Effective August 1, 2014, hospitals, doctors, and consumers can now purchase DME and prosthetic devices without Alabama state or local sales tax if these items are purchased under a prescription and are billed to Medicare or Medicaid. This includes rentals and purchases of the DME. DME is equipment that can stand repeated use and is to serve a purpose for medical reasons and is appropriate for use in the home. This may include medical beds, walkers, crutches, special chairs, monitors, etc. Also covered are any “single use” disposable items that are connected to these devices, such as masks and tubing. Prosthetic devices include items that replace all or part of a limb or body part or function of the body. This can include bone screws, artificial knees, artificial hips, and artificial shoulders. It can also include items such as urinary catheters, catheter supplies, ostomy bags and supplies, and certain type of wound care supplies.
The exemption is found at Alabama Code Section 40-9-30(d). To be exempt, the DME or prosthetic device must be purchased under a valid prescription and be billed to Medicare, Medicaid, or a health benefit plan. This process may work well when it concerns items of DME that are normally purchased or rented directly by the patient who has some personal connection with the vendor and may have the ability to direct that these items be billed directly to Medicare or Medicaid. When it comes to prosthetic devices, however, the process of claiming this exemption by a hospital or surgical centers may not be so easy. From a hospital perspective, every prosthetic device or implant is administered under a prescription or ‘order’ that the doctor enters into the patient’s chart and which becomes part of the medical record. Depending on the nature of the medical procedure, hospitals can acquire prosthetic devices in a several different ways.
Some common items, such as bone screws, are purchased in bulk and are removed from inventory and billed to the patient at the time of the medial procedure. Screws come in different sizes and hospitals generally have a sufficient supply on hand for use in surgery. The same can be said for coronary stents. Many hospitals will purchase stents in bulk so that they have various sizes on hand at the day of surgery. Once the correct size is determined by the doctor, the correct stent is removed from inventory and is charged to the patient. Sometimes these items are owned by the hospital at the time of the procedure but they are often sold “on consignment” from the supplier who bills the hospital for the stent after the procedure is completed. The same procedure can apply when hips and knee joints are replaced. Because of the similarity in body size, hospitals often have an inventory of these joints on hand and use the one that best fits the patient. From experience in working with hospitals, it is not very common for prosthetic device to be purchased specifically for a patient in advance of the procedure. I have never seen a situation where a prosthetic device used in the hospital was billed directly to a patient.
From a hospital’s perspective, they have no idea at the time they purchase these prosthetic devices which will ultimately be billed to Medicare or Medicaid. As such, they will either need to pay tax on all of their purchases and then attempt to seek a refund from the state of Alabama on those items that are billed to Medicare or Medicaid or purchase all items exempt from tax and then accrue Alabama use tax on the cost of items not billed to Medicare or Medicaid. In fact, the tax paid on these prosthetics is paid by the hospitals and passed through to the insurance company or patient.
While I applaud the Alabama legislature for finally adopting this exemption, the administrative mechanics of how certain parts of this exemption will work could be very tedious. I see this becoming a very challenging issue for hospital and surgical centers that purchase prosthetic devices for implant into a patient. I welcome your opinions, comments and questions!
Other recent “Alabama (AL)” posts by Ned Lenhart, CPA:
- Alabama DOR Withdraws Amendment to Tax Digital Transmissions
- “Digital Transmissions” Subject to Alabama Rental Tax! (Update)
- Alabama Caterers: Service Charges Are Taxable!
- Alabama's "Non-Nexus Use Tax Remittance" - Will Flat Tax Fall Flat?
- Alabama Governor Proposes Sales Tax Increase to Balance Budget!