Understanding the Rules – A Primer on Massachusetts Sales and Use Tax for Medical Practices

Massachusetts, like many other states, has an intricate set of rules regarding the collection and remittance of sales and use tax on the sale or resale of tangible personal property.
In this article, we will explore some of the areas that may challenge the typical medical practice on a day-to-day basis.
In general, Massachusetts levies a sales and use tax on retail sales of tangible property. The current sales-tax rate within the state is 6.25{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}. A physician’s services are not subject to these taxes; however, other sales of tangible items within a practice may be subject to the collection and remittance of Massachusetts sales and/or use tax.
It is important to review the applicable tax statutes and rulings to determine what does or does not require the withholding/collection of sales tax.
It is generally understood that a sales tax is collected by the seller on the purchase of many tangible items. Businesses located within the state and other businesses that have nexus (some level of legal connection with Massachusetts) are required to collect and remit this sales tax on a timely basis, usually monthly.
Use tax, on the other hand, occurs when a purchase is made outside of the state’s jurisdiction when the property purchase would have been subject to sales tax within Massachusetts but no tax was collected by the vendor. In such cases, the taxpayer is obligated to remit the full tax to the state. Often, purchases over the Internet will not have sales tax collected by the vendor.
For example, if your practice purchases $5,000 in computers from an online vendor located in California and the vendor does not charge you sales tax at the time of your transaction, you are then obligated to submit a tax of $312.50. This would also apply to medical instruments and some machinery, office supplies, and other items you may purchase from an out-of-state vendor.
Generally, all sales of tangible property are subject to the sales tax, unless specifically exempt (Mass. General Laws, Chapter 64, Section 6[l]). There are exemptions for purchases by the government and not-for-profit organizations. Additionally, there are exemptions for prescription drugs and medical equipment.
While prescription drugs are easily understood, there are some gray areas. For example, as long as prescribed by a doctor, many over-the-counter items can be exempt from tax, such as aspirin to treat a medical condition, certain ointments, etc. (see Massachusetts Department of Revenue Directive [MADOR] 86-32). Medical devices used to treat illnesses (but not diagnose illnesses) are exempt, again, as long as there is a written prescription by a medical professional.
Examples would be the purchase of eyeglasses, crutches, and canes. If they are prescribed, an exemption is allowed against the sales tax, but purchased off the shelf without a physician’s note, these would be taxable. An easily understood example would be the purchase of off-the-shelf reading glasses from a drugstore (taxable) and prescription glasses (tax-exempt).
Of note, some important items that are subject to the sales and use tax are medical instruments purchased for use by doctors and staff (Letter Ruling 85-57), supplies that are used to diagnose an illness (Letter Ruling 88-4, regarding blood diagnostic products), and protective clothing used for work (MADOR Directive 99-3).

Statute of Limitations and Other Timing Issues
Similar to other areas of tax law, the statute of limitations dictates how and when the state can assess the sales and use tax. Generally, there is a three-year limitation from when the return was due for the state to audit the return. If there is a significant understatement (more than 25{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the gross revenue), the audit period would extend to six years. In order to have the statute of limitations begin, a return must first be filed.
This is why, whether you owe a tax or not (be it sales or use tax), it is recommended that a return be filed at least annually in the case of a business-use tax return showing that no tax is due.
There is a recent change regarding the non-filing of these returns. Beginning in January 2011, there will only be a seven-year look-back period for assessing the tax, whether or not a return was filed. This is a concession to taxpayers by MADOR. In the past, there was no limit to how far back MADOR could look if no return was filed.

Retention of Records
Based on the statute of limitations noted above, records should be retained at least as long as the audit period is open. In this case, that would generally be retaining records at least six years and following the recommendation that an annual use-tax return be filed each year to begin the statute running. Records to retain would be sales records, copies of filed sales and use tax returns, copies of tax payments, bank statements showing proof of payment, business income-tax returns to show total revenues reported, and reports that distinguish taxable sales from exempt sales related to the sales tax.
This topic is a very complex area of tax and is fraught with peril. Consider seeking the recommendation of a tax professional to sit with you and review your situation, particularly because each situation is unique.