Sales and use tax continues to be a complex area within the healthcare industry with regard to medical supply purchases, presenting both opportunities and potential exposure for healthcare organizations. It is possible that an organization may be remitting unnecessary sales and use tax and may not only be able to cease those payments, but also recoup erroneous payments previously made. It also is possible that an organization needs to assess taxability and strengthen compliance.
For those healthcare organizations that do pay sales tax on medical supplies, this expense can be a tremendous burden. This is due to the high cost of many medical supplies (particularly implants and specialty surgical devices) along with sales tax rates that seem to be increasing over time, often approaching or exceeding 10% in many jurisdictions.
There are two primary drivers of the complexity in this area:
- Entity-level exemptions
- Product-level exemptions
Entity-Level Exemptions
Many states offer entity-level exemptions for certain types of healthcare entities. When there is an exemption at the entity level, all purchases made by that entity are considered non-taxable, regardless of the type of product being purchased. For example, Alabama provides an entity-level exemption for medical clinic boards operating in the state.1
There also can be partial exemptions at the entity level. In Georgia, there are varying exemptions depending on the type of healthcare entity. General hospitals and hospital authorities are granted full exemptions, while nonprofit health centers only receive state-level exemptions and still must pay any local city/county sales taxes.2
While the entity-level exemptions can provide a great benefit for healthcare organizations, there also are risks to be aware of. The primary risk is making sure the exemption is only being applied to eligible entities. Many healthcare organizations include multiple types of facilities within their structure, such as hospitals, surgery centers, physician groups, rehabilitation centers, and orthopedic clinics. A state’s exemption may only apply to certain types of entities within the organization. It is important to confirm that an exemption is not being claimed by an entity within the organization that may be deemed taxable. Also, vendors may incorrectly apply an exemption if they are selling to an exempt entity along with others within the group. Therefore, when there are organizations that have varying exemption eligibility at the entity level, there should be consistent monitoring of purchases and a process to address tax that was not charged on purchases by the entities that are not eligible for exemption.
In addition to risks, there are potential opportunities for healthcare organizations that have entity-level exemptions. The primary opportunity would be overpayments of sales tax due to vendors that do not apply the exemption to the exempt entity’s purchases. This typically occurs when vendors do not receive proper exemption documentation from the entity; thus, sales tax is included on purchases that should be nontaxable. With the appropriate processes in place within accounts payable, including exemption certificate distribution to vendors and P.O./invoice matching, these occurrences should be minimal.
Beyond this, some states provide that the attributes of an exempt entity can flow down to other entities where they have an ownership interest. Texas has issued rulings that allow joint venture and partnership entities that are partially owned by exempt entities to enjoy the benefit of the owner’s exemption up to the percentage owned by the exempt entity.3 For example, if an exempt entity in Texas (Company A) holds a 40% ownership interest in an entity that is otherwise subject to sales tax (Company B), Company B would only be subject to tax on 60% of its purchases because it would be able to apply Company A’s exemption up to its 40% ownership interest. Partial entity-level exemptions stemming from these structures are less apparent than traditional exemptions; therefore, there is an increased likelihood that both the partially exempt entity and its vendors have misapplied tax. This can lead to opportunities to recover prior tax overpayments and reduce sales tax expense prospectively.
Product-Level Exemptions
If a healthcare organization is not eligible for an entity-level exemption, there could still be certain purchases that are eligible for exemption based on the type of product, how it is used, and/or how it is ultimately paid for or reimbursed.
The most universal exemption that most states recognize is prescription drugs. Beyond this, some states consider over-the-counter drugs to be fully exempt or exempt when prescribed by a qualified physician.
On the medical supply side, states often look at the general category of the supply and define the taxability based on each category. Examples of common categories defined by states include prosthetic devices, orthopedic devices, mobility enhancing equipment, medical gases, and durable medical equipment.
States may provide that supplies within some or all of these categories are exempt, but also could have additional requirements in order to qualify for the exemption. For example, Georgia provides that mobility enhancing equipment is exempt if it is ultimately transferred to the patient to whom it was prescribed.4 However, if that same equipment is first possessed or used by a service provider such as a treatment or rehab center, then the equipment is considered taxable to the service provider.
Florida has broad exemptions in place for medical supplies and devices but does have certain requirements. A medical supply will qualify if it meets both of the following:5
- The medical product, supply, or device must be dispensed under federal or state law only by the prescription or order of a licensed practitioner; and
- The medical product, supply, or device is intended for use on a single patient and is not intended to be reusable.
Beyond the type of supply and how it is used, the method of payment/reimbursement also may impact the taxability of a medical supply. In Alabama, items used for the treatment of illness or injury or to replace all or part of a limb or internal body part purchased by or on behalf of an individual pursuant to a valid prescription are exempt only if they are covered by and billed to Medicare, Medicaid, or a health benefit plan.6
From a vendor’s perspective, sales tax will often be included on medical supplies unless the purchasing healthcare company provides substantiation that tax should be turned off (typically in the form of an exemption certificate). Therefore, it is very common for vendors to overcharge sales tax on items that ultimately qualify for exemption. In cases where vendors are not charging sales tax, the purchasing healthcare organization often self-accrues and remits use tax. Therefore, knowing the product-level exemptions within the state where an organization is operating can be very beneficial, as it can lead to recoupment of prior overpayments of sales and use tax and permanent savings prospectively on qualifying medical spend.
Conclusion
The examples above are just a small sample of how states across the U.S. treat healthcare entities from a sales tax standpoint. The State & Local Tax team at FORVIS has helped many healthcare organizations navigate the complexities of both entity- and product-level exemptions. If your organization has significant medical supply spend, it is worthwhile to discuss your sales and use tax posture to evaluate whether risks and opportunities are being properly addressed. If you have any questions or need assistance, please reach out to a professional at FORVIS or use the Contact Us form below.
- 1“Ala. Admin. Code r. 810-6-3-.38,” casetext.com, July 31, 2023.
- 2“Georgia Sales and Use Tax Exemptions, O.C.G.A. §48-8-3, dor.georgia.gov, July 1, 2023.
- 3“TX PLR 201005252L,” star.comptroller.texas.gov.
- 4“Ga. Comp. R. & Regs. 560-12-2-.30,” casetext.com, August 3, 2023.
- 5“Rule 12A-1.020, F.A.C.,” flrules.org.
- 6“Title 40 – Revenue and Taxation,” casetext.com.