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1 Joseph Henchman, States Should Avoid Sales Taxes on Nonprofit Hospital Purchases 1 (2008)

handle is hein.taxfoundation/ffbcfxz0001 and id is 1 raw text is: TAX FOUNDATION States Should Avoid Sales Taxes on Nonprofit Hospital Purchases Fiscal Fact No. 125 by Joseph Henchman April 11, 2008 Six States Tax Nonprofit Hospital Purchases; Only Seven States Exempt All Hospital Purchases Summary States seeking a neutral, transparent sales tax system should exempt all business-to-business transactions and impose sales tax only on final retail sales of goods and services. Because many states continue to impose sales tax on business-to-business inputs, examining the tax treatment of a variety of such transactions can provide insight into the neutrality and transparency of a state's overall tax system. While income tax exemptions for nonprofit hospitals may not be justified under the principles of sound tax policy, sales tax exemptions for the purchase of inputs are. Only seven states exempt inputs purchased by all hospitals, and six states do not exempt inputs purchased by nonprofit hospitals. For many states, exempting inputs from the sales tax should be a part of any tax reform effort. Inputs Should Generally Be Exempt from Sales Tax Ideally, a sales tax should be levied on all goods and services sold at retail, and to prevent distortions and hidden taxes, it should be levied only once on each good or service sold at retail. Take the example of bread sold at retail. The bread is the final retail product, coming after the farmer purchased seeds from a store owner, the miller purchased wheat from the farmer, the bakery purchased flour from the miller, and the supermarket purchased the bread from the bakery. If a sales tax is imposed on each of those transactions, the taxes cascade or pyramid on top of each other, resulting in taxes on top of taxes. Tax pyramiding distorts economic decision-making because goods or services provided by one company become artificially favored over those requiring multiple production steps. If the

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