If you’ve been following these series about multi-state tax facts, you know we’ve already covered software and SaaS companies. What about medical device companies?
Because the term “medical device” covers a wide range of instruments, machines, accessories or other tools that can be used both externally (such as tongue depressors) or internally (like pacemakers), there are a lot of multi-state tax questions that arise in this industry.
3 Multi-State Tax Facts Medical Device Companies Need to Know About
Fact 1: As with so many other areas of state tax, a key driver is “nexus,” or taxable presence. Employees of medical device companies often travel frequently to trade shows, doctors’ offices, and for other demo and training opportunities. But because they may not actually sell their products at these events, they often aren’t even aware their business has established nexus across state lines. It’s important to note that third party representatives (beyond just a company’s own employees) can create nexus, as can the presence of tangible property in a state. So, if a doctor’s office maintains piece of demo equipment in his/her office and the medical device company retains title to that equipment, nexus has been created. Or if the doctor helps to engage in the sale of the equipment, she may have become an agent of the company, thereby creating nexus.
Fact 2: There are various sales tax exemptions in the medical device industry, but they also vary by state. In some cases the device is exempt from sales tax based upon its use. For example, many states exempt prosthetic devices, such as artificial limbs, but not items such as canes or walking aids. In other cases the sales may be exempt from sales tax due to the nature of the purchaser, as in the case of a non-profit hospital. Because these exemptions vary from state to state, it’s important that medical device companies are aware of where they’ve established nexus and stay current with those state’s laws. Of course, this is an area in which we can help!
Fact 3: Medical device companies need to be aware of where they’ve created nexus for income tax purposes as well as sales tax. Even if the business has R&D credits or NOLs (net operating losses) for many years, they need to file income tax returns in the proper states. This will make everything much easier once the business becomes profitable and liable for income taxes, as the NOLs will then also be properly applied.
Case Study: Miles Consulting’s Work with Medical Device Companies
As you can see, it’s important for medical device companies to know where they’ve established nexus and what state tax ramifications it may have for them. We’ve worked with a lot of businesses in this field to help them determine taxes and fees they’re responsible for, as well as exemptions and credits they can take advantage of.
As an example, we are currently working with a client who has developed a device which is temporarily inserted into a patient’s body to cure a specific ailment. Company representatives travel across the country to meet with both doctors and patients about the device – thereby creating nexus. In some cases, the company may sell the devices to tax-exempt hospitals, making the sale exempt from sales tax, but in other cases they sell to “for-profit” clinics, which are not generally exempt. The taxability review is even more interesting because the technology is new, so the device is seldom specifically listed under a state’s list of exempt items. Because of this, we’ve had to look to similar devices and sometimes rely on rulings within the state based upon similar use items. In some states we’ve reviewed, the device is clearly exempt. In others, it’s clearly taxable. And in others, it’s not so clear! We’ve helped our client navigate these waters and evaluate each state individually to determine the correct course of action to take.
Do you have questions about how multi-state tax issues may affect your business – whether a medical device manufacturer or other business? Contact us today! We’re happy to provide answers so you can rest assured your company is keeping up with all the various taxes, fees, exemptions and credits from state to state.
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. To learn more, contact us today at www.MilesConsultingGroup.com.
