Being in a business that relies on third-party reimbursement can create some interesting problems. One of those is state sales tax. If you are in a state, such as Texas or Virginia, that recognizes that the reimbursement system does not cover sales tax and therefore exempts all HME from sales tax, you may not give it much thought. But in other states, providers find sales tax can add up quickly and they must either absorb the cost in their profits, or pass the cost on to their customers.

In some states, such as Kansas and New Jersey, items obtained with a physician’s prescription are exempted. But in other states the exemptions are less clear-cut. In California, for example, diabetic test strips supplied by a pharmacy are tax-exempt, but taxable when sold by an HME provider.

Finally, in a few states HME sales are taxed by the state regardless of whether reimbursement will cover the cost of the tax. The HME associations in four of those states—Washington, Ohio, South Carolina, and Nevada—are working to change the rules governing their industry by introducing legislation to exempt HME from sales taxes.

Washington
Washington already has a host of HME items that are exempted from sales tax including insulin, prosthetic devices and components, and, when prescribed by a physician, orthotic devices, oxygen, oxygen concentrator systems, oxygen enricher systems, liquid oxygen systems, and gaseous, bottled oxygen systems. However, with those items that are taxed, often the customer, not the dealer, bears the cost.

In January 2001, the Pacific Association for Medical Equipment Services (PAMES) helped to introduce bills in the Washington State legislature to exempt all HME from sales tax. However, the bills—HB 2739 and SB 5563—failed to pass and were reintroduced in January 2002.

The motivation for reintroducing the legislation, a project the group has been working on for more than 3 years, is a matter of equity. “Our patients have to pay this tax, often out of their own pockets,” says Jan Wallace, branch manager for Providence Home Services, Olympia, Wash, and secretary-treasurer of PAMES. “Many of the insurance [providers] are eliminating HME benefits and so that just increases the expense of these necessary items. There is an equity issue also within our state. Washington state sales tax has always been based on taxing luxuries, not necessities. And then, of course, there is the issue of all the confusion for the patients, because of the differences of what is and is not exempt. Even our State Department of Revenue has not been very clear on what is exempt.”

The tax bill is not the only issue of equity. “The Northwest is largely managed care, and so managed care demands discount business,” says Tom Coogan, a PAMES director and vice president of Care Medical Equipment Inc, Portland, Ore. “Taxation in the State of Washington goes from 8.7% to 8.9% depending on the counties, so the provider of service not only is stuck with providing discounted business, but then also has to pay that 8.9% additional to the state, so it is almost like a double-dipping discount for the managed care organizations and they use it.”

Although the state will lose money by eliminating the tax, in the long term, the repeal of the tax on HME could save the state administrative costs. As a result, the elimination of the tax has won the support of the Washington State Department of Revenue, Wallace says.

PAMES is working with the Department of Revenue in an effort to minimize the fiscal impact of the bills, which is critical because the state has felt the bite of the current economic downturn. “We have been working with the Department of Revenue over the last 2 years to identify a realistic fiscal impact,” Wallace says. “It has been very much a collaborative situation. The Department of Revenue has been very, very helpful.”

Complicating matters in Washington is that, when the state purchases HME items, it pays itself tax. These numbers have not been broken out from the numbers PAMES has been working with. Preliminary numbers show that the tax impact from the two bills will be about $4.9 million, according to Wallace, about 35% of which will be paid by the State of Washington.

The bills have broad bipartisan support, Wallace says. “Most of our legislators that we have met with have told us that they think this is a good bill,” she says. “Everyone knows that it is the right thing to do. But just because it is the right thing to do and even though the fiscal impact is considerably lower, it is a very tough year budget wise.”

Passage may come at a price to HME providers. In order to keep the fiscal impact of the bill down, not every HME item, including incontinence and wound care supplies, will be exempted. However, if the majority of items that fall under HME become tax exempt, it may prompt the Department of Revenue to eventually simplify their tax code by making all HME tax exempt, Wallace says.

The legislative session ended without passage of the exemption, but Wallace blames this on the economic climate of the state. Undeterred, PAMES will have the bill reintroduced in 2003.

Ohio
While the dealers in Washington try to eliminate their tax burden, dealers in Ohio are trying to establish what is and is not taxable. Since the early 1990s, this has been one of the tasks of Ohio Association of Medical Equipment Services (OAMES) executive director Kam Yuricich. “There was confusion in the industry and we found people had difficulty interpreting the tax law, so we scheduled a meeting with the Ohio Department of Taxation (ODT) representatives to get clarification,” she says. “That started the whole chain of events. What we thought was going to be a very straightforward request was very difficult to get from the department. They were cooperative, they met with us, but we never got very specific answers to the questions [on what was taxable].”

The enforcement of tax laws covering HME dealers in Ohio tends toward the kafkaesque, with no one, including field tax auditors, in complete agreement as to what is taxable. “Decisions are being made more through the audit process than through the ODT [issuing] something that is proactive...with that determination made beforehand for the businessperson to have clarification on whether he or she is supposed to be collecting tax on an item,” Yuricich says. Adding to the frustration is that the ODT has yet to issue a comprehensive list of taxable and tax-exempt items.

The problem in Ohio lies not so much with the ODT, but with the law itself, Yuricich says. “The Ohio law is written in such a way that it actually lists in statute certain items that are exempt, but there is a phrase—‘devices to aid human perambulation’—that is the source of the confusion because it leaves way too much room for interpretation,” she says.

Along with tax relief, it is this confusion that the recently introduced HB 457 is designed to rectify. “It is important to our home medical companies because they hold too much risk in operating in an environment that does not have a clear tax code,” Yuricich says.

The bill’s sponsor, Rep Geoffrey Smith (R-Columbus), became aware there was a problem when he was contacted by OAMES. He agrees with Yuricich that the issue is a matter of fairness. “This is an inconsistent tax and it places an undue burden on small business owners all over Ohio—we are talking 450 companies that employ over 9,000 employees,” he says. The bill’s opponents point out that unfair tax laws can be contested in court and resolved that way. However, filing a lawsuit can be more expensive than simply paying the unfair tax. “Why not change the statute instead of trying to handle each one of these claims individually?” Smith asks.

As in Washington, the problem with the Ohio HME tax relief bills in the past—all of which were prepared with the help of OAMES—was the question of fiscal impact, not support. Legislators agreed the tax cut made sense, but were afraid that the state could not afford it.

Yuricich says the goal with HB 457 is to keep the fiscal impact as low as possible, somewhere between $1 million and $2 million. “What I like about the process this time is we are doing extremely good preparation work, so we are prepared to address any issues that come up,” she says. “We will have real numbers from real Medicare and Medicaid [cases], and hopefully [we] can reassure [the legislature] that the financial impact is minimal to the State of Ohio’s budget.”

Unlike the Washington bill, Ohio’s HB 457 is still very much alive and is currently being reviewed by the Ohio House Ways and Means Committee.

Even though HB 457 is lingering in committee, OAMES received some good news from the Ohio tax commissioner Tom Zaino. Yuricich and Smith met with Zaino on May 9. Yuricich says that the meeting was positive with Zaino agreeing in principle to turn over the list of taxable and tax-exempt items. Even with the promise of the list—which could be in the hands of OAMES by the end of June—Yuricich says the ultimate goal remains the passage of HB 457.

South Carolina
Fiscal impact has stopped the South Carolina Medical Equipment Services Association from pursuing its tax relief efforts in the current session of the South Carolina State legislature. The state is currently looking at a budget shortfall of $500 million, according to Bobby Horton, executive director of the association. “[The Legislature] is in session working on the budget for 2002-2003 and it doesn’t look any better than the current one. In fact it may look worse in some areas,” Horton says. “As a practical matter, we thought it would shoot our credibility in the head if we tried to eliminate more [tax] income. The best [tax exemption] figure we can come up with is $6 or $7 million in [tax] revenue, which is a considerable amount of revenue [for the state to lose].”

According to Horton, because of the South Carolina budget shortfall, legislators will not sponsor tax-cutting legislation. “This happens to be an election year for everybody in the House of Representatives, so you cannot ask a guy to do something that is going to kill [his chances for reelection],” he says. “Your friends cannot help you if they are not up there after an election.”

In South Carolina HME dealers absorb the tax loss, Horton says. In addition, more than half the counties in the state have their own sales taxes, which are added onto the state rate of 5%.

As a result, although there will not be a bill on the Senate or House floor this year, the organization plans to continue to pursue sales tax exemption. “We are continuing to educate legislators about the inequity of it,” Horton says. “Those I have talked to are not aware. They just assume that you pass it on. They are not aware that DME dealers have to eat that.” Horton expects the tax exemption campaign to take at least 2 more years.

Nevada
Fortunately, not every state association has found its efforts to pass a sales tax exemption bill stymied. On May 31, 2001, Nevada Governor Kenny Guinn signed S 528 into law exempting sales tax on any medical device obtained with a prescription.

It was a hard-fought victory, says Rich Pozesky, executive director of the Nevada Association of Medical Products Suppliers. “We worked like hell,” he says.

The exemption from sales tax is only a partial victory in the continuing HME tax battle. The next fight is the repeal of use taxes on rented equipment, an issue that will be high on the association’s agenda when the Nevada legislature meets again in 2003. However, like most states, Nevada is experiencing a budget crunch that could make this new effort a hard sell. “We have to start our grassroots efforts if we are going to do it, probably when the summer’s over,” says Pozesky. “At that point we will make a decision on whether it is worthwhile to allocate the funds and spend the time and energy and money. If it is not going to go through, there is no sense doing it.”

Your Role
If you are concerned about a tax issue in your state and would like to suggest changes, start by contacting your state association. State association contact information is listed on the American Association for Homecare’s Web site at www.aahomecare.org/ membership/statedirectory3.html. 

C.A. Wolski is associate editor of Dealer/ Provider.