Total Renal Care Fails at Board but Raises Interesting Situsing Issues
Recently, the Ohio Board of Tax Appeals (“Board”) affirmed the Tax Commissioner’s denial of a refund claim for Ohio Commercial Activity Tax (“CAT”) filed by Total Renal Care, Inc. (“Renal Care”), which was based on the assertion that certain gross receipts were improperly sitused to Ohio. Total Renal Care, Inc. v. McClain, BTA No. 2019- 849 (July 24, 2023). Renal Care provides dialysis services in Ohio and other states. Renal Care argued that as part of the dialysis services, a customer also receives laboratory testing and administrative services (a “bundled service”). While the dialysis services for an Ohio patient occurred in Ohio, Renal Care argued that the other services occurred and were properly sitused outside of Ohio. The Board rejected that argument, finding that under R.C. 5751.033(I), the services were properly sitused to the location where the purchaser received the benefit of the services, which location was Ohio. The Board found that even if those services could be sitused outside Ohio, Renal Care had not met its burden of providing supportable customer evidence. Renal Care had first proposed an allocation method using the Centers for Medicare and Medicaid Services’ proposed rule that estimated the portion of the costs of each of the three components of the bundled service but it was unclear that Renal Care actually used the allocation method set forth in the proposed rule. Renal Care’s second method used the breakdown of costs provided by the laboratory, which the Board rejected since the CAT is on gross receipts, not on costs. Although the taxpayer lost, the case raises some interesting questions about the situsing of bundled services. Perhaps because the Tax Commissioner didn’t argue otherwise, the Board seems to allow the concept of “unbundling” services. The wording of the opinion also suggests that an allocation based on gross receipts rather than the costs of the services could be persuasive. This is supported by Ohio Administrative Code 5703-29-17(C)(28), which refers to a reasonable allocation of gross receipts from healthcare services.
The Board’s finding that the laboratory and testing services were sitused to the physical location where the patient received the benefit and not to where the services were performed appears to be inconsistent with Ohio Administrative Code 5703-29-17(C)(28) (health care services) and Ohio Administrative Code 5703-29-17(C)(49) (testing services), both of which rules the Board cited in its decision. Both rules situs the services to where they are performed, not to where the purchaser receives the benefit of those services. Did the Board infer that those sections of the rule are not valid because they are in conflict with the statute, R.C. 5751.033(I)? Should the Tax Commissioner be bound by its own rules, even if the rules conflict with the statute? It should be noted that the situsing statute expressly authorizes the Tax Commissioner to adopt rules to provide additional guidance and alternative methods for situsing gross receipts for persons engaged in certain business activities. R.C. 5751.033(K). The Board’s decision has been appealed to the Ohio Supreme Court.
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