Case Study: For Profit Hospital’s Review Results in Precedential Ruling

Agile Recovered Over $250,000 in Sales & Use Taxes

Background:

This single-location 76-bed hospital located in Alabama has been listed among America’s 100 Best Hospitals for Orthopaedic Surgery and Joint Replacement for 4-consecutive years and has also been included by Healthgrades in the top 5% of hospitals in the nation for overall orthopaedic services and joint replacement.  The hospital had never conducted a reverse sales and use tax audit prior to engaging Agile.

Goals:

The hospital wanted to determine whether sales and use tax refunds were recoverable and to assess the internal processes for self-assessing sales and use tax on purchases that were not taxed by their vendors.  Agile was also engaged to help the in-house staff to achieve a more robust understanding of the relevant sales and use tax exemptions.

Agile’s Role:

Agile’s sales and use tax consultants traveled to the hospital to conduct an onsite review because the accounts payable invoices were hard copies.  Agile’s team identified a 2012 ruling that expanded the definition of the term “medicine” to include items consumed by the body, such as absorbable sutures.  As this was an interpretative change rather than a statutory change refunds could be pursued for the entire 36-month open statute of limitations.

Agile also identified two asset acquisitions of software on which the retailer was charging the hospital sales tax.  Agile analyzed the software program’s features, the software licensing Agreement, and interviewed the hospital’s IT Director and the Account Executive from the software company who was responsible for the implementation.   Agile’s sales tax consultants concluded that the program qualified as an exempt custom software purchase.  As a result, refund petitions were filed to recover the taxes on the two software programs.

Agile’s team continued to fight on behalf of the hospital.

The auditor representing the Alabama Department of Revenue agreed to refund the taxes on the purchases included in the new definition of medicine.  However, an impasse was reached regarding the software transactions.  The auditor denied the refunds for taxes paid to the software vendor.  Agile’s sales tax consultants protested the Department’s denial and received a second denial of the claim by the auditor’s supervisor.  Agile did not give up.  Rather than walking away from the issue, Agile’s team continued to fight on behalf of the hospital.

Comparing the language in the purchase agreements against the language included in the Tax Regulations, Agile’s sales and use tax consultants felt they had a strong argument that these purchases should be exempt from taxes and were not willing to accept the Department’s denials. Agile gathered statements from key staff at the software company which stated that the two programs in question had traits that made them qualify based on language included in Alabama’s software exemption.  Agile then appealed the denial to the Alabama Tax Tribunal where the Chief Tax Tribunal Judge eventually ruled in favor of the hospital and instructed the Department of Revenue to issue the refunds in full plus applicable interest.

Not only did this ruling benefit the hospital, but it was also precedential and expanded the types of software which can now be purchased tax exempt for all taxpayers within the state of Alabama.

case study hospitalResults:

  • Recovered over $250,000 in state and local sales & use taxes
  • Fought and won a case at the Alabama Tax Tribunal which is precedential and expands the Alabama software exemption
  • Contacted vendors charging tax in error and distributed exemption paperwork so the hospital would not be charged tax on future purchases
  • Identified recent ruling that expanded the definition of “medicine” in Alabama which yielded over $100,000 in refunds to the hospital
  • Trained accounts payable staff about appropriate tax treatment for the major categories of purchases for which we secured refunds
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