Were medical-item purchases exempt from Texas sales tax merely because Medicare or Medicaid funded or reimbursed them?

Plain-English summary

The requester argued that purchases made by or for Medicare- or Medicaid-covered patients should be exempt because those programs were federally funded.

The Comptroller rejected that argument. The tax was imposed on the consumer of the taxable items—the patient or health-care provider depending on the circumstances—not directly on the United States. The federal government did not consume the items.

The letter cited Hearing No. 22,906, which had rejected the same argument from a health-care service provider, and United States v. New Mexico. It separately noted that certain drugs, medicines, and medical devices were exempt under Rule 3.284 regardless of Medicare or Medicaid funding.

What this means for you

The payment source did not create a blanket exemption. A seller or provider still had to determine whether the particular medical item had its own Texas exemption and who was the consumer in the transaction.

Common questions

Did Medicare or Medicaid funding automatically exempt a purchase? No.

Why was federal immunity unavailable? The tax was imposed on the patient or provider consuming the item, not directly on the United States.

Could a medical item still be exempt for another reason? Yes. The letter said certain drugs, medicines, and medical devices were exempt under Rule 3.284.

Did an Illinois tax opinion control? No. The Comptroller said the Illinois opinion was based on Illinois law, while this answer applied Texas law.

Citations and references

• Texas Comptroller Hearing No. 22,906 — same Medicare/Medicaid funding argument
• United States v. New Mexico, 451 U.S. 720 (1982) — federal tax-immunity authority cited by the letter
• 34 Tex. Admin. Code Rule 3.284 — drugs, medicines, medical equipment, and devices

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9104L1106E01

Original ruling text

April 25, 1991

Dear ***:

Thank you for your recent letter. As I understand it, you
request our opinion that purchases made by and for patients covered by Medicare
or Medicaid should be exempt from Texas sales and use taxes because Medicare
and Medicaid are federally funded programs.

It is our position that the tax imposed in this situation is
not imposed directly upon the United States, but upon the consumer (either the
patient, or the health care provider, depending on the circumstances) of the
items subject to tax. The federal government does not consume the taxed items.

I have attached an edited copy of Hearing No. 22,906, in
which the Comptroller's Administrative Law Judge reached the same conclusion,
based on an identical argument from a health care service provider regarding
Medicare and Medicaid. The judge cites U.S. v. New Mexico, 451 U.S. 720
(1982), a United States Supreme Court decision that supports our position that
this is not a tax upon the United States.

The Illinois Department of Revenue no doubt rendered its
opinion based on Illinois law. This opinion is based on Texas law.

Certain drugs, medicines, and medical devices are exempt from
Texas tax, in any event. See enclosed Rule 3.284.

This opinion is based on the facts presented. Different
facts, though similar, might led to different answers. If you have further
questions, feel free to write or call 1-800-252-5555. My direct extension is
3-3889.

Sincerely,

John Christian
Attorney
Tax Administration