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Pharmacists certainly know the high cost of glucose test strips.
A January 2010 Diabetes Forecast article published by the American
Diabetes Association noted that the yearly cost of test strips to
an individual typically range from $104 to $1,820, depending upon
the frequency of testing. Some states exempt test strips from sales
tax when they are purchased by individuals, but these states pay a
high price. If all the states with a sales tax imposed their tax on
test strips sold to individuals and medical providers, the
resulting sales-and-use tax revenue would total approximately a
quarter of a billion dollars per year.
SSTP states all over the map
Twenty-four states currently participate in the Streamlined
Sales Tax Project (SSTP), which seeks to simplify sales tax laws in
order to overcome a U.S. Supreme Court decision that state
sales-and-use tax systems are so complicated that states cannot
justifiably require out-of-state catalog and internet sellers to
collect such tax unless the sellers have a physical presence within
the state.
To reduce sales-and-use tax complexity among states, the SSTP
has developed uniform definitions — such as the
definition of a "drug." However, neither the SSTP
definitions nor the healthcare item lists related thereto define or
otherwise address diabetic test strips, leaving SSTP states to
independently determine the taxability of the test strips, with
varying results.
SSTP states such as Arkansas, Georgia, Indiana, Iowa, Kentucky,
Minnesota, New Jersey, North Dakota, Ohio, and Wisconsin, maintain
specific exemptions for test strips. Kansas, Nebraska, North
Carolina, South Dakota, Utah, and West Virginia exempt the test
strips if they are purchased with a prescription.
Michigan and Vermont classify test strips as a component of
blood glucose meters, which constitute exempt durable medical
equipment in those states. Rhode Island exempts test strips
"as they are considered used in the diagnosis of a
disease" under the Streamlined definition of a drug.
Other SSTP states tax test strips. Oklahoma imposes tax unless
reimbursed under a Medicaid or Medicare program, while Tennessee,
Nevada, and Wyoming tax test strips sold to individuals on the
basis that such items do not qualify as exempt durable medical
equipment.
Nevertheless, because SSTP states exempt prescription drugs
purchased by individuals, an argument exists in SSTP states taxing
test strips that such test strips constitute exempt drugs when
purchased by an individual holding a prescription.
Test strips typically consist of a plastic test strip with a
small spot impregnated with glucose oxidase, or some other
substance, which undergoes a chemical reaction when mixed with
glucose in a blood sample. As defined by the SSTP, a
"drug" generally includes "a compound, substance or
preparation, and any component of a compound, substance or
preparation, other than 'food and food ingredients,'
'dietary supplements,' or 'alcoholic beverages;'...
[i]ntended for use in the diagnosis, cure, mitigation, treatment,
or prevention of disease." According to this definition, a
test strip should constitute a drug because it (1) contains "a
compound, substance or preparation, other than food and food
ingredients, dietary supplements or alcoholic beverages," and
(2) with regard to diabetics, it is obviously "intended for
use in the diagnosis . . . treatment, or prevention of
disease."
A solid argument
Parties seeking to change a state's taxation of test strips
may proceed legislatively or judicially. However, successfully
lobbying to enact legislation exempting test strips is likely to be
difficult, due to the large negative fiscal impact on a state's
budget. To proceed judicially, a retailer must either challenge a
sales tax assessment on test strip sales or request a refund of
sales tax previously collected and remitted on such sales.
As discussed, litigants in states adopting the SSTP's
"drug" definition have a solid argument that test strips
constitute drugs exempt from sales-and-use taxation when provided
pursuant to a prescription. However, a successful judicial
challenge will typically produce no economic advantage to a
retailer, unless they challenge a significant sales tax audit
assessment on test strip sales, nor would any real competitive
advantage materialize, since all retailers would benefit from a
favorable ruling.
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guide to the subject matter. Specialist advice should be sought
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The Internal Revenue Service has recently published an IRS Large Business & International Directive, which updates an earlier directive to field agents addressing the examination of capitalization and repair costs issues.
A state cannot include income in the apportionable base and then exclude the receipts and related factors that generated that very same income from the apportionment formula.
