We Are Sunshine

IRS Publishes Rules for New 10 Percent Tax

Monday, June 14th, 2010


The U.S. Federal government on Friday finally published guidelines for the collection of the new 10 percent luxury tax on UV-related indoor tanning services, a supplemental tax crammed into 2010 Health Care Reform legislation as a revenue alternative to a 5 percent tax on Botox injections and elective cosmetic surgeries.

“In general, providers of indoor tanning services will collect the tax at the time the purchaser pays for the tanning services. The provider then pays over these amounts to the government, quarterly, along with IRS Form 720, Quarterly Federal Excise Tax Return,” the U.S. Internal Revenue Service reported in a press release on Friday.

Dermatology lobbying groups — who proposed the tax along with lobbyists for Botox — successfully exempted their own usage of indoor tanning equipment for phototherapy-related cosmetic services. Dermatologists use indoor tanning equipment to treat psoriasis, eczema and other conditions. Additionally, more than 1 million indoor tanning clients are referred to tanning facilities by dermatologists for informal treatment of skin conditions.

Most surprisingly the IRS guidelines exempt fitness facilities who offer tanning as a part of a membership fee. “The tax does not apply to phototherapy services performed by a licensed medical professional on his or her premises. The regulations also provide an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee,” IRS wrote.

The Indoor Tanning Association on Friday released a preliminary analysis of the regulations prepared by ITA’s tax counsel. ITA advised that its preliminary analysis was for informational purposes, that its advisors will continue to study the issue and that tanning businesses should get actual advice from their own tax advisors.

According to the ITA:

  1. In general, liability for the IT Tax arises upon payment for indoor tanning services (ITS), and IT Tax applies only to amounts paid for ITS after June 30, 2010.
  2. If ITS are sold in combination with other goods & services, an allocation is made to the ITS
    • If a charge for ITS is separately stated on the bill, then the charge for other goods and services is not subject to the IT Tax as long as (i) those charges do not exceed the fair market value of the other goods and services, and (ii) the vendor’s records reflect in exact amounts the separate charges.
    • If ITS are not separately stated on the customer’s bill, then the IT Tax is based on the portion of the amount paid that is reasonably attributable to the ITS.
  3. A payment for ITS is deemed made (and liability for the tax arises) when it can reasonably be determined that the payment is made specifically for ITS. Thus,
    • If a customer buys a gift certificate, gift card, or similar device that can be used for ITS or other goods or services (an undesignated card), the taxable event happens when the card is redeemed, in whole or in part, specifically for ITS — and not when the card is first purchased.
    • If, instead, a customer purchases a bundle of goods and services that includes ITS (in a specified or unlimited amount) over a period of time, the taxable event occurs at the time of purchase (to whatever extent the charge is allocable to ITS), regardless of actual usage of the ITS.
  4. If the amount of the tax is not separately stated in the bill to the customer, the payment from the customer is presumed to include the ITT (i.e., if the customer is simply charged $30, the sales price is deemed to be $27.27 and the tax is $2.73).
  5. EXCEPTION — If a membership fee is sold by a qualified physical fitness facility(QPFF) that includes access to ITS, but the QPFF’s predominant business or activity is to serve as a physical fitness facility (and there is no separate charge for access to ITS), then the membership is not deemed to include any payment for ITS, and no IT Tax is imposed.

Smart Tan on Friday published a poll showing that — just 20 days before the 10 percent luxury tax on tanning is to go into effect — 95 percent of tanning businesses said they had received no information on how to collect the tax.

To read the IRS press statement with a link to the agency’s publication of rules in the Federal Register click here.