Regardless of whether your medical device company is a start-up, or has been in business for several years, the question remains: have you addressed the sales taxation of your device?
As your company grew and began selling its device in other states, did you assume your device is not taxable?
The truth is the sale of medical devices can be subject to sales taxation depending on the state. Hence, there is no one simple answer to apply to all states. However, generally, 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. Again, this depends on the state.
You may be asking yourself, so what? Why should I care? Improperly treating your medical device as exempt, when it is taxable, can lead to large tax liabilities, penalties and interest when discovered upon audit.
What can you do?
You can conduct research regarding the sales taxation of your medical device to mitigate your risk of large liabilities in the future. The process generally entails reviewing state statutes, regulations, and applicable letter rulings and/or court cases to obtain clarity and reasonable assurance that your medical device falls under some type of exemption.
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?
- You could 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.