As you know, at Miles Consulting Group we’re all about helping companies approach multi-state tax issues such as defining nexus, determining the taxability of various products and services, and complying with state income tax and sales tax regulations and more. State tax legislation affects companies in a wide variety of ways, which is part of what makes the topic so complex.
In this brand new series, we’re going to explore the nuances of state taxes as they apply to various technology industry niches. After all, we are based in Silicon Valley, and have had the privilege to work with some of the nation’s most innovative companies. Today’s focus is medical device companies!
An Overview of Medical Device Companies
This subset of the technology industry actually covers a fairly large spectrum. The FDA defines a medical device as, “An instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent or other similar or related article, including a component part, or accessory, which is:
- Recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement to them,
- Intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or
- Intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes.”
As you can tell, a lot of products fall into this category. From simple tools like tongue depressors to those fully dependent on modern technology like programmable pacemakers, the body uses medical devices both internally and externally. Interestingly, the sales tax ramifications on a medical device can vary as well – depending upon its use.
Companies that fall within the niche industry include Johnson & Johnson, General Electric, Medtronic and many more. You can see a full list of the top 40 medical device companies here.
Medical Device Company General State Tax Issues
At Miles Consulting, we see several state tax issues relating to medical device companies. Some apply directly to the medical device niche, whereas others are applicable to almost all growing technology businesses:
- Nexus: As we’ve previously discussed in our blog posts, nexus refers to the minimum connection a company must have with a state in order for that state to be able to impose its taxes. In the case of sales tax, it’s the minimum connection needed in order to require the company to collect sales tax in such state. States may define nexus differently, so companies selling products across state lines need to be aware of the rules in different states. For example, if a company sends a sales person to another state to sell or demo their products, it’s possible they’re creating nexus in those states, making the company responsible for state taxes.
- Sales Tax: Many medical devices are exempt from sales tax for a variety of reasons. For instance many states offer exemptions on the device itself (statutorily). Also, many states offer an exemption due to the nature of the buyer (such as a not-for-profit hospital).
- Income Tax: Once nexus is created, a company is responsible for more than just sales tax; it has often created nexus for income tax as well. While many medical device companies may have R&D credits or net operating losses (“NOL”) for many years at the beginning of their lives, hopefully they will be profitable and pay taxes eventually! Because of this, it is important to file correctly, both to properly allocate the NOL or credits for future use, and for current tax ramifications.
How Miles Consulting Assists Medical Device Companies
We regularly assist companies in the medical devices niche in the areas above. First, we help them determine where they might have nexus. Nexus isn’t just created in states where the company has employees living! The nature of the business is that sales representatives (whether company employees or third party representatives) often travel to doctors’ offices to demonstrate their products. They might also engage in training or installation of devices. All of these activities could, by themselves or in the aggregate, create nexus. Each client’s scenario is different, and we help them to determine the states in which they should be filing.
As mentioned above, there are several possible sales tax exemptions for medical devices. Many states offer exemptions for prescriptions, prosthetic devices and devices implanted inside the body. The challenge remains that states are not uniform in their treatment of these types of devices, so we often work with our clients to determine the correct (and varying) treatment in multiple states. Another challenge is that companies are often on the cutting edge of new technologies and new devices that improve the lives of patients. However, state tax statutes are NOT generally on the cutting edge. So, we find ourselves working with clients to fully understand the mechanics of a new device and then applying that knowledge to existing (and possibly outdated) tax law – and hopefully finding a good outcome for our client.
We often also assist new clients in engaging in voluntary disclosure where they didn’t realize that they should have been filing in various states. Sometimes this comes to light during an audit. We help companies determine where they should have been filing, whether their product is taxable, documentation of any exemptions, and finally, coming forward to become compliant in a number of states.
As you can see, there are a lot of things to think about when it comes to the multi-state tax ramifications of medical device companies. Curious how other technology niche industries are affected? Stay tuned for the next post in our series!
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the new California Partial Manufacturer’s Exemption for Sales Tax. To learn more, contact us today at www.MilesConsultingGroup.com.
