SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 624 (Wilk) - Qualified medical supplies providers: sales taxes: repayment

Bill Summary:

SB 624 would allow a qualified medical supplies provider to receive a qualified repayment of sales tax reimbursement paid to the state, but clawed back under Medi-Cal reimbursement reductions.

Fiscal Impact:

The California Department of Tax and Fee Administration (CDTFA) indicates that it would incur one-time costs of up to $1 million related to the processing of refund claims. Additionally, the department projects a maximum one-time revenue loss of $81 million, assuming all eligible providers file qualified claims for repayment. The actual revenue loss resulting from the bill would likely be lower.

Background:

State law imposes the sales tax on every retailer “engaged in business in this state” that sells tangible personal property, and requires them to (1) register with CDTFA, and (2) collect and remit appropriate tax at purchase and remit the amount to CDFTA. Sales tax applies whenever a retail sale occurs, which is generally any sale other than one for resale in the regular course of business. The current rate is 7.25 percent. Additionally, cities, counties, and specified special districts may increase the sales and use tax, also known as district or transactions and use taxes. The current average sales tax rate statewide is 8.5 percent.

Unless purchasers pay the sales tax to the retailer, they are liable for the use tax, which current law imposes on any person consuming tangible personal property in the State. The use tax is the same rate as the sales tax, and also like the sales tax, must be remitted on or before the last day of the month following the quarterly period in which the person made the purchase.

When a taxpayer believes that they have overpaid sales taxes, they can file a claim for refund with CDTFA within the statute of limitations; however, the statute of limitations provides that they taxpayer must do so within three years from the last day of the month following the close of the calendar quarter for which they believe they overpaid. Taxpayers can also file refunds six months from the date of the claimed overpayment or from when the determination becomes final, or three years from the date CDTFA uses a levy or lien to collect a tax.

The Department of Health Care Services (DHCS) administers the Medi-Cal program, under which DHCS both directly pays providers and Medi-Cal managed care plans for health care services they perform for qualified low-income patients. While the number of people receiving health care through Medi-Cal has grown dramatically since 2008, the Legislature began reducing Medi-Cal payment rates to health plans and providers in the program in 2008 in response to state budget deficits. In 2011, the Legislature enacted AB 97 (Committee on Budget), which largely replaced prior legislative provider payment reductions, and which remains in effect today. AB 97 (1) reduced Medi-Cal payments, with specified exceptions, by 10 percent for dates of service on and after June 1, 2011, (2) required the payment reductions be applied retroactively to June 1, 2011, or on such other date as may be applicable when federal approval is obtained, and (3) conditioned the implementation of the payment reductions on the reductions complying with federal Medicaid requirements.

The federal government approved the rate reductions in October 2011. However, in response to a legal challenge that agued the payment reductions did not comply with federal requirements, among other grounds, a court enjoined DHCS from implementing the reductions, which it lifted on June 14, 2013. To ensure that the full amount of the savings from AB 97 were realized, the state applied these reductions both prospectively for both direct providers and managed care plans, and also retroactively by recouping the reductions from past payments made to direct providers, known as the “claw back.” DHCS began the claw back in 2014, but commenced a 58-month claw back period for pharmaceuticals on March 1, 2016, and over the same period for medical supplies on September 1, 2017.

The claw back did not apply to certain provider categories, including hospital inpatient and outpatient services, critical access hospitals, federally qualified health centers and hospices, among others. Entities subject to the AB 97 rate reduction include physician services to adults, nurse practitioners, psychologists, podiatrists, optometrists, physical therapists, blood banks, adult day care centers, medical transportation providers, durable medical equipment/supply providers, dental service providers, clinics, and pharmacy providers. Since the 2013-14 Budget Act, either the Legislature or DHCS exempted several types of providers and services from the ongoing payment reductions, such as: (1) hospital inpatient and outpatient services, critical access hospitals, federal rural referral centers, (2) federally Qualified Health Centers and Rural Health Clinics, (3) services provided through the Breast and Cervical Cancer Treatment and Family Planning, Access, Care and Treatment programs, (4) hospice services, (5) payments to facilities owned or operated by the State Department of State Hospitals e State Department of Developmental Services, and (6) payments funded by certified public expenditures and intergovernmental transfers.

Providers subject to the claw back include pharmacies, durable medical equipment and supply providers, clinical laboratories and laboratory services, distinct part skilled nursing facilities, and radiology service providers. While many items purchased by Medi-Cal providers are services that are not subject to the sales and use tax, such as prescription drugs, many others are taxable. Some medical supply companies purchased items, and paid tax, for Medi-Cal recipients during the time the injunction was in place based on rates higher than those that prevailed after the injunction was lifted, and DHCS initiated the claw back. For example, a firm that purchased a bedpan for a Medi-Cal beneficiary for $10 paid 80 cents in sales tax (assuming an 8 percent tax rate). However, if the state claws back $1 (10 percent) for that bedpan, the new sales price becomes $9, so the tax should have been only 72 cents, leaving the state 8 cents better off on top of its fiscal benefits accruing from the claw back.

The general three-year statute of limitations for Medi-Cal providers to file a claim for refund with CDTFA for the sales and use taxes had expired by the time DHCS commenced the claw back for medical supply and equipment firms. Some medical supply and equipment providers want the state to repay them for sales and use taxes paid based on higher reimbursement rates that DHCS subsequently clawed back.

Proposed Law:

This bill would allow a qualified medical supplies provider to receive a qualified repayment. The bill defines a “qualified medical supplies provider” as a pharmacy or durable medical equipment provider enrolled in Medi-Cal, who (1) furnished medical supplies or equipment to Medi-Cal beneficiaries as a Medi-Cal provider, (2) had its reimbursement payments from Medi-Cal for those supplies or equipment reduced due to AB 97, and (3) paid state and local sales taxes on the gross receipts from the sales of medical supplies or equipment furnished to Medi-Cal beneficiaries between June 1, 2011, and November 1, 2013, for which a portion of the payments from Medi-Cal for those sales included sales tax reimbursement, and was paid back to the DHCS due to the reduction in reimbursements.

SB 624 defines a “qualified repayment” as an amount equal to the amount of sales tax reimbursement paid back to DHCS, less any amounts previously refunded, credited, or paid to a qualified medical supplies provider. The bill states that the qualified medical supplies provider may file a claim with CDTFA, which must be in writing and completed in accordance with any instructions or regulations prescribed by CDTFA and accompanied by proof of payment of tax on or before January 1, 2020. The measure also (1) directs CDFTA to work with representatives of a qualified medical supplies provider to establish information and documentation necessary to process a claim for repayment, (2) requires CDTFA to provide the Controller with qualified repayment amounts to be made, and (3) provides that claim amounts cannot exceed the total amount appropriated. If it does, and the amount appropriated is less than amounts claimed, CDFTA must determine each qualified medical supplies provider’s pro rata share based on each provider’s proportional share.

SB 624 would appropriate $1 million from the General Fund to make qualified repayments to qualified medical supplies providers; however, the bill bars the payment of interest.

Related Legislation:

AB 3017 (Acosta, 2018), as amended August 14, 2018 was identical to this bill. It was never heard in the Senate.

Staff Comments:

Using data from the California Office of Statewide Health Planning and Development, CDTFA calculates that claims for refunds could be made for a total of $2.9 million per month over the 29 months covered in the bill, or a total of $81 million. However, CDTFA notes that this figure assumes that all eligible qualified medical supplies providers apply for refunds. Additionally, the department notes that implanted medical devices are included in the figures above, but are actually exempt from the sales tax under current law. Consequently, the $81 million figure serves as an upper bound for the revenue estimate. The actual revenue loss likely to be lower.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2019 - 2020 Regular

Qualified medical supplies providers: sales taxes: repayment

Allows a qualified medical supplies provider to receive a qualified repayment of sales tax reimbursement paid to the state, but clawed back under Medi-Cal reimbursement reductions.

Background

Sales and Use Tax. State law imposes the sales tax on every retailer “engaged in business in this state” that sells tangible personal property, and requires them to register with the California Department of Tax and Fee Administration (CDTFA), as well as collect and remit appropriate tax at purchase and remit the amount to CDFTA. Sales tax applies whenever a retail sale occurs, which is generally any sale other than one for resale in the regular course of business. The current rate is 7.25% as shown in the table below. Additionally, cities, counties, and specified special districts may increase the sales and use tax, also known as district or transactions and use taxes.

Unless the purchaser pays the sales tax to the retailer, he or she is liable for the use tax, which the law imposes on any person consuming tangible personal property in the state. The use tax is the same rate as the sales tax, and also like the sales tax, must be remitted on or before the last day of the month following the quarterly period in which the person made the purchase.

When a taxpayer believes that they have overpaid sales taxes, they can file a claim for refund with CDTFA within the statute of limitations; however, the statute of limitations provides that they taxpayer must do so within three years from the last day of the month following the close of the calendar quarter for which they believe they overpaid. Taxpayers can also file refunds six months from the date of the claimed overpayment or from when the determination becomes final, or three years from the date CDTFA uses a levy or lien to collect a tax.

Medi-Cal. The Department of Health Care Services (DHCS) administers the Medi-Cal program, under which DHCS both directly pays providers and Medi-Cal managed care plans for health care services they perform for qualified low-income patients. While the number of people receiving health care through Medi-Cal has grown dramatically since 2008, the Legislature began reducing Medi-Cal payment rates to health plans and providers in the program in 2008 to help address state budget deficits. In 2011, the Legislature enacted AB 97 (Committee on Budget), which largely replaced prior legislative provider payment reductions, and which remains in effect today. AB 97:

• Reduced Medi-Cal payments, with specified exceptions, by 10 percent for dates of service on and after June 1, 2011;
• Required the payment reductions be applied retroactively to June 1, 2011, or on such other date as may be applicable when federal approval is obtained; and
• Conditioned the implementation of the payment reductions on the reductions complying with federal Medicaid requirements.

The federal government approved the rate reductions in October 2011. However, in response to a legal challenge that agued the payment reductions did not comply with federal requirements, among other grounds, a court enjoined DHCS from implementing the reductions, which it lifted on June 14, 2013. To ensure that the full amount of the savings from AB 197 were realized, the state applied these reductions both prospectively for both direct providers and managed care plans, and also retroactively by recouping the reductions from past payments made to direct providers, known as the “claw back.” DHCS began the claw back in 2014, but commenced a 58-month claw back period for pharmaceuticals on March 1, 2016, and over the same period for medical supplies on September 1, 2017.

The claw back did not apply to certain provider categories, including hospital inpatient and outpatient services, critical access hospitals, federally qualified health centers and hospices, among others. Entities subject to the AB 97 rate reduction include physician services to adults, nurse practitioners, psychologists, podiatrists, optometrists, physical therapists, blood banks, adult day care centers, medical transportation providers, durable medical equipment/supply providers, dental service providers, clinics, and pharmacy providers. Since the 2013-14 Budget Act was enacted, either the Legislature or DHCS exempted several types of providers and services from the ongoing payment reductions, such as:

• Hospital inpatient and outpatient services, critical access hospitals, federal rural referral centers,
• Federally Qualified Health Centers and Rural Health Clinics, 
• Services provided through the Breast and Cervical Cancer Treatment and Family Planning, Access, Care and Treatment programs, 
• Hospice services
• Payments to facilities owned or operated by the State Department of State Hospitals e  State Department of Developmental Services, and 
• Payments funded by certified public expenditures and intergovernmental transfers.

Providers subject to the claw back include pharmacies, durable medical equipment and supply providers, clinical laboratories and laboratory services, distinct part skilled nursing facilities, and radiology service providers. While many items purchased by Medi-Cal providers are services that are not subject to the sales and use tax, such as prescription drugs, many others are taxable. Some medical supply companies purchased items, and paid tax, for Medi-Cal recipients during the time the injunction was in place based on rates higher than those that prevailed after the injunction was lifted, and DHCS initiated the claw back. For example, a firm that purchased a bedpan for a Medi-Cal beneficiary for $10 paid 80 cents in sales tax at an 8% rate. However, if the state claws back $1 (10%) for that bedpan, the new sales price becomes $9, so the tax should have been only 72 cents, leaving the state 8 cents better off on top of its fiscal benefits accruing from the claw back.

The general three-year statute of limitations for Medi-Cal providers to file a claim for refund with CDTFA for the sales and use taxes had expired by the time DHCS commenced the claw back for medical supply and equipment firms. Some medical supply and equipment providers want the state to repay them for sales and use taxes paid based on higher reimbursement rates that DHCS subsequently clawed back.

Proposed Law

Senate Bill 624 allows a qualified medical supplies provider to receive a qualified repayment. The bill defines a “qualified medical supplies provider” as a pharmacy or durable medical equipment provider enrolled in Medi-Cal, who:

• Furnished medical supplies or equipment to Medi-Cal beneficiaries as a Medi-Cal provider;
• Had its reimbursement payments from Medi-Cal for those supplies or equipment reduced due to AB 97; and
• Paid state and local sales taxes on the gross receipts from the sales of medical supplies or equipment furnished to Medi-Cal beneficiaries between June 1, 2011, and November 1, 2013, for which a portion of the payments from Medi-Cal for those sales included sales tax reimbursement, and was paid back to the DHCS due to the reduction in reimbursements.

SB 624 defines a “qualified repayment” as an amount equal to the amount of sales tax reimbursement paid back to DHCS, less any amounts previously refunded, credited, or paid to a qualified medical supplies provider. The bill states that the qualified medical supplies provider may file a claim with CDTFA, which must be in writing and completed in accordance with any instructions or regulations prescribed by CDTFA and accompanied by proof of payment of tax on or before January 1, 2021. The measure also:

• Directs CDFTA to work with representatives of a qualified medical supplies provider to establish information and documentation necessary to process a claim for repayment;
• Requires CDTFA to provide the Controller with qualified repayment amounts to be made; and,
• Provides that claim amounts cannot exceed the total amount appropriated. If it does, and the amount appropriated is less than amounts claimed, CDFTA must determine each qualified medical supplies provider’s pro rata share based on each provider’s proportional share.

SB 624 appropriates amounts necessary from the General Fund to make qualified repayments to qualified medical supplies providers; however, the bill bars the payment of interest. The bill also includes legislative findings providing that the measure does not constitute a gift of public funds, and provide that the bill takes effect immediately for a specified reason.

State Revenue Impact

CDTFA estimates a potential revenue loss to the state is expected to be a maximum of $81,462,169, assuming all eligible providers file claims.

Comments

1. Purpose of the bill. According to the author, “This measure extends the statute of limitations for medical supply companies to be refunded excess taxes paid on the original pricing of their products. The taxes were paid on the higher cost that Medi-Cal unilaterally changed to a smaller amount. The refund is for the difference between what was paid and what should have been owed if the retroactive refund was taken into consideration. Companies would only be allowed to get what they are owed. No penalties would be assessed or interest allowed. The money belongs to the companies providing the supplies. The State should be fair to these businesses who were penalized by the statute of limitations running out. The fact is Medi-Cal changed their price after the fact.”

2. Buyer beware. The Legislature enacted AB 97 to reduce state spending during a budget crisis forced by a severe recession, a difficult decision given the vital work that health care providers perform when serving the Medi-Cal population. When the cuts were enacted, many health care providers resisted, and filed suit against the state seeking to overturn AB 97. A court initially enjoined the reductions, but litigants were aware that they may not eventually prevail on the merits, and should not have been surprised when the state clawed back the reductions retroactive to its effective date. Many years later, some of these providers are asking for reimbursement for excess sales and use taxes clawed back during the time the Court enjoined the reductions, which SB 624 would provide. While these providers perform vital work with vulnerable populations, and the state was enriched by the additional taxes collected, why should the state repay its former legal adversaries who were aware of this risk when they filed suit? Additionally, the Legislature and DHCS could have exempted those who would benefit from SB 624 when they exempted several categories of providers from the cuts and the clawback. The Committee may wish to consider the merits of SB 624’s repayments, and whether it creates a precedent for future litigants.

3. State and local. The sales and use tax contains a base general fund component, state-imposed rates that pass through to local agencies under specified formulas, as well as Bradley-Burns and locally-imposed transactions and use taxes. The State Board of Equalization (BOE), CDTFA’s predecessor, allocated taxes originally paid by medical supply providers to both state and local agencies; However, SB 624’s refunds would be paid exclusively by the state General Fund.

4. Gift of public funds. Section Six of Article XVI of the California Constitution prohibits the Legislature from making a gift of public funds. SB 624 states that its provisions do not constitute a gift of public funds.

5. Urgency. As an urgency statute, SB 624 must be approved by 2/3 vote of each house of the Legislature. Regular legislation takes effect on the January 1 following its passage, but urgency bills take effect as soon as they are passed, signed, and chaptered.

6. Technicals. CDTFA recommend technical amendments to add “and approved by the Department.” on page 3, line 26, after “claims filed,”

Support and Opposition

(4/26/19)

Support: Aids for Daily Living, California Association of Medical Products and Supplies, Shield Health Care.

Opposition: Unknown.

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