Sales Tax and Durable Medical Equipment - A Members Perspective
Recently Alpine Home Medical had a sales tax audit. This audit dispelled our prior understanding that items requiring a prescription from a third party payer are exempt from sales tax.
During our audit, the State auditor indicated that breast pumps were not exempt from sales tax. He sighted the definition of what qualifies as “Durable Medical Equipment” under Publication 53. This publication defines Durable Medical Equipment to meet five qualifiers:
1. Can withstand repeated use,
2. Is primarily used for medical purposes,
3. Is generally not useful to person with illness or injury,
4. Is not worn in or on the body, and
5. Is for home use only.
The auditor ruled that a breast pump did not meet qualifier number 3.
As we met with the State Tax Commissioner in protest, it was immediately clear that the Utah State Tax Commission was powerless in defining if a breast pump is Durable Medical Equipment. The State of Utah has given its decision power to an association called Streamline Sales and Use Tax Agreement.
The State of Utah belongs to an association along with 23 other states called the Streamline Sales and Use Tax Agreement (www.streamlinedsalestax.org). Much of the design of this association is to unify states on taxing items sold through the internet. However, this association of states now takes away the ability of individual states to make a decision about what is and is not exempt from sales tax.
The Streamline Sales and Use Tax Agreement have created a “Health Care Item List” of exempt items and the categories they fall under. At the time of our initial meeting with the State Tax Commission, breast pumps were “Not Defined.” In the coming months, I received a letter indicating that the Streamline board met and decided that a breast pump is not Durable Medical Equipment. They advised me that we are required to start charging sales tax immediately.
Taxing breast pumps presents several issues. As a medical equipment provider, we are subject to third party payers and their varying allowed reimbursements. Through the Affordable Care Act, breast pumps became a covered benefit at 100% for mothers. At the point of purchase, the amount of what the third party payer is going to pay is not always clear. To whom do we charge sales tax? Is the payer going to pay, or do we charge the patient for something that is 100% covered? The State has given no guidance regarding these questions other than “you need to charge sales tax.”
The most curious issue is regarding Medicaid. If the payer of a breast pump is on Medicaid, then it is exempt. However, if the payer is on Medicaid through an ACO, then we are required to charge sales tax. If we charge the patient, we are breaking guidelines with Medicaid. If we charge the ACO, we will not likely get paid as their margins are so thin and they will not see it as their responsibility because it is against Medicaid rules. Indeed, we have two state agencies (State Tax Commission and State Medicaid) working against each other. However, we are caught in the middle because both agencies will sting us pending the move we make.
Alpine has now adjusted our system and sales team to start charging sales tax on breast pumps. The State Tax Commission is preparing a letter on our behalf for us to send to our payers, letting them know that it is required in the State of Utah to collect sales tax on breast pumps. It is yet to be seen how patients and payers will react. We are also waiting to hear Medicaid’s reaction.
As new information becomes available, the Utah Medical Equipment Dealers Association will provide you with updates.