The Internal Revenue Service has finalized the regulations for the 10 percent excise tax on indoor tanning services that was included as part of the health care reform law.

The IRS originally issued regulations in 2010 on the tax (see IRS Publishes Regulations on Tanning Tax), but finalized them on Monday, with some changes, and removed their status as temporary regulations. The tax originally went into effect on July 1, 2010, but they are superseded by the latest version, which applies on or after June 11, 2013.

However, there may be further revisions in the future. Public comments on the 2010 regulations identified two issues that the IRS and the Treasury Department said they would study further and on which the IRS and the Treasury Department request additional comments. Those issues involve the treatment of bundled services and undesignated payment cards.

Physical Fitness Facilities Exception
Among the issues dealt with in the latest regulations, commenters questioned the exception for Qualified Physical Fitness Facilities in the 2010 regulations. The 2010 regulations exempt from the tax any membership fee paid to a QPFF that includes access to indoor tanning services. In a QPFF, taking into consideration all of the facts and circumstances, the predominant business or activity of the facility is to serve as a physical fitness facility. The 2010 regulations limit the definition of a QPFF to a business that does not charge separately for indoor tanning services, offer such services to the general public, or offer different membership fee rates based on access to indoor tanning services.

Commenters stated that an exception for QPFFs does not appear in the law and suggested that there is no compelling reason to differentiate these facilities from other indoor tanning service facilities. The commenters argued that while other providers of bundled services must use a complicated method of determining the amount attributable to indoor tanning services, QPFFs are exempt from the tax even though they provide the same indoor tanning services. Thus, these commenters suggested, the exception for QPFFs creates an unfair competitive advantage for some providers of indoor tanning services over others, and should not be included in the final regulations.

The final regulations do not adopt this suggestion. “Access to indoor tanning services is incidental to a QPFF’s predominant business or activity,” said the IRS. “Customers of a QPFF typically pay a monthly fee in exchange for access to all equipment in the QPFF, including any indoor tanning equipment. Requiring a QPFF to allocate its customers’ monthly membership fees among tanning and non-tanning services under such an arrangement would be burdensome and difficult to administer.”

In contrast, the IRS pointed out, non-QPFF providers of bundled goods and services typically offer indoor tanning services to customers as part of the purchase of a package of specific goods or services. This generally allows the provider to determine the portion of the purchase price that relates to the use of indoor tanning services by the customer and allocate the appropriate portion of the purchase price to those services.

Free and Discounted Tanning Services
Commenters also requested guidance on the application of the tax to free indoor tanning services and indoor tanning services that are sold at reduced rates. The final regulations provide that the tax only applies if an amount is paid for indoor tanning services. If services are provided at a reduced rate, the tax applies to the amount actually paid for the services.

The final regulations do not apply the tax to indoor tanning services that are obtained by redemption of “bonus points” through a loyalty program or similar program. In the case of promotions that entitle a customer to a “free” tan with the purchase of a certain number of tans, the amount paid for the purchased tans reflects a reduced price for all of the tans rather than a package of tans at full price coupled with a “free” purchased tan. Thus, the tax is imposed on the purchase of the package of tans rather than on the redemption of the additional tan.

Bundled Services
If a provider (other than a QPFF) sells bundled services in which access to indoor tanning services (in a specified or unlimited amount) over a period of time is bundled with other goods and services, the 2010 regulations set out a formula to determine the amount reasonably attributable to indoor tanning services.

Commenters noted that there are no commercially available point-of-sale software programs that automatically calculate the tax on the sale of indoor tanning services that are bundled with other goods and services. Thus, providers must manually calculate the tax on these types of sales, a process that the commenters said is time consuming, expensive, and prone to error.

The final regulations do not change the rules for bundled goods and services. The statute imposes the tax on indoor tanning services; if those services are bundled with other goods and services, the provider must determine the amount of the payment for the bundled goods and services that is reasonably attributable to indoor tanning services.

The 2010 regulations describe a reasonable method for making this determination, which is retained with minor clarifications in the final regulations.

However, the final regulations also authorize the Treasury Department and the IRS to issue future guidance to provide additional options for making this determination. The Treasury Department and the IRS request comments on other reasonable methods for determining the amount of a payment for bundled goods and services that is reasonably attributable to indoor tanning services.

Gift Cards
The 2010 regulations define an undesignated payment card as a gift certificate, gift card, or similar item that can be redeemed for goods or services that may, but do not necessarily, include indoor tanning services. Under the 2010 regulations, the tax is not imposed on the purchase of these cards; rather, the tax is imposed only when the card is redeemed specifically to pay for indoor tanning service.

Commenters noted that, in practice, a provider can collect the tax only when the card is bought and not when the card is redeemed for indoor tanning service. Thus, the commenters suggested that the tax be imposed on the purchase of an undesignated payment card. Providers could either estimate how much of the card will be used for indoor tanning service in the future or collect tax on the entire purchase price.

The final regulations do not adopt this suggestion. However, the Treasury Department and the IRS want to hear comments on this issue. The final regulations authorize the Treasury Department and the IRS to issue future guidance to provide additional options for administering the tax with respect to undesignated payment cards.

The temporary regulations require the tax to be reported and paid quarterly on Form 720, “Quarterly Federal Excise Tax Return.” Commenters suggested that Form 720 is too complex or burdensome for the average provider to complete and file. These commenters request that the IRS issue a special tax return form specifically and exclusively for reporting the section 5000B tax.

The final regulations do not adopt this suggestion. Form 720 is the standard form used to report many excise taxes, including the other types of excise taxes collected from a customer upon the purchase of services, such as the taxes on communications services and transportation of persons and property by air. In addition, the Treasury Department and the IRS said they believe that creating a new form would add unnecessary complexity.

Membership and Enrollment Fees
The final regulations clarify that the tax is imposed on amounts paid for prepaid monthly membership and enrollment fees to a provider of indoor tanning services, other than a QPFF, even if a member does not use any indoor tanning services during the period to which the fee relates. Some providers offer monthly membership programs through which customers receive a number of tanning sessions at a lower cost than would be charged for each session individually. Some of these providers charge customers an enrollment fee when the customers join a membership program. Typically, the customer pays the enrollment fee before paying the first monthly membership charge.

Some providers also impose fees on their customers to allow the customer to skip one or more months of membership dues without being charged an enrollment fee when the customer restarts the monthly membership. Amounts paid to a provider that temporarily suspend a periodic membership program are amounts paid for indoor tanning services. Because payment of these fees allows the customer to receive indoor tanning services at reduced prices, the final regulations clarify that these fees are subject to the tax as amounts paid for indoor tanning services.