Occasionally our firm will receive a phone call from a doctor that goes something like this, “I just got a notice from the State Department of Revenue telling me I am going to be audited for sales and use taxes. I’m a doctor. This doesn’t apply to me, does it?” Unfortunately, it does apply, unless you are registered as a governmental or charitable organization.
Virtually every medical and dental practice in the Commonwealth of Massachusetts (and the State of Connecticut) should be registered for state sales and use taxes and should be filing returns, at least annually, and in some cases, more frequently. When first forming the practice you should register for sales and use tax at the same time you are registering for state withholding and employment taxes.
Here are some commonly asked questions on this subject:
What is “use tax”? Most people know that they must pay a sales tax (Massachusetts 5%, Connecticut 6%) on certain items and services at the time of rental or purchase, but aren’t familiar with the term “use tax.” A use tax is the same as a sales tax, except that it is not collected nor remitted by the seller at the time of purchase because of jurisdictional issues. Rather, it must be reported by and remitted by the purchaser. Use taxes are most often due on sales or rentals of certain tangible property items (i.e. equipment and computers) and services purchased through mail order catalogs or over the internet from out-of-state vendors which are shipped into your state of business or residence where they are used or consumed.
It also applies in instances when you physically purchase an item in another state and then bring it back into your state (i.e. from Connecticut to Massachusetts). Even if the other state charges you a sales tax at the time of purchase, you may still be liable to report and pay the difference, if any, between the use tax rate in your state and the sales tax assessed in the state where you purchased the item. For example, if you purchased an item of furniture in Massachusetts, paid the 5% sales tax and then brought it into Connecticut, you are liable for a 6% Connecticut use tax but would be eligible for a credit for the sales tax paid in Massachusetts, and therefore, only required to remit the difference of 1%.
What items are taxable? It varies by state. A good rule of thumb is to ask yourself if the item or service would be taxable if you purchased it in your locality. If the answer is yes, then consider it subject to use tax. Both Massachusetts and Connecticut publish guides to sales and use tax which will enumerate certain items that are taxable and tax-exempt but these, unfortunately, are not all-inclusive. A listing of medical, dental and optical equipment, supplies, drugs, and services that are taxable versus exempt, can be found on the internet. In medical and dental practices, furnishings, equipment, forms, and office and medical supplies are often purchased from out of state vendors who do not charge a sales tax. The tax for these purchases can be much higher than you expect.
We recommend reviewing each invoice from out-of-state vendors and making a list of the date, vendor, item or service, sales price and sales tax paid if any. This will facilitate determining the use tax due and the frequency with which you need to file. Most small- to medium-sized practices need only file annually.
What if I don’t file? If you don’t file, you are exposing yourself to serious financial penalties. In Massachusetts, the penalty for failure to file a timely return is 1% of the balance due per month, up to a maximum of 25%. In addition, there is a penalty for late payment of ? of 1% of the unpaid tax per month, up to a maximum of 25%. Also, interest will be charged at the federal short-term rate plus four percentage points, compounded daily. There are other costs as well, including tying up your support staff for hours and sometimes days, pulling past records and invoices. You will also incur professional fees for representation before the taxing authorities.
How far back can I be liable? If you file regularly and timely, Massachusetts auditors will usually limit the audit to three years. However, returns may be audited for up to six years if you understate by more than 25% the tax due on receipts that should have been reported. There is no limitation on the period for which the Mass DOR may request records if you fail to file a return or file a false or fraudulent return. However, as a policy, Massachusetts will only look back seven years.
Must I file a return even if no tax is due? Yes. Just enter zero in the appropriate places. Filing each period is necessary for the DOR’s record keeping purposes. It can also limit the look back period and reduce exposure to penalties in the event of an audit.
What are my chances of being audited? If you have been filing, reporting and paying use taxes on a regular timely basis, your chances of audit are minimal. If however, you have not filed, it is probably just a matter of time before you are contacted. Both Massachusetts and Connecticut are vigorously pursuing nonfilers and are much more technologically equipped to identify businesses in each state that have not reported.
Am I subject to sales tax as a vendor? You may very well be. Many practices are venturing into ancillary services and products that are subject to sales tax and you should check with your CPA if you are going to offer these. Examples of taxable items include nonprescription optical products and accessories, nonprescription medication, vitamins and weight loss aids to name a few. As mentioned earlier, Massachusetts publishes various lists detailing items that are taxable or exempt from sales tax.
Sales and use taxes are becoming more of a certainty for medical and dental practices. With new technology available to regulatory authorities it is a pay now or pay much more later situation. If you have not yet registered and filed, it behooves you to do so sooner rather than later.v
James B. Calnan, CPA is partner-in-charge of the Health Care Services Division of Meyers Brothers Kalicka, P.C., in Holyoke. Certified Public Accountants and Business Consultants; (413) 536-8510