Think sales and use tax doesn’t impact healthcare? Think again.

by Jessica Kyt

A common misconception within the healthcare industry is the belief that sales and use taxes have little impact on daily operations. The reality, however, is far more nuanced. While it is generally assumed that medical goods and services are universally tax-exempt, the truth is each state defines taxable and exempt items differently, often with highly specific distinctions. Healthcare organizations face unique challenges as they are typically liable for both ends of the sales and use tax equation—on purchases and revenue streams.

The Complexity of Sales and Use Tax in Healthcare

Healthcare organizations must consider whether their purchases are subject to sales tax and whether their vendors are correctly collecting tax from them. They also need to evaluate the taxability of revenue streams such as medical devices, which may be classified differently depending on the state. For example, whether a medical device is deemed durable equipment or a general supply can determine its tax status, leading to nuanced and state-specific interpretations.

Consider medical devices such as pacemakers and loop-recorders. While both serve medical purposes, one might qualify for a tax exemption in a given state, while the other does not. Arizona, for example, provides a detailed but complex definition of what qualifies as a medical device exemption, requiring a line-by-line analysis of applicable statutes. Without careful review, organizations risk either overpaying taxes or undercollecting them—both of which carry significant financial consequences.

Consequences of Overlooking Sales and Use Tax

Failing to properly manage sales and use tax compliance can result in serious consequences, including:

Unpaid Tax Liabilities

Many healthcare organizations unknowingly fail to collect sales tax on over-the-counter products or medical services involving taxable medical devices. These oversights can result in substantial liabilities to the state, further compounded by interest and penalties. Left unaddressed, these liabilities can grow quickly, posing a serious threat to the organization’s financial stability.

Overpayment of Taxes

Conversely, hospitals and healthcare providers may overpay sales tax on purchases that qualify for exemptions. These errors create opportunities to file refund claims for overpaid taxes, which can often be recovered for up to 3–7 years, depending on state-specific statutes of limitations. Identifying and addressing overpayments can provide a significant financial boost while ensuring compliance.

The complexity of sales and use tax compliance is further amplified by the varying tax rules applied to different services, devices, and medications—even within the same state. Additionally, multi-layered taxing authorities, including state, county, city, school districts, and tourism districts, can create compounded rates, making compliance even more challenging.

Without specialized expertise and proactive measures, these issues can snowball, exposing healthcare organizations to unnecessary financial risks and costly audits. Addressing these challenges requires a thorough understanding of state-specific regulations and a structured approach to compliance.

A Costly Sales and Use Tax Lesson for Multi-State Operators

For healthcare organizations operating across multiple states, the patchwork of tax regulations becomes even more challenging. Consider the example of a healthcare organization with locations in six states. Some locations house pharmacies, while others perform specialized medical services requiring the implantation of medical devices.

Historically, the organization has not invested in software to monitor or manage sales and use tax compliance. Instead, they have relied on inconsistent staff training to determine taxability—a process prone to errors and oversights. Over time, they assumed medical goods and services were universally tax-exempt, failing to account for the highly specific tax rules that vary from state to state.

This approach proved costly when one state conducted an audit and uncovered significant unpaid sales and use taxes on taxable items and services. The audit revealed inconsistencies in how the organization handled sales tax for medical devices, pharmacy goods, and other taxable revenue streams. The amount owed was substantial, jeopardizing their financial stability and exposing them to potential penalties.

How We Can Help

At this point, it’s clear that the organization needs professional guidance to address compliance gaps and prevent further issues. This is where Elliott Davis’s State and Local Tax (SALT) team can help. We follow a comprehensive four-phased approach to bring clarity and compliance to even the most intricate situations:

1. Clarify Nexus: Determine where the organization has a legal obligation to collect and remit sales and use taxes by assessing its activities, operations, and physical presence in each state.
2. Clarify Taxability of Revenue Streams: Analyze each revenue stream, including pharmacy sales, medical devices, and services, for taxability in every state where nexus exists, accounting for the unique rules that apply to healthcare providers.
3. Assign a Dollar Value: Calculate the total tax liability, including interest and penalties, owed to each state, while also identifying potential overpayments that can be refunded.
4. Provide Actionable Recommendations: Deliver a clear and practical plan to clean up past liabilities, recover overpayments where applicable, and establish robust processes to ensure future compliance.

The Path Forward

In an industry as complex as healthcare, overlooking sales and use tax implications can have significant consequences. By leveraging the experience and resources of Elliott Davis, healthcare organizations can reduce liabilities, recover overpayments, and maintain compliance with state-specific regulations.

For multi-state operators, our tailored approach can resolve current compliance issues while establishing a sustainable framework for the future. The SALT team at Elliott Davis helps minimize financial risk and enables healthcare organizations to focus on their core mission of delivering exceptional patient care.

Don’t wait for an audit to uncover costly mistakes. Contact Elliott Davis today to stay ahead of the curve. Simply fill out the form below, and a member of our team will connect with you.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.