Does a nonprofit hospital's school of nursing owe sales tax on textbooks and uniforms sold to students who pay with financial-aid loan funds?

Subject

Hospital — Nonprofit/Charitable — Textbooks And Uniforms Sold To Nursing Students Under Scholarships Or Financial Aid

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9401L1287C05

Plain-English Summary

A nonprofit hospital system (TP) that operates four hospitals, three medical office buildings, and a School of Professional Nursing asked the Comptroller whether textbooks and uniforms sold to nursing students are taxable. Most students (90%) receive "scholarships or financial aid" from a restricted fund built from private and business donations, but that aid is actually structured as a loan: each student signs a Financial Aid Agreement promising to take a nursing job with TP if offered, and to repay the aid if they withdraw, are not offered a job, refuse a job, or leave employment early. The nursing program's charges to each student are broken out separately for tuition, fees, textbooks, dormitory, insurance, and uniforms.

The Comptroller ruled that the textbooks and uniforms are taxable in every scenario presented:

• Direct sale via loan proceeds: Because students pay for textbooks and uniforms using loan money from TP, the sale is taxable — the Comptroller compared this to prior rulings where staff paying for taxable items with an employer allowance or reimbursement still owed tax, and where meals sold to work-aid college students were taxable.
• Loan forgiveness: Even if the loan is later forgiven or reduced because the student accepts employment, the sale of textbooks and uniforms is a separate and distinct transaction from the financial-aid loan-and-repayment arrangement, so tax is still due.
• Lump-sum billing: If TP bills students a single lump sum instead of itemizing, TP itself would owe use tax on the purchase price of the textbooks and uniforms — unless TP can prove those items are related to its exempt purpose.

The ruling also notes a narrow escape valve: as of August 30, 1993, TP could sell the textbooks and uniforms tax-free by using one of its two annual one-day tax-free sales or auctions (available to qualifying exempt organizations).

What This Means For You

If you run a nonprofit school, hospital, or similar exempt organization that sells textbooks, uniforms, or other taxable goods to students or trainees: Structuring the payment as "financial aid" or a loan does not make the sale of those goods exempt. If the student (or an outside fund) is paying you money for tangible personal property, sales tax applies to that transaction regardless of where the money to pay it came from.

If your organization forgives or reduces the loan later (e.g., because the person takes a job with you): That forgiveness does not retroactively undo the tax obligation on the original sale of the goods — the Comptroller treats the sale and the loan/employment arrangement as separate transactions.

If you bill in a lump sum rather than itemizing: Be prepared to owe use tax on the cost of taxable items unless you can affirmatively show they are used for your organization's exempt purpose. Itemizing charges (as TP did here) may help clarify what is and isn't taxable, but doesn't change the answer on textbooks and uniforms sold to students.

If you qualify as an exempt organization: Ask whether your organization can use one of its permitted one-day tax-free sale days to move textbooks, uniforms, or similar items without collecting tax, instead of selling them as part of ordinary taxable transactions throughout the year.

Q&A

Q: We're a nonprofit hospital's nursing school, and students pay for their textbooks and uniforms using financial aid we gave them. Do we still have to charge sales tax?
A: Yes. The Comptroller ruled that textbooks and uniforms sold to nursing students are taxable even when the students pay using financial aid, because that aid is structured as a loan from the hospital, not a gift — the source of the student's payment doesn't exempt the sale.

Q: If a student accepts a job with us and we forgive their loan, does that erase the sales tax owed on the textbooks and uniforms they bought?
A: No. The Comptroller treated the sale of textbooks/uniforms and the loan forgiveness as separate and distinct transactions. Tax was due on the sale regardless of what later happens with the loan.

Q: What if we just bill students one lump sum instead of separately listing tuition, textbooks, uniforms, etc.?
A: In that case the hospital itself would owe use tax on the purchase price of the textbooks and uniforms, unless it can prove those items are related to its exempt purpose. The ruling also notes the hospital could instead sell such items tax-free using one of its two annual one-day tax-free sales or auctions.

Original ruling text

DATE: January 27, 1994

TO: David Dunn, San Antonio Audit (2160)

FROM: Eddie C. Washington, Tax Administration Division (2E10)

SUBJECT: Taxability of the Consideration Paid for Textbooks Sold
by a Non-Profit Hospital

RE: ** (TP)

FACTS: TP is a non-profit entity that operates four hospitals,
three medical office buildings and a school of professional nursing.
TP's School of Professional Nursing offers "scholarships or financial
aid" to the majority of students who attend.

Monies used for the financial aid are derived through private and
business donations that are kept in a restricted fund for student
financial aid.

Each student who receives the financial aid from these funds (90%
of all students) is required to sign a Financial Aid Agreement as
"consideration" to cover the costs of their nursing program.

The Financial Aid Agreement (attached) is summarized below:

1. In the event employment is offered by TP, I agree to accept
   and perform full-time employment in a professional nursing position
   for the financial aid which I have received. I will be compensated
   at the prevailing rate being paid by TP to other new employees
   occupying similar positions at the time of my employment.

2. TP is not obligated to offer employment.

3. All financial aid loans received from TP must be repaid under the
   following circumstances:

(a) Withdrawal or termination of employment.

(b) A decision by TP not to offer employment even though the student
successfully completes the School.

(c) Refusal by the student to accept employment.

(d) Termination of employment with TP before completion of the agreed
employment period. (Emphasis added.)

The nursing program charges to each student are separated in the
Financial Aid Agreement and Expense Statement (attached) as follows:

Tuition: $XX.XX
Fees: $XX.XX
Textbooks: $XX.XX
Dormitory: $XX.XX
Insurance: $XX.XX
Uniforms: $XX.XX

TOTAL CHARGES: $XX.XX

Question 1. Based on the facts presented above, would the textbooks
and uniforms sold be subject to sales tax?

ANSWER: Yes, the uniforms and textbooks sold to the students are
taxable. The students pay for the textbooks and uniforms with a loan
made by TP. In microfiche document 7801L0099El2, the Comptroller
advised a college that staff members were required to pay sales tax
when buying taxable items. The fact that the staff member received an
allowance From the college or was reimbursed by the college did not
make the transaction exempt.

In microfiche document 6710L0006C06, the Comptroller determined
that meals sold to college students on work aid were taxable. The
college handled the sale of meal by either having students work to
pay the college for the meals or by issuing a check that the students
endorsed the check to the college.

Question 2. If the student accepts employment and the "loan" is
forgiven or reduced by the terms of the Financial Aid Agreement would
sales tax still be due?

Answer: Yes. The sales of the textbooks and uniforms to students
are separate and distinct transactions from the financial aid (loan
and repayment) transactions. See microfiche document 8802L0890G10 in
which a 501(c)(3) organization is told to collect sales tax on sales of
textbooks.

Question 3. If the billing was a lump-sum amount, would TP owe use
tax on the purchase price of the textbooks and uniforms because they
are not used for the exempt purpose of the organization?

Answer: Yes, unless TP can prove that the uniforms and textbooks
used in the nursing school are related to TP's exempt purpose.

Please be aware that as of August 30, 1993, TP may sell the
textbooks and uniforms tax free as one of its two one-day tax-free
sales or auctions.

This opinion is based on the facts presented. If there are additional
or different facts, the opinion may change.

NOTE: Previous Accession Number 9401070L