No Refund of Kentucky Health Care Provider Tax on Receipts From Federal Carriers
In Saint Joseph Health Sys., Inc. v. Finance and Admin. Cabinet Dep’t of Revenue, File No. K12-R-18, Order No. K-24835, (Ky. Bd. Tax App. April 30, 2015), the Kentucky Board of Tax Appeals (“Board”) found that a state tax imposed on healthcare providers is not a direct or indirect tax upon federal insurance carriers, and that providers may therefore pass on the economic burden of those taxes to such carriers. It also found that Kentucky House Bill 380 limits a healthcare provider tax liability to the base tax amount it paid in 2005-2006, and that this limit cannot be reduced by refunds subsequently granted for the 2005-2006 tax year.
Kentucky House Bill 380 (“HB 380”), from the 2006 General Assembly, “limits the healthcare provider tax liability for tax years 2006-2007 and 2007-2008 to the ‘amount the hospitals paid in taxes in fiscal year 2005-2006.” Saint Joseph Health Systems (“Taxpayer”) argued that this language limited liability to the amount of tax paid in that year minus any refunds later granted to it for the same year. The Kentucky Department of Revenue (“Department”) argued that the amount Taxpayer paid during those tax years was the base amount for calculation purposes, and that whether those amounts were subsequently found to be in error was irrelevant. The Board held that the language of HB 308 clearly meant the amount paid according to the tax return filed and did not take into account any subsequent actions by the Department. Therefore, even if Taxpayer overpaid its base tax amount in 2005-2006, it was the appropriate fixed amount for the following two years.
The Board also rejected Taxpayer’s arguments that the Department engaged in selective enforcement and that denial of a refund for overpaid taxes was a taking without just compensation under the Takings Clause. The Board explained that the Takings Clause claim was similar and dependent on the claims that the denial constituted selective enforcement as it was considered an arbitrary application of HB 380. The Board dismissed these counts and clarified that selective enforcement claims require both evidence of disparate impact and evidence that the government’s actual motivation was discriminatory in nature. The Board concluded that Taxpayer failed to show that the government acted with discriminatory intent or purpose.
Another argument advanced by Taxpayer was that it ought to receive a refund for its receipts from federal insurance providers because federal law preempts taxation of those receipts. It argued that it would otherwise pass the economic burden of that tax onto the federal carriers, and that this is an indirect state tax on federal carriers. The Board pointed out that there are no specific federal regulations or court rulings requiring that the receipts be excluded. Finally, the Board found that taxing these receipts is not preempted under 5 U.S.C. § 8908(f)(1) and that the only federal court addressing this issue held that an economic burden which could be passing through to carriers does not equate to an imposition of an indirect tax. The Board found the Fourth Circuit decision persuasive, and held that the provider tax was not imposed directly or indirectly on the carriers and thus did not violate the federal law. The Board denied Taxpayer’s request for a refund of receipts from federal insurance carriers.