Answering healthcare providers’ indirect tax FAQs

Delivering excellent patient care is the primary focus of healthcare providers. However, indirect taxes on items used for that care can sometimes create challenges. As a Product Manager, I hear first-hand from our customers about the specific challenges they face in tax compliance. To help you better understand, I’ve answered some FAQs on the topic. 

Let’s start with the basics. What do we mean when we say medical items sold to healthcare providers?  

Medical items sold to healthcare providers could be diagnostic equipment such as EKG equipment, MRI equipment, or pulse oximeters as well as patient treatment items such as orthopedic traction supplies, pacemakers, and prosthetics. These are business-to-business items (B2B) used in the healthcare setting, not anything you or I would buy at grocery store or pharmacy for home healthcare use. 

What companies or organizations need help with indirect taxes on healthcare items? 

Usually when people think of healthcare providers, global hospitals and systems or long-term care centers come to mind. However, there are also outpatient medical facilities and physician’s offices that purchase medical equipment, wholesalers of medical equipment, and group purchasing organizations (GPOs).  

What’s interesting is that usually companies with a high number of employees who could become sick or injured on the job — think manufacturing, distribution, and logistics facilities — use items such as face masks, heating pads, non-surgical gloves, and even hospital beds and bed rails. These organizations are also subject to pay tax on those items as well. Additionally, they may be eligible for reduced rates or exemptions if they meet the definition as a healthcare provider.  

What makes indirect taxes for healthcare unique? 

In this space, indirect tax is definition driven, meaning there are a whole host of nuances that impact what the tax rate will be. This includes whether the item is intended to affect the structure or function of the body; if it’s used to treat an illness, injury, or a part of a limb or internal body part; whether it’s disposable (single use vs. reusable); and even if a replacement part is treated for tax purposes like the original item.  

For example, a catheter will be taxed based on various specifications such as size and material used. Different tax rates may apply depending on the type of medical procedure a catheter is used for. Fun fact, Vertex supports more than 30 taxability categories for catheters — and that’s just one instrument. Think of how many different medical items healthcare providers use daily (and we have now covered this globally), so it is a lot of data to help medical equipment manufacturers, distributors, and healthcare organizations get it right.  

Why is it essential to accurately account for and pay taxes in the healthcare industry? 

Tax compliance is an obvious reason; healthcare providers want to avoid audit fines and penalties. But also, what makes this industry unique is that there are many reduced tax rates and exemptions. Healthcare is considered essential by many taxing authorities. Many healthcare providers hire third-party advisory professionals to help reclaim overpaid taxes because they were charged the standard rate by the manufacturer. I have heard of situations where companies go back two or three years in their records to reclaim between $20,000 to $200,000 per healthcare location. Imagine if they used that money for other healthcare purposes. Reclaiming overpaid taxes adds to administrative strain in terms of both time and resources. More than once, I have heard that submitting a refund claim for taxes has spurred an audit by the same authority. If a healthcare provider can get it right up front, they avoid both the administration and fees for the refund claim and they may avoid an audit. 

How is Vertex helping healthcare providers better manage tax obligations?  

Taxation of healthcare items is complex and keeping track of different rules and rates is not something healthcare providers, with limited time and staff, want to take on. To help, we offer Vertex O Series for Medical, which provides accurate tax content to reduce risk and increase efficiency throughout the buying, selling, and billing lifecycles. Vertex O Series for Medical has over 400 global taxability categories for medical equipment, devices, and supplies sold to healthcare providers. 

What makes Vertex O Series for Medical different from other options in the market? 

Vertex O Series for Medical stands out because of its breadth and granularity. Our content covers an extensive range of items used daily in healthcare settings to meet our customers' complex tax requirements. Vertex O Series for Medical is powered by our extensive research department, increasing accuracy in upstream processes to reduce negative impact downstream impacts like costly reclaim, audit defense, and adjustments. 

How can healthcare providers learn more about it? 

Navigate to our Vertex O Series for Medical page to learn more. Additional information can also be found in one of my recent blogs - Taming tax complexity in the medical equipment, devices & supplies segment.

For a deeper dive, don’t miss our upcoming webinar on August 22, where we’ll discuss strategies for overcoming indirect tax challenges in the medical equipment industry. This is a great opportunity to connect with industry experts and explore how Vertex can help streamline your tax processes.