Tanning Tax Income Pales Compared With Estimate, Audit Finds

Revenue from a 10 percent excise tax on indoor tanning services mandated by the 2010 health-care overhaul law is falling short of projections, a government watchdog reported today.

The tax brought in $17.8 million in the last quarter of the 2010 fiscal year and $36.6 million in the first half of fiscal 2011, according to the report by J. Russell George, the Treasury Department’s inspector general for tax administration.

The tanning levy was projected to generate $2.7 billion over 10 years, including $200 million for fiscal 2011, according to the congressional Joint Committee on Taxation.

George attributed the lower-than-projected revenue to a smaller number of taxpayers than anticipated filing returns with the excise tax payments. George cited IRS documents indicating that there were an estimated 25,000 businesses providing indoor tanning services in 2010.

“The actual number of businesses liable for the tax has been difficult to determine with any degree of accuracy,” the report says.

For the first three fiscal quarters that the tax has been in force, the number of federal excise tax forms reporting tanning taxes has averaged about 10,300, the report found.

‘Tight Deadline’

“The IRS quickly implemented the tanning tax under a tight deadline,” George said in a statement accompanying the report. “Since this was a brand-new tax imposed on a group of businesses and taxpayers with no previous experience with excise taxes, the IRS should have done more to inform taxpayers of their filing responsibilities and bring them into compliance in a timely manner.”

The IRS agreed with George’s recommendations to identify more potential taxpayers and to provide more information about the tanning levy in the agency’s excise tax publication.

In a statement, IRS spokeswoman Michelle Eldridge noted the report’s finding that there is no authoritative list of tanning businesses subject to the tax.

“The IRS has taken numerous steps to identify and educate the potential businesses that could be liable for this tax,” Eldridge said. “IRS has already contacted a number of businesses who have not filed and may potentially be required to do so.”

Confusion Over Tax

John Overstreet, executive director of the Washington-based Indoor Tanning Association, a trade group, said in an interview today that the lower revenue results, at least in part, from confusion about who owes the tax.

Gyms and health clubs that offer tanning as an ancillary service are exempt from the tax. Hair salons and movie-rental outlets with tanning beds are subject to the tax, Overstreet said.

“I don’t think the IRS has its arms around this industry,” he said. “My guess is that a lot of people who are supposed to be paying the tax don’t even know about it.”

The tanning industry opposes the tax and has been lobbying Congress to eliminate it.

The tanning tax is one of the smaller taxes in a mosaic of levies and fee increases totaling about $409 billion through 2019 that Congress assembled to pay for the 2010 health-care overhaul.

To contact the reporter on this story: Andrew Zajac in Washington at azajac@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net