Document Number
08-81
Tax Type
BPOL Tax
Description
Any revenues attributed to services provided as a fiscal intermediary for the federal Medicare Part B program are exempt from local BPOL taxation
Topic
Exemptions
Date Issued
06-06-2008

June 6, 2008








Re: Appeal of Final Local Determination
Taxpayer: *****
Locality: *****
Business, Professional and Occupational License Tax

Dear *****:

This final state determination is issued upon the application for correction filed by you on behalf of ***** (the "Taxpayer") with the Department of Taxation. You appeal an assessment of Business, Professional and Occupational License (BPOL) taxes issued to the Taxpayer by the ***** (the "County") for tax years 2003 through 2006.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct. That is, the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS


The Taxpayer administers the federal Medicare Part B program in Virginia under a contract with the United States Department of Health and Human Services (DHHS). The County classified the Taxpayer as a business service for BPOL tax purposes, and assessed the Taxpayer accordingly. The Taxpayer protests the classification and assessment, claiming that it is an instrumentality of the federal government exempt from state and local taxation. In the alternative, the Taxpayer asserts that it is a nonprofit organization exempt from BPOL taxation or that it receipts from the federal government are excludible as reimbursements of expenses for BPOL tax purposes.


ANALYSIS


The Taxpayer claims that as an instrumentality of the federal government, it is immune from state and local taxation. The United States Supreme Court (the "Court") has interpreted Article VI, Clause 2 of the United States Constitution, (the Supremacy Clause) as prohibiting the states from taxing the United States and its instrumentalities, unless the United States expressly waives its immunity from state taxation. See McCulloch v. The State of Maryland, 17 U.S. 316 (1819).

In James, State Tax Commissioner v. Dravo Contracting Co., 302 U.S. 134 (1937), the Court determined that a state cannot impose a tax when the entity subject to such imposition is "so intimately connected with the exercise of a power or the performance of a duty" by the federal government that taxation of such entity would be "a direct interference with the functions of government itself." The Court has also held "there is no simple test for ascertaining whether an institution is so closely related to governmental activity as to become a tax-immune instrumentality . . . ." See Department of Employment et el. v. United States et al., 385 U.S. 355 (1966). Accordingly, the determination of tax immunity for an entity acting as a government instrumentality can only be made by examining all the facts and circumstances.

Under 42 U.S. C §1395u, the Secretary of Health and Human Services (the "Secretary") is authorized to enter into contracts with "carriers" or "contractors" in order to "provide for the administration of the benefits under this part [Medicare Part B] with maximum efficiency and convenience for individuals entitled to benefits under this part and for providers of services and other persons furnishing services to such individuals, and with a view to furthering coordination of the administration of the benefits . . . ."

This statute explicitly delineates the responsibilities of the carriers with respect to the implementation of Medicare Part B and establishes that the chain of responsibility begins with the Secretary. Finally, the statute sets rates for specific services, prescribes how carriers are to determine prevailing rates, stipulates how percentage rate increases are to be determined and provides other detailed operational instructions.

As a contracted carrier for the federal Medicaid Part B program, the Taxpayer's primary function is to receive, disburse and account for federal funds used for making payments for services furnished by eligible Medicare providers. This function includes the responsibility of determining reasonable charges with respect to services rendered by eligible providers. The Taxpayer also serves as a channel of communication between DHHS and eligible providers. Contracted carriers are the sole instruments used to implement the Medicare Part B plan. As such, carriers like the Taxpayer are so "intimately connected" with the performance of the federal government's duty to implement the law that they cannot be subject to state or local taxation.

Although not binding to Virginia, a number of circuit courts have ruled a fiscal intermediary to be an instrumentality of the federal government. See Donald M. Peterson v. Caspar W. Weinburger, Secretary of Health, Education and Welfare, et al., 508 F.2d 45 (1975), Lydia B. Anderson v. Occidental Life Insurance Co. of California, 727 F.2d 855 (1984), Nadine Brooks et. Al., v. Blue Cross and Blue Shield of Florida, Inc. et. Al., 116 F. 3d 1364 (1997), and Kailash C. Pani, M. D. and Kailash C. Pani, M. D., P.C. v. Empire Blue Cross Blue Shield, 152 F.3d 67 (1998).

DETERMINATION


After careful consideration of the Taxpayer's relationship with DHHS, I find that the Taxpayer is an instrumentality of the federal government. As such, any revenues attributed to services provided as a fiscal intermediary for the federal Medicare Part B program are exempt from local BPOL taxation.

There is no need to address the Taxpayer's arguments that it qualifies as a nonprofit organization under Va. Code § 58.1-3703 C 18 a or its receipts are eligible for the reimbursement of expenses exclusion in accordance with the rules set forth in Public Document (P.D.) 01-38 (4/12/01) in interpreting City of Alexandria v Morrison­Williams Associates, Inc., 223 Va. 349, 288 S.E.2d 482 (1982).

Based on this determination, I am remanding this matter to the County. If you have any questions regarding this determination, you may call the Office of Tax Policy, Appeals and Rulings, at *****.
                • Sincerely,

                  • Janie E. Bowen
                    Tax Commissioner



    AR/1-1173812575H


    Rulings of the Tax Commissioner

    Last Updated 08/25/2014 16:46