When were nonmedicine medical supplies furnished by hospitals under Medicare or California medical assistance exempt?

Plain-English summary

The inquiry concerned hospital-furnished medical supplies that were not classified as medicines under the rule then in effect.

For Medicare, the contract and direct payer controlled. If the hospital contracted with the United States and the government paid the hospital directly, the sale was exempt to the extent of the federal payment. If the patient contracted with and paid the hospital, the sale was taxable even when the United States later reimbursed the patient in whole or part.

The letter found no comparable exemption for supplies furnished under California's Medical Assistance Program. Those sales were taxable whether the patient, county, or state made the payment.

What this means for you

Hospitals, medical suppliers, billing teams, and tax advisers

Separate the patient's contract from the government's contract and identify who pays the hospital directly. Reimbursement after a patient purchase did not create a federal sale.

Common questions

Q: Was every Medicare supply exempt?

A: No. Only the portion directly paid under a hospital contract with the United States was exempt under the letter.

Q: Did later federal reimbursement exempt a patient-paid sale?

A: No.

Q: Were California medical-assistance supplies exempt?

A: No, under the historical program rules described.

Citations and references

• California Welfare and Institutions Code §§ 14000–14157 and 15000–15200
• Sales and Use Tax Ruling 22, as described in the letter

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 505.0820
• Original supporting opinion: 505.0820 PDF

Original ruling text

505.0820

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

August 22, 1966
[G]
Certified Public Accountants
XXX --- ----- ---, -- XXXXX
Gentlemen:
This is in reply to your letter regarding the application of sales tax with respect to “medical supplies” furnished by hospitals to patients who receive assistance under the Medicare Act and the California Medical Assistance Program. We understand from your inquiry that the medical supplies about which you inquired are not “medicines” as defined in sales and use tax ruling 22. In reply to your specific inquiries, if such supplies are furnished to patients under the Medicare Act, pursuant to contracts entered into between the hospital and the United States Government, and the government makes direct payment to the hospital in whole or in part for such supplies, the transactions are sales to the United States and are exempt from tax to the extent of the payment by the United States. If such supplies are furnished to the patients under the Medicare Act pursuant to contracts entered into between the hospital and the patients, and direct payment is made by the patients to the hospital, the transactions are taxable sales to the patients, notwithstanding the fact that the patients may be subsequently reimbursed, in whole or in part, by the United States Government for such expenditures. There is no exemption under the law with respect to such supplies furnished to patients under the California Medical Assistance Program, as set forth in Chapters 7 and 8 of the Welfare and Institutions Code (§§ 14000-14157 and 15000-15200). Accordingly, the sale of such supplies to patients under the California Medical Assistance Program is subject to sales tax whether payment is made by the patient, the county, or the state. Very truly yours,

George A. Trigueros
Associate Tax Counsel