Pages

Wednesday, October 19, 2011

The Federal Tanning Tax?

I had been blissfully unaware, until I saw an article about the federal tanning tax a few days ago in USA Today, that such a tax was part of President Obama's health care reform. The  Treasury Inspector General for Tax Administration tells the story in a report published on September 22, 2011: "Affordable Care Act: The Number of Taxpayers Filing Tanning Excise Tax Returns Is Lower Than Expected."

The TIGTA report sets the stage: "On March 23, 2010, the Patient Protection and Affordable Care Act (Affordable Care Act) was signed into law. Along with amendments in the Health Care and Education Reconciliation Act of 2010, which was signed on March 30, 2010, this legislation contains revenue provisions anticipated to generate $438 billion in the form of new taxes, fees, and penalties. One of these new taxes is an excise tax on indoor tanning services (referred to hereafter as the tanning tax)."

Apparently this was a 10% excise tax on tanning services, to be paid by the customer, collected by the business, and the forwarded along to the U.S. government quarterly. "According to IRS documents, in April 2010 the Indoor Tanning Association estimated that 25,000 businesses were providing indoor tanning services, including approximately 15,000 stand-alone tanning salons and approximately 10,000 other businesses that offer tanning services, such as spas, health clubs, and beauty salons." "The Congressional Joint Committee on Taxation estimated this tax would raise less than $50 million in the last 3 months of Fiscal Year 2010 and raise $200 million for Fiscal Year 2011."

But the tax hasn't raised nearly that much. Instead of 25,000 businesses filing, only about 10,000 have been filing. Not surprisingly, the tax is likely to raise less than $100 million in 2011, less than half of what was predicted.

 I have never entered a tanning booth and hope never to do so. I can readily believe that if overused, they aren't great for your skin. But when the federal government starts trying to collect a small amounts of money from many small businesses, it's like an elephant standing on a ice rink trying to pick up peanuts. Sure, you get some peanuts. But the contortions and the effort seem hardly worth it. As you consider what the IRS has been going through to collect this tax, and the costs on businesses of record-keeping and dealing with the tax, remember that the $200 million that Congress hoped to raise with this tax represents about 1/20 of 1% of the $438 billion in total revenue-raisers in the health care reform bill. And consider the efforts needed to do this, laid out in dry detail in the TIGTA report:

Of course, the first step is to define which tanning services are covered and which are not: "This new excise tax applies to indoor tanning services paid for on or after July 1, 2010, and is 10 percent of the amount paid for the tanning services. Indoor tanning services are defined as services using ultraviolet lamps to induce skin tanning. There are other services provided by tanning salons that are excluded from the tanning tax. It does not apply to ‘spray’ tans or topical creams or lotions. In addition, it does not apply to phototherapy services performed by licensed medical professionals, during which individuals are exposed to light for the treatment of certain medical conditions. Tanning services are not taxable when provided by qualified physical fitness facilities (such as a workout facility or gym). The fitness facility must meet various tests to be exempt."

This line of business had not owed federal excises before. "[A]n IRS document describing compliance challenges states, “The tax is new and unusual for this industry, which has never experienced the imposition of a Federal excise tax on tanning services, and thus the overwhelming majority have never filed an excise tax return."

Thus, of course the IRS needed an an outreach program to let tanning booth owners know about the bill. This involved "Hosting live webinars and uploading videos on the YouTube web site,"  "Outreach to industry associations," "Contacting State licensing bureau," "Issuing electronic bulletins to tax professionals," and "Giving seminars at the Nationwide Tax Forums."  For the IRS page with its Frequently Asked Questions about the tax, see here.

 The new tax required reprogramming IRS computer systems. "There was a relatively short time period to prepare for receipt and processing of returns reporting the tanning tax. Accordingly, the IRS had to immediately update the computer systems used for processing tax returns. The IRS receives both paper and electronically transmitted returns. ... In general, the systems had to be updated to include a new abstract code for the tanning tax, which is a unique number assigned to each of the excise taxes."

And of course, now that only about half of those expected to pay are doing so, the IRS is needing to send thousands of follow-up letters, and then to follow up on those letters.

At the end of the day, the tanning tax probably collects more in revenue than the costs to the government and business of putting the tax into place and collecting it. But surely, the IRS resources could be better allocated (more audits on potentially large targets?). Indeed, given how little revenue the tanning tax corrects, it's probably misguided to think of it primarily as "tax" policy. It's some anonymous Congressman or staffer who doesn't like tanning booths sticking a tiny provision that almost no one hears about into an enormous bill. It's the sort of piddly annoying oddball regulation that gives the rest of government regulation a bad name.