Medical Device Companies: Is Your Device Exempt from Sales Tax?
When conducting research regarding the sales taxation of medical devices, the process generally entails reviewing state statutes, regulations, and applicable letter rulings and/or court cases to obtain clarity and reasonable assurance that the medical device falls under some type of exemption. Medical devices can be taxable or nontaxable depending on the function of the device, the permanence of the device, whether the device is implanted in a patient, who prescribes the device, who buys the device, etc.
In addition, companies that sell medical devices to hospitals, specifically nonprofit hospitals, may escape taxation of their medical device because the hospital qualifies as an exempt charitable organization. If your company sells to nonprofit hospitals, it is highly recommended that you obtain exemption certificates from those hospitals to protect yourself upon audit.
Most states (not all) describe a "prosthetic device" as:
a replacement, corrective, or supportive device, including repair and replacement parts for the device, worn on or in the human body to artificially replace a missing portion of the body, prevent or correct physical deformity or malfunction, or support a weak or deformed portion of the body. Some states also add:To qualify for exemption, these items must either completely or partially replace a missing body part or the function of a permanently inoperative or permanently malfunctioning body part and must be primarily and customarily used for such purposes. In addition, to be exempt, these items must not be generally useful in the absence of illness, injury, or physical incapacity.You will find that some states directly address your device or something similar. In other cases, you may not find anything directly on point. In those cases, what do you do?
Well, if you can obtain exemption certificates from the hospitals you sell to, that would cover it. If that is not an option, then you could also request a private letter ruling with the state.
A private letter ruling allows you to spell out your facts and obtain a determination from the state on how they would tax your device.
The other option is to assume your device is taxable, register, and start collecting and remitting sales tax.
If you need assistance in determining the taxability of your device in any state or requesting a private letter ruling, please contact me at firstname.lastname@example.org.
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
You can reach Brian at email@example.com.
Because state and local taxes are deceptively simple and endlessly complicated.