KY Sales Tax Update (HB 366): The Loophole!

Over the past few weeks my office has been asked numerous times about the new tax on "luxury services" in Kentucky, including veterinary and pet care services. After much thought below is the loophole all veterinarians should read! 

If you haven't heard, starting July 1, 2018 *all* veterinarians in the state of Kentucky will be required to charge 6% sales tax on all professional services (which now means all goods and services). Specifically the law reads the following is subject to sales tax:

"Small animal veterinary services...; Pet care services, including but not limited to grooming and boarding services, pet sitting services, and pet obedience training services..."

The KVMA submitted several inquiries to the Department of Revenue to clarify what constituted veterinary and pet care services and imagine this...they said everything veterinarians do is a professional service (i.e. cremation, outside lab work, etc.). However, the DOR also said that all non-veterinarians providing pet services and pharmaceuticals as well as non-profit clinics will also have to charge sales tax under the new law.

Essentially, every invoice from a Kentucky veterinarian, or out-of-state mobile veterinarians providing services in Kentucky, will have a flat 6% sales tax charge on every invoice. It would be advisable for every hospital to update/review their resale certificates with distributors and ensure the staff is accurately charging the hospital account for consumables (use tax). 

The loophole. Lucky for us the state legislature in its ultimate wisdom only applied the tax law to "luxury pets" such as those commonly considered small animals, but exempted cattle, swine, sheep, goats, llamas, alpacas, ratite birds, buffalo, and cervids...oh, and horses. As we all know, horses are the ultimate non-luxury pet, especially those poor derby horse owners struggling for quality veterinary care in the state. So my hospital would like to declare that it will no longer be seeing "small animals" only non-luxury, exempt, horse-hybrids. I attached photos of our newest clients: Kentucky Chrome, the miniature appaloosa heeler; Affirmed, the miniature shetland corgi; and Clementine, the miniature Hackney Tab.

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Ohio 6th Appellate District Confirms Pets Worth More than Market Value

On October 14, 2016, Ohio's 6th Appellate District remanded a Lucas County Municipal Court decision granting plaintiff a mere $400.00 after his dog was viciously attacked by the defendant's dog resulting in $10,000 in veterinary bills.  The trial court issued its opinion that damages for pets are capped at the market value because Ohio treats pets as property pursuant to O.R.C. 955.03.  The Court of Appeals disagreed and sent the case back to the trial court for a better calculation of damages stating: 

"We agree with and acknowledge that pets do not have the same characteristics as other forms of personal property, such as a table or sofa which is disposable and replaceable at our convenience. Accordingly, additional factors should be considered in fashioning an appropriate economic damages award due to loss or injury. Such factors include fair market value, age of the pet, pedigree, training, breeding income, recommendation of the treating veterinarian, circumstances of the injury, and anticipated recovery. The overriding consideration is the reasonableness of the expenses and is fact specific. Importantly we note that

'[a]lthough the owner's affection for the animal may be considered in assessing the reasonableness of the decision to treat the animal, the owner cannot recover for his or her own hurt feelings, emotions, or pain. Nor is the owner entitled to recover for the loss of the animal's companionship or society.'"

The is yet another step in the right direction to correctly calculate damages for a beloved pet in a legal proceeding.  While the law is slow to catch up to the importance of pets in our lives, courts are progressing towards awarding damages more appropriately than the "replacement market value.” However, the opinion also shows the court's hesitancy to permit any type of emotional damages of the owner based solely upon injuries to a pet. 

While courts are progressing in the right direction—in a way that would negatively affect veterinarians fending off veterinary malpractice actions—I often present a conundrum in my veterinary continuing education seminars:  Veterinarians overwhelmingly agree a pet is worth more than its market value, yet under existing law a veterinarian concerned that he or she may be subject to malpractice would be legally better served for an animal to die than receive further veterinary care.  This is because the loss of a pet’s life diminishes damages because an owner cannot recover for emotional loss whereas if the pet is transferred to a specialty/emergency hospital for further care the veterinarians facing malpractice could be on the hook for thousands in medical bills to try and save the pet’s life.  Conversely we would not weigh damages of a [human] person in such an asinine manner.  It is only a matter of time before the law catches up with our conscience and permits accurate damages for those that lose a family member which values life over property.

Rego v. Madalinski, 6th Dist. Lucas No. L-16-1030, 2016 Ohio App. LEXIS 4198 (Oct. 14, 2016)

2016 Speaking Engagements Confirmed!

Our 2016 Speaking Scheduled has been confirmed.  We will be providing continuing education seminars as follows:

Saturday, July 30, 2016 1:45pm-3:45pm:  Classes on the Cumberland.  Lake Cumberland State Park.  "Legal Implications in the Veterinary Practice:  Preventative Care for the Legal Health of Your Practice."  Enhance the Legal Health of your veterinary practice through implementing best practices in the areas of employment law, business law, insurance considerations, and tort law.  Please contact your Elanco representative for more information.

Tuesday, August 2, 2016 7pm-9pm:  Merial Cincinnati/Northern Kentucky Practice Manager's Meeting.  Montgomery Inn Boat House, 925 Riverside Dr., Cincinnati, Ohio.  "Anatomy of Veterinary Contracts:  Preventative Care for the Legal Health of Your Practice.  Enhance the Legal Health of your veterinary practice through knowledge of contract basics and implementing best legal practices to reduce risk.  Topics include:  Contract basics, veterinary volume and service contracts, employment agreements, the validity and invalidity of non-compete agreements, and rising claims against employers for improper classification of independent contractors. 

November 2016:  Cincinnati Veterinary Medical Association.  TBD.

New Regulations for Compounded Drugs in Ohio

The Ohio Pharmacy Board just promulgated new regulations that directly affect veterinary hospitals in Ohio that purchase or dispense compounded drugs.  As of 2/22/2016 compounding pharmacies will not be permitted to ship compounded drugs to your facility unless your facility has registered with the Ohio Pharmacy Board as a Terminal Distributor of Dangerous Drugs (TDDD).  If your hospital compounded its own drugs it should already be registered as a TDDD.

The Application to obtain the TDDD permit is below: https://pharmacy.ohio.gov/Documents/Licensing/TDDD/Apps/Facility%20or%20Practitioner%20Application.pdf

The application process currently takes about 30 days to be approved.  Please pay special attention as veterinarians are excepted from the normal fees and only pay $40.00.  Lastly, the pharmacy board informed us that incomplete or incorrect applications will be rejected and will restart the process.  If you need assistance obtaining your permit feel free to contact us.  

1099 or W-2: Contractor or Employee?

The thought of classifying a worker as an independent contractor is appealing to small business owners.  The main benefits of a 1099 independent contractor are that the company does not have to withhold income taxes, social security, medicare, city tax, county tax, school tax, and doesn't pay unemployment compensation or the employer's share of the aforementioned payroll taxes.  Instead, it is the 1099 independent contractor's responsibility to account for his/her/its own tax liability.  The only remaining obligation on the employer is to issue a 1099-MISC form at the end of the year (if the contractor is paid more than $600/year and not a C-corp).  Although an employer has free reign to choose how to classify workers, a misclassified worker can result in severe penalties and interest to federal, state, and local agencies (i.e. the IRS).

Misclassification of a worker as 1099 independent contractor when he or she is truly an employee will result on underpayment of payroll withholding liabilities and ultimately fines and costs associated with the underpayment.  The various agencies can also impose statutory penalties in the $1,000's for each violation.  More importantly, the fines and costs can attribute to losing your occupational permit/business license or other specialized licenses (such as the state's refusal to renew a liquor license or a professional licenses).  Getting caught is not as hard as you think either.  As soon as a worker is terminated and files for unemployment compensation or social security benefits you will be alerted to the failure to pay the required payroll liability.  From there the violations can snowball across the various agencies.

The Independent Contractor/Employee Analysis

There is not a bright-line test to determine if a worker is an independent contractor or employee.  The general rule promulgated by the IRS is "that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."  In determining the degree of control an employer exerts the IRS looks at three main aspects:

  1. Behavioral:  How much control does the employer have as to "what" functions the worker performs and "how" the worker performs those functions?  The more an employer keeps the proverbial thumb over its worker the more it appears the worker is a true employee.  Factors often considered:  Employer's level of instruction, amount of training, extent of autonomy to complete services, control of assistants, continuity of relationship between the parties, flexibility of schedule, demands of full-time work, need for on-site services, required sequence of work, and requirements for reports to be generated.
  2. Financial:  Are the business aspects of the worker's job controller by the employer?  The factors considered here are:  Whether the worker is paid by the job or regularly,  how expenses are reimbursed, who provides tools and materials, whether worker maintains his/her own facilities, who realizes profits and losses, whether worker performs functions for more than one company, control over discharge, and right of termination.
  3. Relationship:  Are there written contracts or employee type benefits?  Will the relationship continue for a specified period of time?  The longer the relationship continues and appears like an employee/employer relationship the greater the chance the person is an employee.  But the agency will consider a written agreement between the parties as evidence of their relationship.

The best way to protect against a misclassification is by a contract that specifies the relationship between the parties with an emphasis on the factors listed above.  An independent contractor agreement provides clarity not only between the parties but also to third parties interested in the relationship, such as the IRS.  There is a delicate balance of the factors in which a knowledgeable business attorney can help with, but practically speaking a contract which sets forth factors in favor of employee status but states the worker is an independent contractor will not suffice.  At the end of the day you will have to act the part set forth in the contract, i.e. file the appropriate 1099-MISC returns and follow what is written.

If you have any questions regarding contractual issues or employee relations please feel free review the IRS standards regarding this issue or contact your attorney.

How to Conduct a Legal Working Interview

All too often employers are stuck in a situation with a new employee who has overemphasized or fibbed about his or her qualifications for a position.  To better choose candidates, many professions use working interviews to test a job applicant's knowledge, skills, and abilities prior to making an offer of employment.  The interview consist of seeing how the applicant interacts with staff, clients, and patients and often involves participation in routine employment activities over several hours or days to evaluate the candidate.  But are working interviews legal?

The quick answer is yes, but probably not the way you do it!  The IRS and Department of Labor regulations start with the premise that if someone is doing work for your company they are classified as either an employee or independent contractor and must be compensated for his or her time.  That compensation must be in line with labor laws, such as the minimum wage requirements and tax withholding.  If the person is deemed an employee they must complete the pre-employment paperwork including an  I-9, W-4, and be setup in payroll for tax withholding.  The employer will be responsible for its payroll taxes and employer tax obligations on top of the time, expense, and headache that goes along with it.  If a person is deemed an independent contractor, which may be unlikely given the factors explained in our article on who is a 1099 contractor, the employer would collect a W-9 and issue a 1099 at the end of the year (depending on the amount of compensation).  Once again, a headache.  Oh and do not think classifying the interviewee as a volunteer, intern, or extern would change anything.  Misclassifying a worker could result in even higher penalties for non-compliance.  Even if you hired them as a "temporary" employee the above tax implications would apply.  Furthermore, failure to properly classify the worker means they will not be covered by worker's compensation insurance should they get hurt during the "working interview."

If you do not want to go through the steps of paying job applicants to test their skills then just set up a skills test.  For example, a veterinary hospital may want to interview three potential associate veterinarians, but would otherwise have no way to gauge each candidate's surgical skills, laboratory efficacy, or bedside manner.  To evaluate the candidates the hospital could set up fake lab samples to be read, use previously treated patient charts and lab results to test for diagnostic accuracy, have the applicant verbally walk a doctor through a surgery, or use an owner's dog or office pet for roleplaying an exam.  Because the applicant is not performing work for the hospital, and the hospital sees no financial benefit from the testing, a skills test is viewed simply as part of the interview process to evaluate knowledge, skills, and abilities.  Additionally, the interviewee should be covered by a general liability policy should something go awry while on the premises.

Of course, never rely on any interview procedure alone to evaluate an employee.  Most employees are on their best behavior during the first 30 days of employment.  A well-managed practice will have an employee handbook in place with probationary periods to evaluate newly hired employees over periods upwards of 90 days before providing benefits, such as sick days or even salary increases.

Rise in Veterinary Lawsuits: The Story of Poco and PJ

In the summer of 2012 I was fortunate enough to be a summer law clerk for Justice Wil Schroder on the Kentucky Supreme Court.  While there I remember having a discussion about two horses named Poco and PJ that were the subject of a 2001 opinion written by then Judge Schroder on the Court of Appeals.  Now that my wife and I own Riverview Animal Hospital and I represent several veterinarians, boarders, and animal clinics I am certain that anyone dealing with pets on a regular basis should know the story of Poco and PJ and how Kentucky courts value animals as more than property.

Poco (14y) and PJ (13y) were dearly loved horses and treated like "children" by their owner (sound familiar?).  However, the owner became ill with a variety of medical problems that made it difficult for her to care for the horses by herself.  The owner did not want to sell Poco and PJ and instead approached Taylor, a farm owner, willing to do a "free-lease" agreement and keep the horses.  Taylor also agreed the owner could visit when she wanted and would return the horses to the owner if she decided to no longer keep them.  

Within a few days of receiving the horses Taylor sold them for $1,000 to a known slaughter-buyer.  Within a week the owner requested to visit her horses and Taylor lied stating she had given them to an unknown man she met on a trail ride and later convinced a friend to join the ruse.  After sending the owner on a wild goose chase via directions to a fake farm in Indiana the owner discovered through a local humane organization the horses had been sold for slaughter.  Owner sued Taylor requesting, among other things, compensatory and punitive damages based upon emotional damages for the loss of her beloved pets.  Defendants argued that Kentucky only permits recovery of the property value of the horses.

The Kentucky court of appeals upheld an award of $126,000 stating the tort of intentional infliction of emotional distress depends on the facts of the case as to the offender's conduct and not to the subject of said conduct (i.e. horses).  Intentional infliction of emotional distress is available so long as (1) the wrongdoer's conduct is intentional or reckless; (2) the conduct is outrageous against the accepted standards of decency and morality; (3) there is a connection between the conduct and the emotional distress; and (4) the emotional distress is severe.

As courts progress it is my opinion that the standards of intentional infliction of emotional distress will find its way into veterinary malpractice cases and other pet liability actions.  Additionally, Kentucky and other state courts have begun treating animals as humans and setting up trust funds for negligence awards or otherwise finding value beyond market value, like an heirloom.  In either event, courts are increasingly coming to terms that we value pets beyond a remedial market value--a fact that will attract more attorneys to pursue veterinary malpractice cases.

Attorney Anthony Mahan is the Managing Attorney at Mahan Law, co-owner of Riverview Animal Hospital, and member of the American Veterinary Medical Law Association.