Tanning Tax Not Exactly Glowing: IRS Watchdog

A new U.S. tax on indoor tanning is producing far less revenue than expected, with the U.S. Internal Revenue Service having trouble implementing the measure, the tax-collecting agency's auditor said Thursday.

An indoor tanning services excise tax was enacted in March 2010 as part of President Barack Obama's healthcare law. The tax took effect on July 1, 2010. It is supposed to be paid by customers and passed on by service providers to the IRS.

In the three months ended Sept. 30, the IRS received $17.8 million in tanning taxes, well below the $50 million congressional tax experts expected for the quarter.

The tax was projected to bring in $200 million in fiscal 2011, which started Oct. 1, but through the first half of that fiscal year, the tax collected only $36.6 million.

The IRS quickly implemented the tax and alerted businesses about it, but the agency could have done more to tell taxpayers to file the proper forms and pay the tax, according to a report from the Treasury Inspector General for Tax Administration.

``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,'' said Russell George, the top official at TIGTA.

The tanning industry's lobbying arm in Washington was not surprised. Estimates for tanning tax collection were ``grossly overestimated'' in part because the IRS ``had no clue'' about the size and scope of the industry, said John Overstreet, executive director of the Indoor Tanning Association.

After the healthcare law was passed, the IRS was left with the complex task of implementing the tax on an estimated 30,000 businesses that offer tanning -- ranging from tanning-exclusive shops to those with tanning as part of a hair salon or gym.

Other excise taxes, collected by telecommunication companies or airlines, are easier to implement because ``it's very centralized'' among fewer businesses, Overstreet said.


To alleviate the implementation challenge, IRS exempted ''qualified physical fitness facilities'' because it was deemed too hard to collect taxes on health clubs that include tanning as part of a package of services.

This has given health clubs a competitive edge over businesses that have to pay the tax, Overstreet said.

At an IRS hearing Tuesday, industry participants slammed the tax. Small business owners from Nebraska and Ohio said some tanning shops have been forced to close under the weight of the new tax.

The IRS said it struggled with implementing the tax because ''there is no authoritative list of tanning businesses,'' according to a statement released Thursday.

``The IRS has already contacted a number of businesses who have not filed and may potentially be required to do so,'' the agency said.

Two bills introduced in the U.S. Congress in June would repeal the tax. The bills, one sponsored by Senator Olympia Snowe and the other by Rep. Michael Grimm, have not come up for a vote. (Reporting by Patrick Temple-West +1 202 354 5841; editing by Andre Grenon)