Taxing Tans Causes Confusion, Health Risks
Carl Gipson, Director, Center for Small Business, July, 2010
In late June, a fantastic case study in unintended consequences vis-à-vis tax policy in The Wall Street Journal emerged. As a part of the massive health care overhaul, the Obama Administration and Congress passed earlier this year, officials levied a special tax on the tanning industry to help pay for the expansion in coverage. Someone wants to take a turn in the tanning bed? Fine, they just have to pay a little more, right?
If only it were that simple.
According to the story in the Journal, the tax depends not only on the type of tanning bed, but also where the fake 'n bake takes place.
From the article, "When Jeanne Chamberlain turns up at work Thursday, she's going to have to grapple with America's first federal tax on tanning services, a 10% levy designed to help pay for Congress's health-care overhaul. Ms. Chamberlain runs a video-rental store."
About 20 years ago, to help with the fledgling video rental market, Ms. Chamberlain expanded her shop to include tanning beds. I suppose tanning and a video rental go hand-in-hand to some folks. Ms. Chamberlain offers a free tan for every three rentals.
Enter the ever-evolving IRS rules on the subject. "Free tans at video-rental stores might be taxable, but tanning services offered by health clubs mostly aren't, thanks to a late exemption. Ultraviolet tans are taxed. Spray tans aren't. Tanning salons are fretting over how to calculate unlimited memberships that combine taxed and non-taxed tans. Customers, meanwhile, have been racing to cram in tanning sessions to avoid the levy."
Thanks to political favoritism, if you tan at your health club, your tan is tax exempt, as is your faux fake 'n bake spray-on tan. But if you head to the neighborhood tanning salon or hit up one of these video/tan hybrid stores, you're now pitching in for Congress's health care overhaul. Originally, Congress debated taxing elective plastic surgery, but after protests from plastic surgeons Congress lined up an easier target in tanning salons.
What's even more troubling, according to this story, is that the IRS isn't helping matters. Many business owners interviewed in the story are simply confused by the application of the new tax. There are simply too many variables -- how are memberships taxed? Are free tans taxable? What if I just put some treadmills into my tanning salon, does that make it a health club? Why is the gym next to me tax-exempt but my business is not? All good, legitimate questions that business owners are asking.
The IRS's response?
"A spokesman for the IRS said it's not clear whether the free tan would be taxed, and that business owners should 'make the best determination they can based on their own facts and circumstances.'"
This is remarkably similar to the language Speaker Pelosi used to justify the health care overhaul bill, "We have to pass it in order to find out what's in it." But now the IRS’s response is essentially, "We don't know how to tell you to implement this tax, so do your best guestimation and we'll tell you after the fact if we think you're wrong."
That’s not a very inspiring answer. It’s the kind of answer that makes businesses, big and small, rethink expansion or job creation -- both of which our nation needs right now.
The other unintended consequence: "In June [tanning customer] Ms. Scheible developed her own solution [to avoiding the tan tax]: She tanned two to three times a week 'to get in before the tax.'"
However, tanning more often in such a short time-span carries health risks. In fact, the World Health Organization has cautioned that tanning can lead to melanoma, one of the deadliest forms of cancer.
The bottom line is that this new tax has plenty of loopholes, exemptions, confusion and unintended consequences. However you feel about the health care bill, this approach at taxing tans is going to harm the small businesses community and could cause unintended health consequences and should serve as a lesson in how NOT to write tax policy via favoritism and political connections.