A Guide for Industry Players

In the intricate world of healthcare, where the primary focus should be on patient care, discussions about sales tax can often be met with raised eyebrows and a sense of indifference. The common misconception is that healthcare is immune to the complexities of sales tax, but this assumption is far from reality.

Understanding and navigating the nuances of sales tax in the healthcare industry can save both providers and suppliers valuable resources and ensure compliance with state regulations. In this article, we will delve into the often-overlooked world of healthcare sales tax, shedding light on important considerations that can have a significant impact on your bottom line. Please note this article does not apply to sales to not-for-profit institutions.

Durable Medical Equipment (DME) and Sales Tax Exemptions

One frequently misunderstood aspect of healthcare sales tax is the exemption status of Durable Medical Equipment (DME). While it’s true that many states offer exemptions for healthcare products and services, meeting the criteria for these exemptions can be a daunting task.

In general, DME must meet specific criteria to qualify for an exemption in many states, which may include some or all of the following:

  • Ability to withstand repeated use
  • Primary and customary medical use
  • Ineffectiveness in the absence of illness or injury
  • Not worn on or in the body

Take the example of Minnesota, where DME is exempt if it meets all of the above qualifications and is sold for home use. This exemption also applies if the equipment is covered by Medicare or Medicaid, regardless of the payer, including private insurers. However, the caveat here is that to meet the exemption requirements, it cannot be sold directly to healthcare facilities.

Minnesota’s laws align with those of several other states, where DME exemptions are primarily aimed at home hospice care. Ohio also follows a similar “home use” criterion, making it challenging for companies that sell directly to healthcare facilities to meet the DME exemption thresholds.

In essence, the DME exemption criteria can be demanding, especially for businesses focused on healthcare facility sales in multiple states.

Medicare and Medicaid Reimbursement – Not a Guarantee of Sales Tax Exemption

Another common misconception in the healthcare industry is that if a product or service is reimbursed by Medicare or Medicaid, then it automatically qualifies for a sales tax exemption. However, this is not always the case.

Consider Nebraska, where the sale of DME for home use is exempt from sales tax if paid for by Medicare and prescribed by a healthcare professional. However, if the facts remain the same but the payment is reimbursed by Medicare, the sale becomes subject to tax. Kentucky presents a similar scenario where corrective eyeglasses are exempt from sales tax if sold pursuant to a prescription and paid for by Medicare. However, if the eyeglasses are reimbursed by Medicare, the sale becomes taxable.

These nuances highlight the importance of carefully examining the specific sales tax laws in each state, as they can vary significantly.

Prescription Drugs and Medical Appliances – Special Tax Rates

Illinois takes a unique approach by taxing prescription drugs and “medical appliances” at a reduced rate of 1%. Additionally, certain localities in Louisiana also impose taxes on prescription drugs. These exceptions can catch healthcare providers and suppliers off guard if they are not aware of the local tax regulations.

Healthcare Diagnostic Equipment – Not Always Exempt

Many companies that sell healthcare diagnostic equipment, such as blood pressure monitors and EKG machines, are surprised to learn that not every state provides exemptions for these products. It’s essential for businesses in the healthcare industry to research and understand the specific tax treatment of their offerings in each state where they operate.

Mitigating Exposure and Protecting EBITDA

For healthcare industry players, addressing sales tax issues is not just about compliance; it’s also about protecting your financial health. Multiple years of incorrect compliance or inattention can generate significant and unforeseen sales tax liabilities. These liabilities can directly impact EBITDA, which is a critical metric in assessing a company’s financial performance.

How LBMC Can Advise You

At LBMC, we understand the complexities of sales tax in the healthcare industry, and we can help you navigate this challenging landscape. By proactively addressing sales tax issues before they become problematic, we can assist in mitigating exposure. One effective tool in our toolkit is the use of Voluntary Disclosure Agreements (VDAs), which can provide a pathway to compliance while minimizing financial risks.

Moreover, our expertise can also help clean up exposure on an ongoing basis, ensuring that sales tax liabilities do not adversely affect your EBITDA. We recognize that sales tax is an “above the line” expense that can directly impact your financial statements, making it a crucial element of your financial strategy.

The healthcare industry is not immune to the complexities of sales tax, and overlooking these intricacies can have financial repercussions. Understanding the specific tax laws of each state, meeting DME exemption criteria, and navigating the nuances of reimbursement are all essential steps in ensuring compliance and financial stability.

At LBMC, we stand ready to help healthcare industry players navigate these challenges and protect their bottom line, allowing them to focus on what matters most – providing quality care to patients.

Content provided by LBMC tax professional Leigh Ann Vernich. She can be reached at Leighann.vernich@lbmc.com.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.