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IRS issues final tanning tax regulations

Just in time for beach season, the Internal Revenue Service issued final regulations for tanning booth operators.

You remember the tanning tax. The 10 percent levy was created as part of the health care reform law and has been in effect since July 1, 2010.

Tanning bed by Evil Erin via Flickr CCTanning bed customer photo (click image for direct link) by Evil Erin via Flickr CC

But the IRS now has made the process for collecting the indoor tanning services excise tax official.

For the most part, the final rules follow the guidelines issued almost three years ago. Below are some key sections of the final tanning tax regulations.

Health clubs tanning remains exempt: The most contentious of the preliminary guidelines was the ruling that membership fees to fitness clubs, or what the IRS calls Qualified Physical Fitness Facilities (QPFFs), that also offer tanning services are not taxable.

Commenters on the proposed rules denounced this as unfair, arguing that it gives health clubs a competitive advantage over other indoor tanning service providers.

The Indoor Tanning Association (ITA), a trade association representing sun-tanning facilities nationwide, in its comments to the IRS cited anecdotal evidence of QPFFs trying to exploit their advantage by publicizing access to tax-free tanning services.

That didn't persuade the IRS. In the agency's analysis, a QPFF is a facility whose main business is to serve as a physical fitness facility. Indoor tanning at these clubs is simply an add-on service.

Further, says the IRS, QPFFs do not charge separately for tanning services. They don't offer their tanning services to the general public. And the QPFFs don't charge different membership fees based on access to tanning services.

So the IRS kept the exemption for QPFFs in its final tanning tax regulations.

Bonus point tans are exempt: The final regulations also say that the tanning tax applies only to the amount paid for indoor procedures.

That means if your tanning salon offers its services at a reduced rate, the taxs applies only to that lower, actually paid amount.

And if you earned bonus points through, for example, a loyalty or promotion program, there's no tax on the services paid for this way.

So if your tanning salon offers you a free tan procedure after you pay for 10 sessions, that freebie is not taxed.

Bundled services, gift cards: Where a tanning salon offers not just bronzing but a variety of services over a period of time for a particular fee, then the tax amount applicable to that charge must be determined using the "ratio method."

That means the tanning tax applies to the portion of the overall charge that is reasonably attributable to tanning services.

This was a highly debated concept in the discussion period preceding issuance of the final regs. The key question: Why should this complicated method of determining the taxable amount attributable to indoor tanning services be required while fitness clubs are exempt?

The IRS' answer: Because.

OK, it's really for the reasons noted earlier as to the differences between the two types of indoor tanning providers.

The bottom line is that in its final regs, the IRS decided to stick with the ratio option in the case of tanning salons. But the tax agency says it could issue future guidance on additional options in determining the taxable component of bundled services.

To that end, the IRS is accepting 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.

Similarly, when it comes to undesignated gift cards, no tanning tax is collected on that purchase. However, when the card is used to pay for a tanning session, then the tax is added to the amount that is deducted from the gift card.

As with the bundled services, the IRS is leaving the door open for possible changes to the gift card tax issue and wants comments on this area, too.

You can send your written thoughts on either or both to the Office of Associate Chief Counsel (Passthroughs and Special Industries), Re: REG-112841-10, CC:PSI:B7, Room 5314, 1111 Constitution Avenue NW., Washington, D.C. 20224. The submission deadline is Oct. 9.

Personally, I'm sidestepping the tax issue altogether by sticking with the farmer's tan on my arms and legs that I get by walking my neighborhood in shorts and a T-shirt.

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