Medical Devices Taxes

 There is a strong public policy interest in promoting good health with many states applying sales tax exemptions or reduced rates on medical devices in order to support this policy. At the same time, states are looking to bolster their tax revenue and are sometimes inclined to interpret their medical-related sales tax rules strictly. While almost all states have special taxability rules that apply to medical items, those rules vary greatly and are often complex and nuanced. How tax applies for a particular medical transaction often turns on a myriad of details. In this environment, sales and use tax compliance is especially challenging. Taxware understands these challenges and we support robust tax calculation content geared specifically towards the medical industry. We have designed our tax engine to greatly simplify compliance and provide automation that accounts for the nature of the device, the presence or absence of prescription, the identity of the payer and the customer, and many other factors. Let’s talk about how states differ in applying some of these elements to determine proper taxability. Nature of the Device The nature of the medical product can play a key role in how sales tax applies. Tax results vary for broad categories of products such as “durable medical equipment,” “mobility enhancing equipment,” “prosthetic devices,” and medical supplies just to name a few. Taxability can also change based on the specific types of products. For example, different rules can apply to oxygen delivery equipment, enteral feeding systems, kidney dialysis systems, corrective eyeglasses, hearing aids, and diabetic materials. The number of codes Taxware has created within our taxability matrix to support product-based medical distinctions are simply too numerous to list in this publication. In order to accommodate the different ways clients use our content, our codes range from relatively generic (e.g. “prosthetic devices”) to the granular (e.g. “contact lenses”). However, the tax analysis does not stop there. Designed Use In addition to the nature of the medical device, the way that it’s designed to be used can also impact taxability. In some states, durable medical equipment will qualify for an exemption, but only if it’s for “home use.” Likewise, whether or not the item is worn on the body or in the body can also drive different tax results. Some states will also treat a reusable medical supply different from its disposable counterpart. Prescription Many states will provide exemptions or reduced rates for medical devices only if they are sold pursuant to the prescription of a licensed medical professional. For example, the chart below shows those states that exempt/specially tax walkers sold to individuals, regardless of whether they are issued by prescription:

However, if the walker is issued pursuant to a prescription, exemptions also apply in the following additional states (and the District of Columbia):

 *These charts address taxability rules as of 01/01/2014 and do not consider local (county, city, district) distinctions. There are also states that limit their exemption for prescription devices to only those items that cannot be purchased over the counter (OTC). In such jurisdictions, OTC items purchased with a prescription remain taxable.  Identity of the Payer Who pays for the medical device can add another layer of complexity. When Medicare, Medicaid, or even a private health insurance company pays for an item, it could mean additional tax relief. For example, when an Oklahoma patient obtains a prescription for oxygen delivery equipment and pays for it, Oklahoma sales tax is added to the price. But if the patient has Medicare coverage and item is paid through the Medicare program, the transaction becomes exempt. In Mississippi, many prescribed medical devices are exempt when a private health insurance makes the payment, but are taxable when purchased without coverage.  Identity of the Customer In many states, “personal use” is a necessary requirement for an exemption or reduced rate to apply. That is, the medical product must be sold to an individual for their own personal consumption rather than to an institution. By way of contrast, in some states, exemptions may also apply if the item is sold to a non-profit medical provider, while in other states, for-profit hospitals and physicians can purchase certain medical devices tax free without a resale certificate. Medical Device Excise Tax If existing state and local sales tax complexity were not enough, starting January 1, 2013, the US Federal Government began imposing an excise tax on the first sale of qualifying medical devices in the United States at a rate of 2.3%. While also characterized as a transaction tax, the rules which dictate the application of the federal Medical Device Excise Tax (MDET) differ from the state sales tax. Specifically, while sales tax is generally imposed at the end of the supply chain (retail sale to final consumers), the MDET is imposed on the first sale within the chain that occurs inside the United States. Of course, in some circumstances the first sale and the last sale can be the same transaction (e.g., a US based manufacturer selling to a US hospital). Exemptions from the MDET are available for devices generally purchased by individual consumers at retail, exports, and sales for re-manufacturing. These factors represent just a sampling of the federal, state, and local tax compliance issues faced by companies that sell medical devices across the United States. Taxware supports many clients within this industry and we provide a proven technology solution that significantly eases this burden. Legal Disclaimer: The information provided in this document is for informational purposes only. By publishing this document, Taxware, LLC is providing information of a general nature which should not be construed by the reader as specific tax or legal advice or services. Taxware, LLC recommends that you engage a qualified professional before taking any action that affects your business.