You have been greatly misinformed. Any level of ammonia is toxic.
A 50 watt heater on a 40 gallon tank is insufficient. In the summer, it may not be too bad, but in the winter, that will not be enough. You need 3-5 watter per gallon of water.
A dark red nitrate reading is a bad thing for sure. Most tests show nitrate as red when it is 100+.
A pH of 7.8 is bad because of your high ammonia and nitrate, and probably a low alk.
Your hippo scratching is most likely a sure sign of ich. Not always, but with those water parameters, it probably is.
The LFS guy lied to you. He does not know what he is talking about. You need to be doing water changes every 1-3 weeks. This is why your water quality is so terrible.