Top State and Local Tax Challenges for the Healthcare Industry

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2022 WithumSmith+Brown, PC
Top State and Local Tax Challenges
for the Healthcare Industry
August 24, 2023

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BE IN A POSITION OF STRENGTHSM
Jim Bartek, CPA
Partner – SALT Practice Leader
jbartek@withum.com
D: (973) 567 6515
M: (973) 204 5523
Jason Rosenberg, CPA, MST
SALT Principal
Income/Franchise Team Leader
jrosenberg@withum.com
(347) 215 0115
Bonnie Susmano, JD, MBA
SALT Senior Manager
bsusmano@withum.com
(917) 538 8337

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▪ This content is for general informational purposes only and should not
be used as a substitute for individualized tax advice with a qualified tax
advisor. This content represents the views of the authors only and does
not necessarily represent the views or professional advice of
WithumSmith + Brown, PC. All information is provided "as is", with no
guarantee of completeness, accuracy, timeliness or of the results
obtained from the use of this information.
Disclaimer
WithumSmith+Brown, PC | BE IN A POSITION OF S
S
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TRENGTH

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Sales Tax: Healthcare Services
Sales Tax: Sales/Purchases of Healthcare Products/Services
Sales Tax: Exemptions
Sales Tax: Sales by Not-for-Profit Entities
State Audits
SALT Pass-Through Entity Taxes (i.e., Workarounds)
Business Income Tax Implications of Telehealth
Telecommuting/Mobile Workforce
Other SALT Trends
Questions?
Agenda

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▪ The following services are generally not taxable in most states:
▪ Medical Services
▪ Dental Services
▪ Physical Therapy
▪ Nutritional
▪ Chiropractor
▪ Certain states impose tax on medical services (e.g., HI, NM)
Medical Services

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▪ New Jersey
▪ Cosmetic Medical Procedures Gross Receipts Tax (CMPT) has been eliminated. No tax is due on procedures after July 1, 2014. [N.J.A.C. 18:24, P.L.
1992, C. 16, P.L. 2002, c. 72]
▪ From 2004 to 2014, the State imposed a CMPT on the purchase of certain “cosmetic medical procedures,” which are medical procedures
performed in order to improve the human subject’s appearance without significantly serving to prevent or treat illness or disease or to promote
proper functioning of the body. Such procedures include:
▪ Cosmetic surgery;
▪ Hair transplants ;
▪ Cosmetic injections;
▪ Cosmetic soft tissue fillers;
▪ Dermabrasion and chemical peels;
▪ Laser hair removal;
▪ Laser skin resurfacing;
▪ Laser treatment of leg veins;
▪ Sclerotherapy; and
▪ Cosmetic dentistry
Cosmetic Medical Services

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▪ Connecticut
▪ Services in connection with cosmetic medical procedures, such as cosmetic surgery, hair
transplants, cosmetic injections, cosmetic soft tissue fillers, dermabrasion and chemical peel,
laser hair removal, laser skin resurfacing, laser treatment of leg veins and sclerotherapy, are
taxable. [Conn. Gen. Stat. §12-407(a)(37)(LL) .]
Cosmetic Medical Services

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▪ Telehealth services are healthcare provided remotely via computer or app
▪ Examples of Telehealth include Doctor visits, remote patient monitoring, online education, etc.
▪ Software as a Service (SaaS), information, data processing and other services
▪ Doctor licenses technology from vendor
▪ Pass through costs to patient
▪ Guidance around technology products and services may not be clear and may need to be analyzed.
▪ Rulings may need to be obtained to provide clarity around taxability.
▪ The “True Object” test may be necessary to identify the intent of the purchase
▪ Watch for sales across state lines
Telehealth

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Sales Tax: Sales/Purchases of Healthcare
Products/Services

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▪ Prescription/Over the Counter Drugs
▪ Prescription drugs are generally not taxable in the majority of states
• Per C.G.S. § 12-412, Connecticut provides an exemption for prescription drugs including the sales of syringes and needles.
• Per N.J.S. § 54:32B-8.1, New Jersey provides and exemption for prescription drugs for human use
▪ Certain states impose sales tax on prescription or over-the-counter drugs
• Per Illinois Admin. Code tit. 86, § 130.311(a), prescription and nonprescription medicines for human use are taxed at the reduced rate of 1%
• Per Ohio Revised Code, R.C. 5739.02(B)(18), Ohio only provides an exemption for drugs dispensed with a prescription.
• An over-the-counter drug or non-prescription is exempt if it is required to be labeled with a “Drug Facts” panel in accordance with
the federal Food and Drug Administration, according to Tex. Tax Code Ann. §151.313(a)(3).
• Washington imposes sales tax on over-the-counter drugs for human use to hospitals per RCW 82-08.0281
Sales/Purchases of Medication and Supplies

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▪ Vitamins/Dietary Supplements
▪ Is it a mineral or vitamin or food?
▪ Check the label!!!!!
▪ Nutritional supplements and vitamins are considered food and therefore are exempt from sales and use tax.
[Maryland -- List of Tangible Personal Property and Services Subject to Sales and Use Tax (Jan. 1, 2020).]
▪ Ohio imposes sales and use tax on sales of dietary supplements because the state does not consider dietary
supplements to be food. [Ohio Rev. Code Ann. § 5739.01(CCC)(1)]
▪ Vitamins and dietary supplements are not taxable in Pennsylvania because they qualify as medical supplies.
[Pa. Stat. Ann. §7204]
Sales/Purchases of Medication and Supplies

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▪ Prosthetic Devices
▪ Per N.J.S. § 54:32B-8.1, New Jersey does not impose sales tax on prosthetic devices whether sold with or
without a prescription. New Jersey defines as a replacement, corrective, or supportive device including repair and
replacement parts for same worn on or in the body in order to:
• (1) artificially replace a missing portion of the body; or
• (2) prevent or correct a physical disability; or
• (3) support a weak or disabled portion of the body.
▪ Per Ohio R.C. 5739.01(B)(1), prosthetic devices sold without a prescription are taxable.
▪ Per Georgia Rule 560-12-2-.30, there is a sales tax exemption on the sale or use of any durable medical
equipment or prosthetic device sold or used pursuant to a prescription, and to the sale or use of all mobility-
enhancing equipment prescribed by a physician.
Sales/Purchases of Medical Devices

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▪ Durable Medical Equipment
▪ Per N.J.S. § 54:32B-8.1, New Jersey provides an exemption for durable
medical equipment for home use by a human. New Jersey defines durable
medical equipment as equipment, including repair and replacement parts, but
not including mobility-enhancing equipment, that:
▪ (1) can withstand repeated use;
▪ (2) is primarily and customarily used to serve a medical purpose;
▪ (3) is generally not useful to a person in the absence of illness or injury; and
▪ (4) is not worn in or on the body.

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▪ Durable Medical Equipment
▪ Per General Laws of Massachusetts, G.L. c. 64H, § 6(l) and Massachusetts Technical Information Release TIR 85-7, Massachusetts provides an exemption for certain specified items of medical
equipment if prescribed by a physician.
▪ Exempt Items
▪ Kidney dialysis machines
▪ Enteral and parenteral feedings and feeding devices
▪ Suction machines
▪ Oxygen concentrators, regulators, humidifiers, masks, and cannulas
▪ Ultrasonic nebulizers
▪ Life-sustaining resuscitators
▪ Incubators
▪ Heart pacemakers
▪ Canes and tripod quad canes
▪ Hospital beds for home use
▪ Breast prostheses
▪ Alternating pressure pad units
▪ Patient lifts

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▪ Mobility Enhancing Equipment
▪ California Code of Regulations, Cal. Code Regs. tit. 18, § 1591.2 (c) Sales to Health Facilities. Sales, or leases that
are continuing sales and purchases, of wheelchairs, crutches, canes, and walkers to hospitals or other health facilities for
use by patients while at the facilities are subject to tax. Such sales or leases are not considered sold to an individual for
the individual's personal use as directed by a physician. However, when wheelchairs, crutches, canes, and walkers are
ordered by a hospital or health facility on behalf of a specific patient, as directed by a physician, the items may be
considered to be purchased by an individual for his or her own personal use as required under Revenue and Taxation
Code section 6369.2 and, therefore, the sale will qualify for exemption from tax.
▪ New York Codes, Rules and Regulations (NYCRR), 20 NYCRR 528.4(a)(1) states Drugs and medicines intended for
the use, internally or externally in the cure, mitigation, treatment or prevention of illnesses or diseases in human beings,
medical equipment (including component parts thereof) and supplies required for such use or to correct or alleviate
physical incapacity, and products consumed by humans for the preservation of health are exempt.
Sales/Purchases of Healthcare
Products/Services

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Sales Tax: Exemptions

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▪ Exemptions for purchases by “Not-for-Profit” entities
▪ Each entity may have to apply for exemption!
▪ State rules for certificate expiration differs
• New Jersey certificate does not expire
• Pennsylvania certificate DOES expire and needs to renewed periodically
• Other states
▪ Non-compliance can lead to exposure
▪ Savings opportunities could exist if sales tax paid by exempt entity for exempt purchases
Purchases by NFP Healthcare Entities

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▪ In NY, being organized and operated as a not-for-profit organization does NOT qualify an
organization as a sales tax-exempt organization
▪ A federal 501(c)(3) must still apply for exemption from paying NYS sales tax by filing Form ST-
119.2 along with its IRS determination letter
▪ Subordinate units of an organization must file their own application for exempt status
Purchases by NFP Healthcare Entities-NY

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▪ Once the NFP receives its exempt certificate from NY, all purchases (e.g., tangible personal
property, services, food and drink, admission charges, rent for hotel occupancy) are exempt from
sales tax
▪ Form ST-119.1 Exempt Organization Exempt Purchase Certificate should be provided

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▪ Examples from New York Publication 843 (12/09)
▪ Example: The treasurer of an exempt organization purchases office furniture for the organization. The
treasurer provides the vendor with a properly completed Form ST-119.1, and makes payment using
the organization's credit card. The treasurer may purchase the office furniture exempt from sales tax.
▪ Example: An authorized employee of an exempt organization purchases office equipment that will be
used by and become the property of the organization. The employee uses her personal credit card to
purchase the equipment and will be reimbursed for the purchase by the organization. The employee
may not purchase the equipment exempt from tax because payment is made using the employee's
funds and not the funds of the organization. In addition, even though the organization is the owner of
the equipment, it is not eligible for a refund of the tax paid.

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▪ Limitations
▪ Certain states may impose sales tax on sales to NFP (e.g., CA, NC)
▪ Review the laws and guidance carefully as taxability could vary by:
• Type of entity
• Type of property
• Other factors
Purchases by NFP Healthcare Entities

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▪ In California, hospitals and other medical service facilities are deemed service
enterprises and are generally considered consumers of tangible personal
property.
▪ Examples include:
▪ Items used in business operations (e.g., office supplies)
▪ Items provided to patients in connection with services performed (e.g., beds, x-ray equipment,
instruments, bandages, etc).
▪ You may not have to pay tax on purchases of exempt sales (e.g., medicines,
certain food products) or items intended to be resold.
Purchases by NFP Healthcare Entities-CA

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Sales Tax: Sales by Not-for-Profit Entities

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▪ Nexus is defined as contact with a state that is sufficient to establish a connection allowing the state
to impose a tax.
▪ Requires the seller to possibly register, collect, and remit sales tax on sales made within the state.
▪ Types of nexus for sales tax include:
▪ Physical Nexus
▪ Economic Nexus
▪ The Wayfair Decision : Wayfair vs. South Dakota
▪ On June 21, 2018, the U.S. Supreme Court, in a 5-4 decision, ruled in favor of the state of South Dakota when it reversed the decades long
physical presence requirement of Quill and ruled that the economic sales nexus requirements of the South Dakota law were Constitutional.
▪ All 45 states, plus D.C., have since passed sales tax economic nexus standards. Five states do not have sales tax.
What is Nexus for Sales and Use Tax?

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▪ When Quill was decided:
▪ In 1992, less than 2% of Americans had Internet access; today the number is about 90%.
▪ In 1992, mail-order sales in the United States totaled $180B; in 2021 e-commerce retail sales
alone were estimated at $870B (increase of 14.2% over 2020 and 50.5% over 2019).
▪ In 2021, e-commerce represented 13.2% of retail sales in the U.S.
▪ In 1992, States were losing between $694M and $3B per year as the result of the physical
presence rule; the estimated range in 2018 was between $8B to $33B.
The Wayfair Decision: Wayfair vs. South
Dakota

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▪ All states, plus D.C., have passed sales tax economic nexus standards.
▪ Beginning January 1, 2023, Missouri became the last states to adopt
economic nexus laws. Retailers selling at least $100,000 into the state in the
previous 12-month period must collect sales tax from Missouri purchasers.
▪ Five states don’t have a sales tax.
▪ Although a taxpayer’s revenue stream may not be taxable in their home state,
their sales into other states may be subject to sales taxes.
At a Glance…

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▪ Other Sales
▪ Supplies
▪ Shared services
▪ Software sales
▪ Bundled Services
▪ Bookstore
▪ Other
Sales by NFP Healthcare Entities

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▪ Generally, sales made by a NFP shop or store are taxable unless the item is
tax exempt (e.g., food) or another exemption applies (e.g., exempt entity).
▪ Other potential taxable sales in New York:
▪ Leases and rentals of tangible personal property
▪ Sales of utility services
▪ Parking
▪ Hotel occupancy
Sales by NFP Healthcare Entities-NY

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Sales Tax Nexus Calculator
https://www.withum.com/sales-tax-nexus-calculator/

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State Audits

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▪ Rise in audit activity
▪ Audits can be triggered by non-compliance (including exemption certificates) or by reviewing related entities
▪ Common Audit Issues for Healthcare
▪ Items purchased sales tax free for use by related “for profit” entities
▪ Management fee
▪ Shared service centers
▪ Intercompany sales
▪ Mixed use assets
▪ Covid equipment or supplies
▪ Durable goods
▪ Resale
▪ Payroll withholding
▪ Other
State Audits

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▪ Technology
▪ Use of existing technology amongst entities
▪ “Sale” of technology to “for profit” or non-related entities
▪ New purchases of technology
• What was purchased (e.g., SaaS, Telehealth equipment)
• Software
• Information Services
• Data Processing
• Equipment
• Other
• Where used
• Which entity(s) using
State Audits

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Current vendor audit
Current customer
audit
“Whistleblowers”
Exemption
certificates
Drop in taxable sales
Requesting a refund Industry type Luck of the draw
Not found in the
state system
Late Return Filings
Incorrect Math
Nexus but no sales
tax registration
Not filing and
remitting use tax
Significant changes
(increase or
decrease) in
sales/use tax
remittance
Increased, or large
percentage of
exempt sales
Additional Audit Triggers

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SALT Pass-Through Entity Taxes (i.e., SALT
Workarounds)

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▪ Tax Cuts and Jobs Act of 2017 capped state and local tax (SALT) itemized deductions to $10,000 for
tax years 2018 through 2025.
▪ Prior to the TCJA, individuals were allowed to deduct in full state and local taxes when itemizing.
▪ THE TCJA SALT limitation is in effect for tax years 2018 to 2025 and only applies to individual taxpayers.
▪ To circumvent the cap, states enacted a variety of workarounds, including Pass-Through Entity Taxes
(PTET).
▪ On Nov 9, 2020, the IRS issued Notice 2020-75, which announced its intention to issue proposed
regulations allowing for PTETs.
▪ This provided some assurance the IRS would allow for PTETs. However, as of today, no proposed regulations have been
issued.
So Where are we Now?

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▪ SALT Limitation: Before passage of the TCJA, individuals who itemized
deductions could deduct their state tax payments in full as Itemized
Deductions, on their federal Form 1040, U.S. Individual Income Tax Return.
The TCJA put into place a $10,000 state and local tax deduction limitation.
▪ SALT Workaround: In theory, the premise of the pass-through entity tax is
straight-forward. By imposing an income tax directly on the pass-through
entity, which is not limited in the amount of state taxes that it can deduct for
federal purposes, a state's tax on pass-through entity income now becomes a
full deduction for the pass-through entity for federal income tax purposes.
Pass-Through Entity Tax Mechanics

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Pass-Through Entity Taxes (Summer 2020)

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Pass-Through Entity Taxes (December 2022)

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▪ By passing through a net amount of income reduced by the SALT
deduction, the owner is able to fully deduct their state taxes for
federal purposes.
▪ Additionally, the owner would not be double taxed in the state, as a credit or exclusion of income
is used to offset tax at the owner’s level.
▪ In states where the PTE tax only calculates tax on state-connected income, businesses that are
most likely to benefit from this election would be businesses with significant state presence.
PTE Tax Benefits

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▪ The Key Features of any State PTE Tax can be categorized as:
▪ Election
▪ Eligibility
▪ State Taxable Base
▪ Owner Income Offset
Key Features of PTEs

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▪ Federal Tax Benefit Rule Consideration
▪ IRS Workaround Repeal: As 2020-75 was released under the Trump administration, it is possible the draft
regulation could be rescinded by the Biden administration.
▪ Nonresident Owners; Resident Credits: The resident state of a non-resident member may not allow a resident
credit on their individual returns for taxes paid at the entity level.
▪ May Require Significant State Presence: As the PTE will only pay tax on state connected income, the benefit
may be limited to the extent of presence in the state.
▪ Duplicate Estimate Payment Requirements: State legislation may not alter existing non-resident withholding
requirements for those PTEs that elect to pay the PTE. Therefore, overlapping payment requirements may be
necessary if individual non-resident taxpayers are subject to both regimes.
▪ Other Risks
PTE Tax Risks and Considerations

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Business Income Tax Implications of
Telehealth

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Telehealth
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Payroll Property
Sales
Factor Components
TPP Services/Intangibles
Market-Based
Cost of
Performance
Activity Types
Destination
Sourcing Methods
Factors Summary

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2000: Market-Based Sourcing for Corporate
Taxpayers

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2021: Market-Based Sourcing for Corporate
Taxpayers

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Telecommuting/Mobile Workforce

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▪ As the result of Covid-19, a renewed focus has put telecommuting at the forefront as businesses
grapple with the state tax implications
▪ Central issues put into focus:
• Income and Sales Tax Nexus
• Income Tax Apportionment
• State Payroll Withholding
Telecommuting

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Factors Summary
Payroll Property
Sales
Factor Components
TPP Services/Intangibles
Market-Based Cost of Performance
Activity Types
Destination
Sourcing Methods

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▪ Locations complicate withholding requirements.
▪ Withholding from employment income is typically based on where employees work.
• Exception: Some states employ “Convenience of Employer” rules which subject employees to
withholding based on their “assigned” office. This could possibly result in double state taxation.
▪ If an employee lives in one state but works in another, the employee is generally subject to
withholding rules of the work state. However, the employee could take a credit for taxes paid to the
work state against tax liability otherwise owed to the home state.
▪ Complications could arise when there are reciprocal agreements between the two states for
withholding.
Telecommuting Impact on Payroll Tax

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▪ Where the wages of telecommuting employees continue to be sourced
to the employee’s primary office location, unless the work performed
outside the state is for the necessity of the employer.
Convenience of Employer Rule

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Current SALT Trends

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Broadening of Nexus Standards
Rate Changes (e.g., Corporate and
Individuals
Expansion of Tax Base (e.g.,
Foreign Income)
Exporting the Tax Burden
Excise Taxes on
Gas/Nicotine/Cannabis
Unclaimed Property
Other Tax Trends

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Sales Tax Expansion
Digital Goods/Services/Advertising
Taxes
Gross Receipts Taxes (e.g., OR
CAT)
Financial Transaction Taxes
Increased Audits
Other Tax Trends

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Dash of SALT
Subscribe here: https://www.withum.com/state-and-local-tax-updates/

61
BE IN A POSITION OF STRENGTHSM
Jim Bartek, CPA
Partner – SALT Practice Leader
jbartek@withum.com
D: (973) 567 6515
M: (973) 204 5523
Jason Rosenberg, CPA, MST
SALT Principal
Income/Franchise Team Leader
jrosenberg@withum.com
(347) 215 0115
Bonnie Susmano, JD, MBA
SALT Senior Manager
bsusmano@withum.com
(917) 538 8337
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