[Code of Federal Regulations]

[Title 42, Volume 4]

[Revised as of October 1, 2006]

From the U.S. Government Printing Office via GPO Access

[CITE: 42CFR433.68]



[Page 85-89]

 

                         TITLE 42--PUBLIC HEALTH

 

  CHAPTER IV--CENTERS FOR MEDICARE & MEDICAID SERVICES, DEPARTMENT OF 

                  HEALTH AND HUMAN SERVICES (CONTINUED)

 

PART 433_STATE FISCAL ADMINISTRATION--Table of Contents

 

     Subpart B_General Administrative Requirements State Financial 

                              Participation

 

Sec.  433.68  Permissible health care-related taxes after the 



transition period.



    (a) General rule. Beginning on the day after a State's transition 

period, as defined in Sec.  433.58(b), ends, a State may receive health 

care-related taxes, without a reduction in FFP, only in accordance with 

the requirements of this section.

    (b) Permissible health care-related taxes. Subject to the 

limitations specified in Sec.  433.70, a State may receive, without a 

reduction in FFP, health care-related taxes if all of the following are 

met:

    (1) The taxes are broad based, as specified in paragraph (c) of this 

section;

    (2) The taxes are uniformly imposed throughout a jurisdiction, as 

specified in paragraph (d) of this section; and

    (3) The tax program does not violate the hold harmless provisions 

specified in paragraph (f) of this section.

    (c) Broad based health care-related taxes. (1) A health care-related 

tax will be considered to be broad based if the tax is imposed on at 

least all health care items or services in the class or providers of 

such items or services furnished by all non-Federal, non-public 

providers in the State, and is imposed



[[Page 86]]



uniformly, as specified in paragraph (d) of this section.

    (2) If a health care-related tax is imposed by a unit of local 

government, the tax must extend to all items or services or providers 

(or to all providers in a class) in the area over which the unit of 

government has jurisdiction.

    (3) A State may request a waiver from CMS of the requirement that a 

tax program be broad based, in accordance with the procedures specified 

in Sec.  433.72. Waivers from the uniform and broad-based requirements 

will automatically be granted in cases of variations in licensing and 

certification fees for providers if the amount of such fees is not more 

than $1,000 annually per provider and the total amount raised by the 

State from the fees is used in the administration of the licensing or 

certification program.

    (d) Uniformly imposed health care-related taxes. A health care-

related tax will be considered to be imposed uniformly even if it 

excludes Medicaid or Medicare payments (in whole or in part), or both; 

or, in the case of a health care-related tax based on revenues or 

receipts with respect to a class of items or services (or providers of 

items or services), if it excludes either Medicaid or Medicare revenues 

with respect to a class of items or services, or both. The exclusion of 

Medicaid revenues must be applied uniformly to all providers being 

taxed.

    (1) A health care-related tax will be considered to be imposed 

uniformly if it meets any one of the following criteria:

    (i) If the tax is a licensing fee or similar tax imposed on a class 

of health care services (or providers of those health care items or 

services), the tax is the same amount for every provider furnishing 

those items or services within the class.

    (ii) If the tax is a licensing fee or similar tax imposed on a class 

of health care items or services (or providers of those items or 

services) on the basis of the number of beds (licensed or otherwise) of 

the provider, the amount of the tax is the same for each bed of each 

provider of those items or services in the class.

    (iii) If the tax is imposed on provider revenue or receipts with 

respect to a class of items or services (or providers of those health 

care items or services), the tax is imposed at a uniform rate for all 

services (or providers of those items or services) in the class on all 

the gross revenues or receipts, or on net operating revenues relating to 

the provision of all items or services in the State, unit, or 

jurisdiction. Net operating revenue means gross charges of facilities 

less any deducted amounts for bad debts, charity care, and payer 

discounts.

    (iv) The tax is imposed on items or services on a basis other than 

those specified in paragraphs (d)(1) (i) through (iii) of this section, 

e.g., an admission tax, and the State establishes to the satisfaction of 

the Secretary that the amount of the tax is the same for each provider 

of such items or services in the class.

    (2) A tax imposed with respect to a class of health care items or 

services will not be considered to be imposed uniformly if it meets 

either one of the following two criteria:

    (i) The tax provides for credits, exclusions, or deductions which 

have as its purpose, or results in, the return to providers of all, or a 

portion, of the tax paid, and it results, directly or indirectly, in a 

tax program in which--

    (A) The net impact of the tax and payments is not generally 

redistributive, as specified in paragraph (e) of this section; and

    (B) The amount of the tax is directly correlated to payments under 

the Medicaid program.

    (ii) The tax holds taxpayers harmless for the cost of the tax, as 

described in paragraph (f) of this section.

    (3) If a tax does not meet the criteria specified in paragraphs 

(d)(1)(i) through (iv) of this section, but the State establishes that 

the tax is imposed uniformly in accordance with the procedures for a 

waiver specified in Sec.  433.72, the tax will be treated as a uniform 

tax.

    (e) Generally redistributive. A tax will be considered to be 

generally redistributive if it meets the requirements of this paragraph. 

If the State desires



[[Page 87]]



waiver of only the broad-based tax requirement, it must demonstrate 

compliance with paragraph (e)(1) of this section. If the State desires 

waiver of the uniform tax requirement, whether or not the tax is broad-

based, it must demonstrate compliance with paragraph (e)(2) of this 

section.

    (1) Waiver of broad-based requirement only. This test is applied on 

a per class basis to a tax that is imposed on all revenues but excludes 

certain providers. For example, a tax that is imposed on all revenues 

(including Medicare and Medicaid) but excludes teaching hospitals would 

have to meet this test. This test cannot be used when a State excludes 

any or all Medicaid revenue from its tax in addition to the exclusion of 

providers, since the test compares the proportion of Medicaid revenue 

being taxed under the proposed tax with the proportion of Medicaid 

revenue being taxed under a broad-based tax.

    (i) A State seeking waiver of the broad-based tax requirement only 

must demonstrate that its proposed tax plan meets the requirement that 

its plan is generally redistributive by:

    (A) Calculating the proportion of the tax revenue applicable to 

Medicaid if the tax were broad based and applied to all providers or 

activities within the class (called P1);

    (B) Calculating the proportion of the tax revenue applicable to 

Medicaid under the tax program for which the State seeks a waiver 

(called P2); and

    (C) Calculating the value of P1/P2.

    (ii) If the State demonstrates to the Secretary's satisfaction that 

the value of P1/P2 is at least 1, CMS will automatically approve the 

waiver request.

    (iii) If a tax is enacted and in effect prior to August 13, 1993, 

and the State demonstrates to the Secretary's satisfaction that the 

value of P1/P2 is at least 0.90, CMS will review the waiver request. 

Such a waiver will be approved only if the following two criteria are 

met:

    (A) The value of P1/P2 is at least 0.90; and

    (B) The tax excludes or provides credits or deductions only to one 

or more of the following providers of items and services within the 

class to be taxed:

    (1) Providers that furnish no services within the class in the 

State;

    (2) Providers that do not charge for services within the class;

    (3) Rural hospitals (defined as any hospital located outside of an 

urban area as defined in Sec.  412.62(f)(1)(ii) of this chapter);

    (4) Sole community hospitals as defined in Sec.  412.92(a) of this 

chapter;

    (5) Physicians practicing primarily in medically underserved areas 

as defined in section 1302(7) of the Public Health Service Act;

    (6) Financially distressed hospitals if:

    (i) A financially distressed hospital is defined by the State law;

    (ii) The State law specifies reasonable standards for determining 

financially distressed hospitals, and these standards are applied 

uniformly to all hospitals in the State; and

    (iii) No more than 10 percent of nonpublic hospitals in the State 

are exempt from the tax;

    (7) Psychiatric hospitals; or

    (8) Hospitals owned and operated by HMOs.

    (iv) If a tax is enacted and in effect after August 13, 1993, and 

the State demonstrates to the Secretary's satisfaction that the value of 

P1/P2 is at least 0.95, CMS will review the waiver request. Such a 

waiver request will be approved only if the following two criteria are 

met:

    (A) The value of P1/P2 is at least 0.95; and

    (B) The tax complies with the provisions of Sec.  

433.68(e)(1)(iii)(B).

    (2) Waiver of uniform tax requirement. This test is applied on a per 

class basis to all taxes that are not uniform. This includes those taxes 

that are neither broad based (as specified in Sec.  433.68(c)) nor 

uniform (as specified in Sec.  433.68(d)).

    (i) A State seeking waiver of the uniform tax requirement (whether 

or not the tax is broad based) must demonstrate that its proposed tax 

plan meets the requirement that its plan is generally redistributive by:

    (A) Calculating, using ordinary least squares, the slope (designated 

as (B) (that is. the value of the x coefficient) of two linear 

regressions, in which the dependent variable is each provider's 

percentage share of the total tax paid



[[Page 88]]



by all taxpayers during a 12-month period, and the independent variable 

is the taxpayer's ``Medicaid Statistic''. The term ``Medicaid 

Statistic'' means the number of the provider's taxable units applicable 

to the Medicaid program during a 12-month period. If, for example, the 

State imposed a tax based on provider charges, the amount of a 

provider's Medicaid charges paid during a 12-month period would be its 

``Medicaid Statistic''. If the tax were based on provider inpatient 

days, the number of the provider's Medicaid days during a 12-month 

period would be its ``Medicaid Statistic''. For the purpose of this 

test, it is not relevant that a tax program exempts Medicaid from the 

tax.

    (B) Calculating the slope (designated as B1) of the linear 

regression, as described in paragraph (e)(2)(i) of this section, for the 

State's tax program, if it were broad based and uniform.

    (C) Calculating the slope (designated as B2) of the linear 

regression, as described in paragraph (e)(2)(i) of this section, for the 

State's tax program, as proposed.

    (ii) If the State demonstrates to the Secretary's satisfaction that 

the value of B1/B2 is at least 1, CMS will automatically approve the 

waiver request.

    (iii) If the State demonstrates to the Secretary's satisfaction that 

the value of B1/B2 is at least 0.95, CMS will review the waiver request. 

Such a waiver will be approved only if the following two criteria are 

met:

    (A) The value of B1/B2 is at least 0.95; and

    (B) The tax excludes or provides credits or deductions only to one 

or more of the following providers of items and services within the 

class to be taxes:

    (1) Providers that furnish no services within the class in the 

State;

    (2) Providers that do not charge for services within the class;

    (3) Rural hospitals (defined as any hospital located outside of an 

urban area as defined in Sec.  412.62(f)(1)(ii) of this chapter;

    (4) Sole community hospitals as defined in Sec.  412.92(a) of this 

chapter;

    (5) Physicians practicing primarily in medically underserved areas 

as defined in section 1302(7) of the Public Health Service Act;

    (6) Financially distressed hospitals if:

    (i) A financially distressed hospital is defined by the State law;

    (ii) The State law specifies reasonable standards for determining 

financially distressed hospitals, and these standards are applied 

uniformly to all hospitals in the State; and

    (iii) No more than 10 percent of nonpublic hospitals in the State 

are exempt from the tax;

    (7) Psychiatric hospitals; or

    (8) Providers or payers with tax rates that vary based exclusively 

on regions, but only if the regional variations are coterminous with 

preexisting political (and not special purpose) boundaries. Taxes within 

each regional boundary must meet the broad-based and uniformity 

requirements as specified in paragraphs (c) and (d) of this section.

    (iv) A B1/B2 value of 0.70 will be applied to taxes that vary based 

exclusively on regional variations, and enacted and in effect prior to 

November 24, 1992, to permit such variations.

    (f) Hold harmless. A taxpayer will be considered to be held harmless 

under a tax program if any of the following conditions applies:

    (1) The State (or other unit of government) imposing the tax 

provides directly or indirectly for a non-Medicaid payment to those 

providers or others paying the tax and the amount of the payment is 

positively correlated to either the amount of the tax or to the 

difference between the Medicaid payment and the total tax cost.

    (2) All or any portion of the Medicaid payment to the taxpayer 

varies based only on the amount of the total tax payment.

    (3) The State (or other unit of local government) imposing the tax 

provides, directly or indirectly, for any payment, offset, or waiver 

that guarantees to hold taxpayers harmless for all or a portion of the 

tax.

    (i) An indirect guarantee will be determined to exist under a two 

prong ``guarantee'' test. This specific hold harmless test is effective 

September 13, 1993. In this instance, if the health care-related tax or 

taxes on each health care class are applied at a rate that produces 

revenues less than or equal to 6 percent of the revenues received by the 

taxpayer, the tax or



[[Page 89]]



taxes are permissible under this test. When the tax or taxes are applied 

at a rate that produces revenues in excess of 6 percent of the revenue 

received by the taxpayer, CMS will consider a hold harmless provision to 

exist if 75 percent or more of the taxpayers in the class receive 75 

percent or more of their total tax costs back in enhanced Medicaid 

payments or other State payments. The second prong of the hold harmless 

test is applied in the aggregate to all health care taxes applied to 

each class. If this standard is violated, the amount of tax revenue to 

be offset from medical assistance expenditures is the total amount of 

the taxpayers' revenues received by the State.

    (ii) If, as of August 13, 1993, a State has enacted a tax in excess 

of 6 percent that does not meet the requirements in paragraph (f)(3)(i) 

of this section, CMS will not disallow funds received by the State 

resulting from the tax if the State modifies the tax to comply with this 

requirement by September 13, 1993. If, by September 13, 1993, the tax is 

not modified, funds received by States on or after September 13, 1993 

will be disallowed.



[57 FR 55138, Nov. 24, 1992, as amended at 58 FR 43181, Aug. 13, 1993; 

62 FR 53572, Oct. 15, 1997]