IPT 2013 Sales & Use Tax Symposium Monterey, CA. Health Sciences Industry

Transcription

1 IPT 2013 Sales & Use Tax Symposium Monterey, CA Health Sciences Industry

2 Presenters Ronnie Gregory Multistate Tax Director, Deloitte Tax LLP Phone: Al Babbitt President, State Tax Services, LLC Phone: (678)

3 Agenda Legislative Updates Administrative Policy Updates Taxability Guidelines Streamlined Sales and Use Tax Agreement ( SSUTA ) Provisions Keys to Determining Product Taxability Local Jurisdictions Medical Device Excise Tax (MDET) Healthcare Provider Taxes 3

4 4 Legislative Updates

5 Legislative Updates 5 AL SB240: Exempts from state, county and municipal sales and use taxes any items used for the treatment of illness or injury or to replace all or part of a limb or internal body part purchased by or on behalf of an individual pursuant to a valid prescription and covered by and billed to a third party payer. Items covered include durable medical equipment, including repair parts and the disposable or single patient use supplies required for the use of the equipment; medical oxygen and related equipment and supplies; prosthetic and orthotic devices; and medical supplies, as defined and covered under the Medicare program, including, but not limited to, items such as catheters, catheter supplies, ostomy bags and supplies related to ostomy care, specialized wound care products, and similar items. (Effective October 1, 2014)

6 Legislative Updates MO HB253 This bill would have substantively adopted SSUTA conformity measures and advanced out of the legislature to the governor s office. However, due to an error in implementation that omitted the prescription drug exemption, Governor Nixon vetoed the bill. Assuming the prescription drug provision had been addressed, this would have been of considerable benefit to device manufacturers and service providers. MN HF677 Passed by the legislature as part of the omnibus tax bill and signed by the governor into law, this bill contains several provisions relevant to the healthcare industry. Items purchased in transactions covered by Medicare/Medicaid are exempt, as well as accessories and supplies for the effective use of a prosthetic device that are not already exempt under section 297A.67, subd. 7. (Effective July 1, 2013) 6

7 Legislative Updates 7 MS SB2244 Amends MS Code Ann. Section to provide an exemption from sales tax on certain sales of durable medical equipment (DME) and home medical supplies (HMS). Exemption applies when DME and HMS are ordered in writing or prescribed by a licensed physician for the medical purposes of a patient and where any part of the payment is made as part of a covered benefit by an insurance policy, contract or plan. (Effective July 1, 2013) OK HB1399 Broadens the application of direct permit status to purchases of medical appliances, medical devices and other medical equipment for administration or distribution by a practitioner under Section (B) when the cost of such items will be reimbursed under the Medicare or Medicaid program. The general requirement that a purchaser have $800,000 in taxable annual purchases does not apply for medical product purchasers. For purchases made by persons that have been issued a permit under these provisions, the Tax Commission will accept (1) patient case number or account number; (2) type of insurance; and (3) item description or product number to evidence the exemption (Effective July 1, 2013)

8 8 Administrative Policy Updates

9 Administrative Policy Updates FL TAA No. 13A-009 (5/3/13) Evaluates the taxability of numerous medical instruments and other devices, reiterating the Rule 12A-1.020(6), F.A.C., provision that sales of medical products, supplies, or devices to hospitals, healthcare entities, or licensed practitioners are exempt when: 1) dispensed under federal or state law only by the prescription or order of a licensed practitioner; and 2) intended for use on a single patient and not intended to be reusable. GA Medical Products Reg. (Rule ) (11/19/12) The revised rule adopts more restrictive provisions for prosthetic device and DME exemptions, requiring that title and possession to a prosthetic device transfer to the patient in order to be exempt and stating that any use of DME by a service provider will render it subject to tax even if the DME is ultimately sold or leased to the patient. MO Letter Ruling No. LR 7246 (4/19/13) A splint device enabling a physician to optimally position and stabilize a patient s hand, wrist, and forearm while performing a medical procedure was held taxable. The device was not a prosthetic or orthopedic device," as it was only used during a medical procedure to temporarily support and stabilize a body part that was not weak or deformed. Further, the device was disposed of after the performance of the medical procedure. 9

10 Administrative Policy Updates 10 NY Advisory Opinion No. TSB-A-13(21)S (7/19/13) Mobile medical services provided to medical facilities constituted taxable rentals of tangible personal property. The taxpayer was deemed to transfer possession of the equipment to its customer facilities, as the attending physician directed the taxpayer s employee in the operation and use of the equipment; separate charges for employees to operate the equipment were exempt. VA Public Document No (6/27/13) The sale of an intrauterine copper contraceptive device (IUD), which was denied exemption as durable medical equipment in P.D (10/31/01), was held to be a prescription drug, based on its FDA and VA Drug Control Act classification as a Schedule VI controlled substance, and therefore exempt when sold to a physician. WA Det No , 32 WTD 168 (11/14/12) Released 7/30/13 The DOR Appeals Division denied the appeal of a letter ruling holding as taxable the packaging and labeling used to package drugs to be dispensed to inmates. The packaging materials simply provided a container with directions to dispense the drugs to inmates and were held to be dissimilar to items inserted into the body to deliver prescribed medication. The containers were therefore not "disposable devices used to deliver drugs." WA Det No , 32 WTD 163 (11/6/12) Released 7/30/13 CPAP machines qualify as exempt prosthetic devices if entirely worn on body, and as DME if not worn on the body.

11 11 Taxability Guidelines

12 SSUTA Provisions Member States: Full Members: AR, GA, IN, IA, KS, KY, MI, MN, NE, NV, NJ, NC, ND, OK, RI, SD, UT, VT, WA, WV, WI, WY Associate Members: OH, TN

13 SSUTA Defined Terms In theory, significantly facilitates administration of taxes on multistate basis. Drug Prescription Mobility Enhancing Equipment Durable Medical Equipment Prosthetic Device OTC Drugs Conforming states terms should be identical in meaning Inconsistencies can and do arise

14 Drug Defined Drug means a compound, substance or preparation: Recognized in the USP/NF; or Intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease; or Intended to affect the structure or any function of the body. Toggles: Insulin and/or medical oxygen may be exempted without prescription. Sales to hospitals and other medical facilities may be determined independently. Taxability of free drug samples may be determined independently. 14 Over-the-counter-drug means a drug labeled with: A Drug Facts panel; or A statement of the active ingredient(s) with a list of those ingredients contained in the compound, substance or preparation. Toggles: A member state may exclude grooming and hygiene products from this definition (most do).

15 Prosthetic Device Defined SSUTA Uniform Definition Requirements: Replace missing part of body Prevent/correct physical deformity/malfunction Support weak/deformed portion of body Adds worn on or in the body requirement Certain items formerly considered prosthetic devices now classified as DME under SSUTA definition Toggles: Prescription Medicare/Medicaid payment or reimbursement No toggle for sales to hospitals/medical facilities

16 Durable Medical Equipment ( DME ) Defined SSUTA Uniform Definition Requirements: Not worn in or on the body Can withstand repeated use Serves a medical purpose Not useful absent illness/injury Toggles: Prescription Medicare/Medicaid payment or reimbursement Home use No toggle for sales to hospitals/medical facilities

17 DME Definition Adoption Issues Items formerly exempted as prosthetic devices now DME Most covered by permitted exclusions (if not worn ): Enteral feeding systems Kidney dialysis equipment Oxygen delivery equipment Includes repair & replacement parts but does it include all single [patient] use items? [States] may exclude from repair & replacement parts items which are for single patient use.

18 SSUTA Healthcare Item Lists Approved at SST Governing Board meetings held in December 2006 (Appendix L) and March 2007 (Appendix M) Rule Healthcare Definitions Member states enacting product-based exemptions for defined healthcare products or utilizing the defined healthcare terms in entity or use based exemptions shall include all products within each defined term unless specific exceptions are provided for in the definition. The attached chart, (Appendix A) which is not an all inclusive list of all products within each defined term, is the placement of products within the correct defined healthcare term included in Part II of the Library of Definitions. Each member state shall utilize the defined terms and the placement of products within each of the defined terms if a member state adopted any of the healthcare definitions contained in Part II of the Library of Definitions. Where a product is not included in the list, member states shall use the list as guidance in placement of products within the defined terms. Address uniform categorization of representative medical products Is a catheter a prosthetic device? Force of SSUTA Some items undefined Useful in securing favorable guidance Useful on audit

19 SSUTA Healthcare Item Lists Categorization Examples: Item SSUTA Categorization Bone Cement Prosthetic Device Bone Growth Stimulator - Implanted/Worn OTB Prosthetic Device Bone Growth Stimulator - Not Worn DME Catheters - Indwelling Prosthetic Device Dialyzers - Single Use Not Defined Dialyzers - Multiple Use DME Dressings - Medicated Rx Drug Dressings - Non-Medicated Not Defined Drains/Shunts Prosthetic Device Implants - Hip, Knee, etc. Prosthetic Device Sutures/Surgical Staples Prosthetic Device Stapler w/staples Bundling Determination Syringe - Prefilled Bundling Determination Stent System - Stent premounted on balloon catheter Prosthetic Device

20 Keys to Determining Item Taxability What are the item s characteristics? Who is purchasing the item? How is the item purchased? How is the item going to be used? How is the item covered or reimbursed? 20

21 What are the Item s Characteristics? 21 How does the item compare with definitions of exempt items (e.g. drug, prosthetic device, DME)? Does it replace/support the function of a missing or malfunctioning body organ? Does it replace a missing body part? Is it used to prevent or correct a physical deformity or malfunction? Does it support a weak or deformed portion of body? Is the item worn on or in the body? Does the item contain a drug or medicine? For example in an SST state, the presence of a drug in an item such as a medicated bandage will alter its taxability. Is the item labeled with a federal legend, requiring sale/use pursuant to a prescription? Is the item typically sold as part of a kit, pack or tray? Catheter sold with a guidewire or introducer.

22 Who is Purchasing the Item? 22 Non-profit hospital or clinic? Watch for limitations on these exemptions Exemption may apply to a non-profit hospital, but not a freestanding non-profit clinic (e.g. GA). For-profit hospital or clinic? Does the exemption flow through? Does it require the issuance of a resale or exemption certificate (e.g., MI, NM)? More states are adopting a narrow view of prescription requirement View the sale to a hospital or physician as not meeting the sale by prescription requirements. Home use, or institutional purchaser? Many states limit application of DME exemptions to home use items. Some states (e.g. WV, VT) have broad DME exemptions that apply to institutional purchasers as well. Physician purchase? Watch for billing practices Denver requires execution of a customer affidavit certifying that the item purchased meets all exemption criteria, including separate itemization on the patient bill. NM differentiates between purchases of prosthetic devices by physicians (taxable consumers), vs. hospitals (eligible resellers).

23 How is the Item Purchased? 23 Is a prescription/chart order issued for the item? Bulk purchase? Is the item inventoried prior to use in a medical procedure? Patient-specific? Is the patient identified on the P.O. prior to purchase or is the item requisitioned from consignment inventory (e.g. AR, VA)? If coming from consignment inventory, is the item replacing bulk consignment inventory or is it the item transferred to the patient? Does the patient have to be named (HIPAA violation), or does an identifying number suffice (e.g. AR, OK)? Resold to patient? Is there a separate charge on the patient s bill? City of Denver and NM prosthetic device exemptions. Does title/possession transfer to the patient? GA and IN prosthetic device exemptions. Resale certificate required for exempt purchase? MI prosthetic device exemption, GA as well if not an Rx only prosthetic device.

24 How is the Item Used? Is the item single patient use? FL and LA exemptions for single patient use medical devices. Worn on or in the body? Ambulatory vs. freestanding equipment SSUTA characterizations as a prosthetic device vs. DME. Does it come into direct contact with the patient? MN patient supplies exemption. Medically necessary? Is the procedure deemed medically necessary? VA prosthetic device exemption. SST exemptions are generally product-based, whereby nature of the procedure is not relevant (e.g. sale of aspirin used on a house plant is exempt). 24

25 How is the Item Covered or Reimbursed? 25 Medicare/Medicaid Minnesota Accessories and supplies required for the effective use of DME for home use only or purchased in a transaction covered by Medicare or Medicaid are exempt. Nebraska Sales of prosthetic devices and DME are exempt when: Oklahoma sold for a patient's use under a prescription, and which are of the type eligible for coverage under the medical assistance program established pursuant to the Medical Assistance Act. Sales of prosthetic devices, DME and other medical appliances to hospitals and other service providers are exempt only when both of the following requirements are met: The item is administered or distributed by a practitioner or purchased or leased, by or on behalf of an individual, pursuant to a prescription or work order of a practitioner; and The item is furnished to a Medicare or Medicaid program recipient and the cost of said item will be reimbursed by Medicare or Medicaid.

26 Bundled Transactions SSUTA Definition: A bundled transaction is the retail sale of two or more products that are distinct and identifiable for one non-itemized price. The SSUTA definition excludes otherwise bundled transactions that include: Drugs, DME, MEE, OTC drugs, prosthetic devices or medical supplies. IF: The purchase price or sales price of all taxable items is 50% or less of the total purchase price or sales price of the bundled tangible personal property. Many states tax bundled transactions. The SSUTA 50% exclusion for specified healthcare purchases can broaden exemptions for: Medical kits, packs and trays. Implants w/delivery systems. Prefilled syringes/needles. Pre-loaded staplers. Wound closure needles sold w/sutures.

27 Bundled Transactions Non-SST states have varying rules Some states, such as AZ, have taken the position that the presence of any taxable items sold with an exempt item (e.g. stent premounted on a balloon delivery catheter) renders the entire charge for the bundle taxable. Some states, such as CA, will exempt the bundle to the extent of the exempt items. Other states, such as LA and TX, will exempt the bundle if the predominant cost/sales price of the bundle represents exempt items, similar to the SSUTA rule. Other jurisdictions have varying de minimis thresholds (typically 10%). When is a bundle a bundle? SST provisions are inconsistent, in that logically bundled transactions such as a stent system aren t treated as such. Why is a medicated bandage not a bundled transaction? Why is a syringe prefilled with a drug, or a disposable stapler prefilled with staples considered a bundled transaction? Many SST states have not focused on the presence of disposable delivery systems when sold with an exempt drug or prosthetic device, yet others such as NV require a detailed accounting of the relative cost/sales price components of the bundle.

28 Local Jurisdictions Alabama Self- or third party-administered (e.g. RDS) local jurisdictions are required to follow state law and DOR interpretations, although expect some pushback from time to time. Exemptions for drugs and reduced tax rates for certain medical equipment items (e.g. dialysis equipment and attachments) available at the state level are mirrored at the local level. Arizona Non-program cities generally follow state rules regarding medical product exemptions, although definitions of certain terms vary from state provisions. Guidance may be sought from the Unified Audit Committee to bind multiple non-program jurisdictions regarding the taxability of certain items and transactions. 28

29 Local Jurisdictions 29 Colorado While the state has a broad patient materials exemption that encompasses prosthetic devices and other items applied to the patient, which leave with the patient, local jurisdictions are generally devoid of this provision. Many local jurisdictions are applying rigid standards for prosthetic device exemptions in the absence of the broader patient materials exemption Louisiana Denver proposes to tax items such as sutures and surgical staples, as not altered or adjusted to fit a particular individual, and requires that there be a separate charge on the patient bill for the exemption to apply. Aurora and Englewood are challenging various implanted prosthetic device items that they argue are not altered or adjusted to fit a particular individual. Drugs, which encompasses certain single use medical devices, are exempt at the state level and either fully taxable or eligible for a reduced tax rate at the parish level. There are certain exceptions, such as Caddo Parish that exempts biologics, while taxing other drugs.

30 30 Medical Device Excise Tax (MDET)

31 Medical Device Excise Tax Overview Affordable Care Act enacted IRC section Section 4191 imposes an excise tax of 2.3% on sales of certain medical devices by manufacturers, producers and importers. Became effective on January 1, The tax is reported on Form 720, Quarterly Federal Excise Tax Return. Semimonthly deposits of tax are required if tax liability exceeds $2,500 for a quarter. Final regulations and Notice were issued on December 7, 2012 The Notice provides interim guidance on the determination of sale price and other issues related to the tax. The Notice also provides special rules for imported convenience kits tax imposed only on portion of sales price allocable to the individual taxable medical devices included in the kit, tax is not imposed on the kit itself. 31

32 Medical Device Excise Tax Overview (cont.) The incidence of tax is on the first U.S. sale by the manufacturer, producer or importer A manufacturer means any person who produces a taxable article by processing, manipulating, or changing the form of an article or by combining or assembling two or more articles. An importer is any person who brings the article into the U.S. or withdraws an article from a customs bonded warehouse for sale or use in the U.S. The tax is based on the price for which a taxable medical device is sold Constructive sales price rules may apply if the articles are first sold to someone other than a 3rd party wholesale distributor. 32

33 What is a Taxable Medical Device? Any device as defined in section 201(h) of the Federal Food and Drug Cosmetic Act (FFDCA), that is intended for humans. Under the Treasury Regulations, this means a device that is listed with the FDA under section 510(j) of the FFDCA and 21CFR Part 807. If a device is not listed with the FDA under these provisions, then it is not a taxable medical device. If a device should have been listed with the FDA, but was not listed, the device is deemed to be listed as of the date the FDA notifies the manufacturer or importer in writing that corrective action, with respect to the listing, is required. 33

34 Medical Device Excise Tax Exemptions 34 Four Exceptions/Exemptions 1) Devices sold at retail to the general public for individual use (eyeglasses hearing aids, etc.) 2) Devices sold for further manufacture or sold for resale for further manufacture 3) Devices sold for export or sold for resale for export 4) Devices sold exclusively for animals Observations 1) Systems implications - Exempt SKUs or activities will require tagging 2) Registration and exemption certificate management will be required 3) Registration and exemption certificate management will be required 4) Products used for both humans and animals, but sold only to veterinarians, are not exempt

35 Medical Device Excise Tax Details The tax is imposed on the Manufacturer, Producer, and/or Importer of medical devices: The IRS defines a Manufacturer to be one who produces a taxable article from assembling two or more articles. The term also includes a producer and importer. (Treas. Reg (a)(4)(i)) The tax is imposed on the price for which the medical device is sold, which may include a constructive sales price : I.R.C provides for a constructive sales price under any sales condition in which the manufacturer, producer or importer does not sell directly to a 3 rd party wholesale distributor. For example, if the manufacturer, producer or importer of the registered medical device sells directly at retail, a constructive sales price is generally required. (I.R.C. 4216(b)(1)(A)) 35

36 Medical Device Excise Tax Details (cont.) What now? Registration requirements. A filing of form 637, application for registration of certain excise tax activities, is required for tax free sales and tax free purchases. This applies to manufacturer, first purchaser and second purchaser (Treas. Reg (a)(1)). Foreign entities are not required to register. Compliance requirements. Semi-monthly deposits are required if the tax liability exceeds $2,500 per quarter, in addition, quarterly tax returns (Form 720) are required to be filed. (Instructions Publication 510) System requirements. A system update may be required to handle pricing of taxable and non-taxable medical devices and the proper calculation of the sales price based on the constructive sales price rules. The ability to track and apply exemptions, exclusions and price readjustments on a device by device basis is very important. Other requirements. If the company sells medical devices to other manufacturers for resale for further manufacturing or export, the company will need proof of the tax free resale (I.R.C (b)). A good exemption certificate management program will be necessary. 36

37 Medical Device Excise Tax Details, (cont.) Other potential concerns: Credit or refund issues: Can a company receive a credit or refund for tax paid erroneously? YES The IRS has a mechanism for this as outlined in I.R.C Accurate determination of tax when a company manufactures a medical device and also separately purchases a taxed medical device and then combines them into the same package to sell. Determination of a fair market price for intercompany transactions. 37

38 38 Healthcare Provider Taxes

39 Healthcare Provider Taxes Many states are now using or considering use of provider taxes, sometimes to supplement static or declining provider reimbursement rates. In general, a "provider tax, sometimes termed a "fee" or "assessment," is a state law that authorizes collecting revenue from specified categories of providers. In most states, it is used as a mechanism to generate new in-state funds and match them with federal funds so that the state gets additional federal Medicaid dollars. 39

40 Healthcare Provider Taxes 40 In a most states, the cost of the tax is promised back to providers through an increase in the Medicaid reimbursement rate for their patient treatment and services. Federal matching funds are provided to help fund state s Medicaid programs. The match runs from 50% in most states up to more than 70% in states with lower relative per capita income. For 2013, the number of states with some type of Medicaidrelated provider taxes or fees has increased to 49 states and D.C. Delaware and Hawaii were the latest additions. The single state not levying provider taxes is Alaska.

41 Healthcare Provider Taxes The type of healthcare provider tax can vary by state and by type of healthcare organization Provider taxes can be levied on some or all of the following operations: hospitals, nursing homes, pharmacies, managed care organizations, health plans, clinical labs, ambulatory surgical centers, home health operations and diagnostic imaging centers. The tax can also vary in how it is assessed Gross receipts tax on net patient revenues, fixed fee per licensed bed, amount per prescription, percent of premiums or amount per paid claim. 41

42 Healthcare Provider Taxes How States Use Provider Taxes To Increase Medicaid Dollars For a state that qualifies for 50% matching federal funds: If a hospital charges $1,000 for a procedure, the state would pay the hospital the full amount, but would be reimbursed by the federal government for $500. If the state institutes a 6% provider tax on revenues, the procedure now costs $1,060 ($1,000 x 6%). The hospital is reimbursed $1,060, but has to pay $60 to the state. The state collects the $60 tax and now gets $530 reimbursement from the federal government. 42

43 43 Questions?

44 44 This presentation contains general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation.