Starting this year, manufacturers and importers of certain medical devices must remit to the federal government a 2.3-percent excise tax on the sale of these devices (as discussed previously in this post). Many sellers pass this tax along to purchasers by baking the value of tax into the price of medical devices. Other sellers are more transparent and include a line-item charge.
The January 25 edition of the Wall Street Journal (subscription required) highlighted sellers who include a medical device excise surcharge, which some label as a “medical device adjustment,” on invoices to customers. While these sellers are attempting to resolve their medical device excise tax liabilities, they likely create a state sales tax problem if they fail to collect applicable sales tax on their “medical device adjustment.”
In most states, if a medical device is subject to sales tax, the excise surcharge is also subject to sales tax. Some sellers may not collect sales tax on the surcharge because they may view the excise tax, in the form of a surcharge, as another tax to be collected on the sale of a medical device, almost as if it is a federal sales tax on medical devices. A common surcharge that is not subject to sales tax is a state E911 surcharge, which is a cost that is not taxable even though the underlying phone service is subject to sales tax (see the Colorado Department of Revenue). However, the line-item medical device excise surcharge is more similar to a fuel surcharge, which is subject to state sales tax (see this 2009 ruling by the Virginia tax commissioner). A fuel surcharge is a cost owed by a seller that is passed along to a customer, whereas an E911 surcharge is a state tax imposed on the purchaser. The excise surcharge is a cost that the seller is responsible for that is being passed along to the purchaser. The Texas Comptroller of Public Accounts stated in her November 2012 policy newsletter:
If Texas sales tax is due on a medical device when it is sold, an excise tax reimbursement charge included with the billing is part of the sales price and also taxable. If a medical device is exempt from sales tax, the associated medical device tax reimbursement charge is exempt from sales tax.
While most states have not made similar pronouncements, they will likely take similar policy positions because of their prior positions that fuel surcharges are subject to sales tax.
Sales tax on medical device excise surcharges impacts both sellers and purchasers. A seller who includes a line-item surcharge will need to collect sales tax on the surcharge if the sold device is subject to sales tax. The failure to properly collect and remit the full sales tax amount to a state can result in owing the additional liability to the state from the seller’s reserves, along with a penalty and interest on the unremitted tax. If a seller includes this surcharge on an invoice, a purchaser should independently verify if that device is subject to sales tax. If the seller fails, or refuses, to impose sales tax on the surcharge, then the purchaser must remit use tax on the surcharge where required. Much like a seller who fails to collect and remit, a purchaser who does not remit use tax will owe the outstanding tax with penalty and interest to the state if and when they are audited by the state.
If you have any questions regarding this sales tax implication of the medical device excise tax, please contact Amol Jain at AJain@brg-expert.com or 202.480.2678.
Berkeley Research Group, LLC is not a CPA firm and does not provide audit, attest, or public accounting services. BRG is not a law firm and does not provide legal advice.
The views expressed in this article are those of the authors and do not necessarily reflect the position or policy of Berkeley Research Group, LLC.
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