related sales and services? The North Carolina Business Court Weighs In.
Feeling Great, Inc. v. North Carolina Department of Revenue
By Robert Shaw, Partner at Gordon & Rees
Sales tax compliance may not be the reason you are in business, but consequences can be very serious if you fail to collect and remit sales taxes on a taxable transaction. Durable medical equipment suppliers (DME) should take note of a recent decision by the North Carolina Business Court in which the DME supplier (at least according to the Court) erroneously thought that certain DME sales were exempt from use tax.
In Feeling Great, Inc. v. North Carolina Department of Revenue, 2015 NCBC 81 (N.C. Business Ct. Aug. 20, 2015), the DME suppliers did not collect and remit use tax to the Department of Revenue on the basis that the purchases at issue (medical supplies used in sleep study testing) were exempt from sales and use tax under N.C. Gen. Stat. 105-164.13(12)d. That statute provides that sales of “[d]urable medical supplies sold on prescription” are exempt from sales tax. Seems straightforward, right?
The Department of Revenue, however, issued a tax assessment for sales of supplies used in sleep study testing in connection with a diagnostic sleep system machine. The sleep studies were covered by Medicare or Medicaid and were not part of the tax assessment. It was the supplies used with the sleep studies, such as cleaner, sensors, gauze tape, Q-Tips, and the like, that the Department took issue with because the physicians’ prescriptions did not specifically mention the supplies as having been prescribed, only the sleep studies!
Feeling Great’s problem was that the prescriptions did not specifically refer to “supplies” associated with the sleep studies. Instead, the physician only “prescribed sleep study testing for the patient.” Had the prescription included “all supplies as needed” in the description, the court implied that the result would have been different: sales of such supplies would have been “on prescription” and therefore exempt from sales tax.
Feeling Great’s many arguments to the contrary, including that “Medicaid routinely authorizes the purchase of durable medical equipment and associated ‘supplies’ under a single prescription” (which the administrative law judge had found), were not accepted by the Business Court.
It may seem odd to distinguish between a prescription that prescribes sleep study testing and a prescription that prescribes sleep study testing as well as needed supplies for the machine, but it is the distinction that caused a significant sales tax assessment for the taxpayer in this case. DME suppliers should carefully review the prescriptions and be mindful of the Department’s position when collecting sales and use tax.
Supreme Court Will Decide Whether Citizens in NC and 26 Other States Can Receive Tax Credits for Health Care Premiums!!
With a decision that, I can only imagine, ricocheted against the White House walls, the Supreme Court granted certiorari to hear King v. Burwell this past Friday, November 7, 2014, despite Obama’s administration’s request for the Supreme Court to postpone granting certiorari in order to wait for a D.C. circuit to re-visit an opinion, the Halbig ruling.
The Supreme Court’s decision in King could, potentially, have devastating consequences on the Affordable Care Act (ACA). However, I write that last sentence with an asterisk. Journalists across the country are entitling articles, “Obamacare Is Doomed! Everybody Panic!”, “The Supreme Court Might Gut Obamacare. Your State Could Save It,” and “Obamacare vs. Supreme Court.” These titles to articles are misleading, at best, and factually incorrect, at worst. King v. Burwell is actually not an attack on the ACA. But I will explain later…
First of all, what the heck is certiorari…or “cert”, as many attorneys call it?
A writ of certiorari is actually an order from a higher court to a lower court demanding a record in a case so that the higher court may review the lower court’s decision. A writ of certiorari is the instrument most used by the Supreme Court to review cases. The Supreme Court hears such a small, minute fraction of lawsuits that when the Supreme Court “grants cert,” it is a big deal.
I have written in the past about these same two appellate court cases, which were both published July 22, 2014, within hours of one another, regarding the Health Care Premium Subsidies Section of the Affordable Care Act. These two cases yield polar opposite holdings. In Halbig v. Burwell, the D.C. Circuit Court found that the clear language of the ACA only allows the health care premium subsidies in states that created their own state-run health care exchanges, i.e, residents in NC along with 35 other states would not be eligible for the subsidies. See my blog: Halbig: Court Holds Clear Language of the ACA Prohibits Health Care Subsidies in Federally-Run Exchanges.
Juxtapose the 4th Circuit Court’s decision in King v. Burwell, which held that “For reasons explained below, we find that the applicable statutory language is ambiguous and subject to multiple interpretations. Applying deference to the IRS’s determination, however, we uphold the rule as a permissible exercise of the agency’s discretion.”
So the two cases came to two entirely different conclusions. Halbig: ACA is clear; King: ACA is ambiguous.
Well, for everyone else, that is as clear….as mud.
When the D.C. court decided Halbig, it was not an en banc decision. In English, this means that the entire bench of judges in the D. C. Circuit did not hear the case, only a panel of three (which is the usual way for a case to be heard on appeal to a federal circuit). The Obama administration, along with other proponents of the ACA, hoped that the U.S. Supreme Court would deny cert to King until the D.C. court could re-visit its decision, this time en banc.
Yet, this past Friday, the Supreme Court opted to consider King v. Burwell.
The sole issue to be decided is: Whether the Internal Revenue Service may permissibly promulgate regulations to extend tax-credit subsidies to coverage purchased through exchanges established by the federal government under Section 1321 of the Patient Protection and Affordable Care Act.
How is King v. Burwell NOT an attack on the ACA?
The plaintiffs in King are not asking the Supreme Court to strike down the ACA, even, in part. They are asking the Court to uphold the plain language of the ACA by holding that the IRS’s interpretation of the ACA is erroneous. Let me explain…
Section 1311 directs states to establish exchanges, and Section 1321 directs the federal government to establish exchanges “within” any state that opts to not set up its own state-run exchange, e.g., NC.
Section 1401 authorizes subsidies for people whose household income falls between 100 and 400% of the federal poverty level, who are not eligible for qualified employer coverage or other government programs, and who enroll in coverage “through an Exchange established by the State.” (emphasis added). These 3 criteria are crystal clear based on the plain language of the statute.
The statute makes no provision for subsidies in states that opt not to create their own exchange but, instead, allow the federal government to create an exchange within its state.
The ACA was intended to create penalties if the states do not establish their own exchanges. For example, the subsidies are not allowed to citizens of states without state-created exchanges.
In August 2011, the IRS issued a proposed rule [add link] announcing it would provide tax credits (and implement the resulting penalties) in states with federal exchanges, too. IRS officials later admitted to Congress that they knew the statute did not authorize them to issue tax credits through federal exchanges…Oops…
The proposed rule received much negative feedback based on the fact that the IRS appeared to have no statutory basis for the rule. Nonetheless, the proposed rule was finalized in May 2012, and lawsuits ensued…
Oklahoma began the litigation with Pruitt v. Burwell in September 2012. In September 2014, a federal district court held that the plain language of the ACA does not allow subsidies in states with federally-run exchanges. In May 2013, Halbig v. Burwell was filed, and in September 2013, King v. Burwell was filed.
So, much to the contrary of popular belief, these lawsuits are not “against the ACA” or “proving the unconstitutionality of the ACA.” Instead, these lawsuits are “against” the IRS interpreting the ACA to allow tax credits for all states, even if the state has a federally-run exchange.
Will it negatively impact the ACA if the plaintiffs win? That would be a resounding yes.
Oral argument could be as soon as March 2015.
Halbig: Court Holds Clear Language of the ACA Prohibits Health Care Subsidies in Federally-Run Exchanges
Remember my post, “The Great and Powerful ACA: Are High, Inflated Premiums Hiding Behind the Curtain?” I warned of the possible consequences of Halbig v. Burwell…and it happened.
Halbig v. Burwell was decided earlier today.
The Halbig court held that the Internal Revenue Service (IRS) went too far in extending subsidies to those who buy insurance through the federally run, Healthcare.gov website.
The Halbig court ruled that the subsection of the ACA that allows high insurance premium tax credits, according to the plain language of the statute, only applies to those individuals enrolled “through an exchange established by the state.” (emphasis added). Therefore, if Halbig is upheld on en banc review by the D. C. Circuit (see below) or on appeal to the U. S. Supreme Court, residents who reside in two-thirds (or 36) of the states that did not establish state-run health care exchanges (including NC), will not benefit from the health care subsidies.
Looking at the decision through a purely objective, legal lens, I believe the federal court of appeals is correct in its ruling. I also agree that the ruling will have drastic and devastating consequences for the ACA and the people who would have benefited from the health care subsidies.
However, the law governing statutory construction and interpretation is clear. Statutory interpretation is the process by which courts interpret legislation.
For years, the U.S. Supreme Court has been explicit on statutory interpretation. “We begin with the familiar canon of statutory construction that the starting point for interpreting a statute is the language of the statute itself. Absent a clearly expressed legislative intention to the contrary, that language must ordinarily be regarded as conclusive.” Consumer Product Safety Commission et al. v. GTE Sylvania, Inc. et al., 447 U.S. 102 (1980).
In other words, if the words of a statute are unambiguous, then the statutory interpretation ends. The clear words of the statute must be followed.
Let me give an example of ambiguous language:
A magazine printed the following: “Rachel Ray enjoys cooking her family and her dogs.” If that were true, Rachel Ray’s family and dogs would be very upset. I am sure what the editor meant to write was “Rachel Ray enjoys cooking, her family, and her dogs.”
It is amazing how important a comma is.
The Halbig court held that the section of the ACA allowing health care subsidies only apply to those enrolled in an exchange established by the state is not ambivalent. Thus, according to statutory interpretation rules, the judicial inquiry ends.
So what happens now?
A request for an en banc ruling by the D. C. Circuit is the next step for Department of Justice. An en banc ruling is a decision made by all the justices, or the entire bench, of an appeals court, instead of a panel selected by the bench. In this case, three federal judges sat on the panel and the case was decided 2-1. An appeals court can only overrule a decision made by one of its panels if the court is sitting en banc.
Looking beyond any en banc ruling, the case could, potentially, be heard by the U.S. Supreme Court, especially in light of the importance of the decision and the fact that a 4th Circuit Court of Appeals ruled the opposite way literally hours after Halbig was announced. See David King, et al. v. Burwell, et al.
The Fourth Circuit found the ACA ambiguous, and it states, “For reasons explained below, we find that the applicable statutory language is ambiguous and subject to multiple interpretations. Applying deference to the IRS’s determination, however, we uphold the rule as a permissible exercise of the agency’s discretion. We thus affirm the judgment of the district court.”
Bizarre that two courts hold opposing positions on the same issue and publish both decisions on the same day. It reminds of the old Sam the Sheepdog cartoon, “Duh! Which way did he go? Which way did he go, George?”
Finally, in closing, and on a personal note, I would like to dedicate this blog to my lab-doberman mix, Booker T, who, sadly, passed Sunday. He was my best friend for over 14 years. You will be greatly missed, Booker T. Rest in peace.
The Great and Powerful Affordable Care Act: Are High, Inflated Premiums Hiding Behind the Curtain?
A lawsuit that could come out as early as tomorrow could be catastrophic for the Affordable Care Act (ACA) in as many as 36 states and impact approximately 5.4 million Americans.
In so many ways, in the last year or so, the all-changing, great and powerful ACA that promised affordable health care for all and “if you like your health care coverage, you can keep it,” has fallen monumentally short of its original, lofty promises.
In a way, we all wanted to believe in the promises of the ACA, like Dorothy in “The Wizard of Oz.” Who can forget the disappointed sigh Dorothy expels when Toto pulls back the curtain of the Great and Powerful Oz only to see a mundane, elderly man with absolutely no super powers or means to grant her wishes. Dorothy wanted Oz to be real. She wanted desperately for Oz to be as Great and Powerful as he proclaimed. However, in reality, he was not.
Like Dorothy wanted Oz to be real, we all wanted the ACA to create an affordable, nationwide health care system…this health care utopia.
So many lofty promises of the ACA have already been crushed, either by the Supreme Court’s decision that allows states to opt-out of Medicaid expansion, or by President Obama himself in executive actions, including an action delaying the employee mandate.
The courts may deflate the illusions of grandeur of the ACA even more with an upcoming and anxiously awaited decision. The case of Halbig v. Burwell, a D.C. Court of Appeals case, has concerned citizens everywhere, who wait on bated breath for a ruling. Halbig could have a huge (negative) impact on health care premiums. Halbig could be the Toto that pulled back the curtain on the ACA.
Let me explain:
There is a subsection of the ACA that allows high insurance premium tax credits, in an effort to make premiums more affordable for low-income families. The subsection applies to individuals who make less than $46,075. In implementing the ACA, it was contemplated that those individuals who make under $46,075 will have difficulty affording the insurance premiums; therefore, the ACA gives nice, large tax credits to offset the costs of premiums.
However, according to the plain language of the statute, these tax credits only apply to those individuals enrolled “through an exchange established by the state.” (emphasis added). Yet two-thirds (or 36) of the states did not establish state-run health care exchanges (including NC). Instead, these states relied on the federal exchange, in part, to avoid additional cost expenditures.
Here is a map of states according to whether it is expanding Medicaid:
The Halbig case asks the question: Can people living in states run by a federal health exchange reap the benefit of tax credits intended for those people participating in an exchange run by the state?
If the Halbig Court takes that stance that the statute is not ambivalent and must be followed exactly as it is written, then millions of Americans will become ineligible for the tax credits for health care premiums, because they will not be enrolled in a state-run exchange. Premiums would sky-rocket and many Americans would be unable to afford health care…again. It is estimated that without the tax credits, the health care premiums will cost 4x as much.
Interestingly, the Internal Revenue Service (IRS) weighed in and issued a highly-contested rule authorizing the federal exchange to issue tax credits. Amidst all the tomfoolery about the IRS targeting 501(c) charities owned by the Tea Party, it is surprising, at least to me, that the IRS would issue such a contentious ruling in favor of the ACA and anti-conservatives.
Hence, the Halbig case, in which Plaintiffs argue that the IRS has exceeded its statutory authority in issuing tax credits to those residing in states with federal exchanges, when the ACA clearly states that the tax credits only apply to state-run exchanges.
If the D.C. Court of Appeals sides in favor of the Plaintiffs, the following could occur:
• Residents of 36 states could pay health care premiums 4x more than promised;
• The ACA would fall short of promises…again;
• The IRS will have exceeded its authority to benefit Democrats…again;
• People may not be able to afford the health care premiums;
• The ACA could risk the downfall of many more promises.
We all wanted the ACA to create health care utopia. We all wanted the Great and Powerful Oz to be Great and Powerful.
But the courts may tell us we just can’t say, “Pay no attention to the man behind the curtain!!”
Government Shutdown: No Medicaid Funds Available in D.C., So Why Am I Still Getting My Mail!
Hey, have you heard??? Our federal government has shut down. So why am I still getting mail???
Unless you have lived under a rock for the past couple weeks, you are aware that our esteemed federal government has shut down. At least…partially. I keep getting mail. Social security is still getting paid. But don’t you dare try to visit a national monument…those are off-limits!! Really? Who decided what gets shut down and what stays open? How is it that I still get my cable bill, but cannot visit Yellowstone National Park??
How is all this tomfoolery affecting Medicaid? Minimally, in most areas, but Medicaid fundings HAS STOPPED in Washington D.C.
Why stop Medicaid funding in D.C. when the federal air traffic controllers are still working. The State Department continues processing foreign applications for visas and U.S. applications for passports. The federal courts are open. The National Weather Service is still working. Student loans are still getting paid. The Veterans’ hospitals are all up and running. The military is still working. I guess, Obama and White House staff are still working. (Although Obama could be on the golf course). The Post Office is delivering mail.
Yet, here are some random federal actions and agencies that are actually stopped/closed: Food safety inspections are suspended; U.S. food inspections abroad have also been stopped. Auto recalls and investigations of safety defects are stopped. Taxpayers, who filed for an extension in the spring, still have to pay their taxes by today, yet the IRS is not processing tax returns (How does this make sense??). The Consumer Product Safety Commission (CSPC) is not working. (Great, after the CPSC starts working again, there are sure to be numerous lawsuits based on new product defects that have been placed in the market over the last 2 weeks). The Environmental Protection Agency (EPA) has ceased to run, which means we have two weeks of allowable pollution. Many at the Federal Bureau of Investigations (FBI) and the federal housing agency are furloughed.
How does this shutdown make any sense?? Who determined that the IRS should not process tax returns, but should accept taxes? Who decided that safety inspections should be stopped, but passports should still be processed?
That safety inspections of food and products should halt, but students should still get federal loans.
Where is the logic?
It is as if someone said, “Shutdown the federal government!! Except not the mail, passports, and the weather service…keep those running!”
And then Medicaid in D.C…. Why did Medicaid funding stop only in D.C.?? While I still think if the mail is being delivered that D.C. providers could get Medicaid fundings, I will attempt to explain the illogical reason below:
Because D.C. is not a state. D.C. is a local government without a state, so its budget must be authorized by U.S. Congress. And Congress has not passed a budget.
D.C. has $2.7 billion budgeted for Medicaid, but providers are getting nothing (and, quite possibly, some recipients). I can only imagine how this is negatively impacting health care providers in D.C. I am sure many of the providers are still rendering services unpaid. But some, I would imagine, are closing up shop. I know I could not last financially without a paycheck for 3 months. I am sure many of the D.C. providers are no different.
But it still makes no sense. Just like NC, D.C. pays for about 30% of Medicaid with the federal government reimbursing about 70%. If NC’s federal reimbursements are still being paid, why not in D.C.?
And why am I still getting mail????
Well, my heart goes out to all the Medicaid providers and Medicaid recipients in D.C. I hope you receive Medicaid fundings very soon.
Although, at least D.C. providers know that, at some point, the Medicaid funds will be funded; whereas in NC we still have NCTracks.
NC Medicaid Audits: Is There a Silver Lining? (Maybe Even Two!)
Normally I am “silver lining” type of person. You know…the whole, “The sun will come out tomorrow, bet your bottom dollar that tomorrow, there’ll be sun,” mentality…
But when it comes to North Carolina Medicaid audits conducted by Public Consulting Group (PCG) or HMS, I have failed to find the silver linings. You, as a health care provider, receive a Tentative Notice of Overpayment (TNO) for $1 million and go through various stages of acceptance: surprise, horror, anger, befuddlement, and fear. In order to defend yourself, you have to shell out tens of thousands of dollars for an attorney (hopefully one that understands Medicaid audits). Then spend countless hours compiling all the documents for the attorney to review and use at the reconsideration review. Then take off a day to attend the reconsideration review, losing even more clinical hours, only to disagree with the Department of Health and Human Services (DHHS) Hearing Officer’s decision. Spend more money in legal fees to appeal the DHHS decision to the Office of Administrative Hearings (OAH). Possibly hire an extrapolation expert at even more expense. Only to prove, finally, that the PCG and/or HMS audit was erroneous and you owe nothing. Or $100. Or $1000.
Where is the silver lining in that process?
That you owe nothing in the end? But you paid exhorbent amounts to the attorney.
Well, there could be a silver lining… (maybe even two)…
Recently, the IRS released a couple private letter rulings as to whether paid overpayments could be tax-deductible.
OK, what the heck is a private letter ruling?
According to Wikipedia, private letter rulings “(PLRs), in the United States, are written decisions by the Internal Revenue Service (IRS) in response to taxpayer requests for guidance. A private letter ruling binds only the IRS and the requesting taxpayer. Thus, a private ruling may not be cited or relied upon as precedent.”
The most important part of the above-referenced definition of a PLR is that the PLR is binding only on the IRS and the requesting taxpayer. Obviously, this means that if the IRS wrote 2500 PLRs saying that paid overpayments in Medicaid audits are tax-deductible, those 2500 PLRs are not binding as to you (unless you were one of the 2500 taxpayers asking for a PLR).
Regardless, PLRs are demonstrative as to how the IRS determines [whatever is determines in the PLR]. Because, despite the fact that PLRs are not binding on all taxpayers, I would find it odd if the IRS issued 2500 PLRs stating that the paid overpayments are tax-deductible, then the IRS turn around and refuse to allow you to treat the overpayment as a tax deduction. Although, I am sure stranger things have happened.
In the first PLR, which, BTW, is not fun to read. Who uses all this legalese??? Taxpayer B asks whether (1) the money he paid to the insurance company could be deducted as a loss incurred in a trade or business; and (2) the money paid to a Government Entity E and Government Entity F in the tax years in which the installment payments are made under the settlement agreement can be deducted. (I made Taxpayer B a male because the PLR makes him a male. I have no idea as to the gender of Taxpayer B).
In Year 1, the Insurance Company sued … Taxpayer B for insurance fraud, demanding both compensatory and punitive damages. In the second year, the state of New Jersey indicted Taxpayer B… for insurance fraud. Taxpayer B agreed to pay $X in restitution to Government Entity E and Government Entity F.
Taxpayer B has represented (a) that he previously included in his gross income in prior tax years the amounts he now seeks to deduct and (b) that he and all other defendants in [both] lawsuits are jointly and severally liable for the amounts due under the settlement agreement because the language of the settlement agreement imposes joint liability upon the defendants and New Jersey law imposes joint and several liability upon members of a limited liability company.
So…can Taxpayer B deduct the money paid to the insurance company and the government as a business loss????
Or, in other words, could you (a health care provider who accepts Medicaid) deduct any money paid to PCG or HMS arising our of a regulatory audit as a business loss?
According to the PLR:
We conclude that Taxpayer B may deduct the payments he made to the Insurance Company and to Government Entity E and Government Entity F in the years the payments were made or will be made, provided that he received or will receive no contribution from any other party and included the amounts he paid or will pay in his gross income in prior tax years.
Yes!
The second PLR is basically identical to the first, except that Taxpayer A is at issue. For the PLR, click here.
So what does this mean? Why should North Carolina Medicaid providers care that 2 taxpayers were able to deduct the monies paid to the government/insurance companies as a business loss?
Because, these PLRs are demonstrative that, perhaps, the IRS would view regulatory audit paybacks to PCG or HMS as an allowable tax deduction as a business loss.
So, you receive a TNO in the amount of $1 million. You spend $20,000 litigating the $1 million to $1000. I know, it sucks, right?? (Not that the amount was decreased by $999,000, but that it cost $20,000 to reduce the amount $999,000).
The silver lining? Maybe you can deduct the $1000 paid as a business loss.
But what about the $20,000 attorneys’ fees???
Let me preface this with:
I am no tax expert. I know Medicaid, not tax. If you want real tax advice, go to a real tax attorney. But, I did find…Publication 529, which states the following:
Legal Expenses
You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax.
You can also deduct legal expenses that are:
- Related to either doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business,
- For tax advice related to a divorce if the bill specifies how much is for tax advice and it is determined in a reasonable way, or
- To collect taxable alimony.
A definitive answer?
No.
But…a possible two silver linings! The sun will come out tomorrow, bet your bottom dollar that tomorrow, there’ll be sun!!!!
