Tennessee Taxes On Diabetes

Previously published in Tennessee Taxes on Diabetes

Diabetes is generally recognized as one of the most costly chronic illnesses in the United States.¹ The American Diabetes Association estimates that medical costs associated with diabetes in Tennessee alone approached $2 billion during 2006.² Diabetic patients on average incur nearly two and a half times the annual medical expenses of a person without diabetes,¹ and the daily costs of supplies to monitor and regulate blood glucose levels, as well as to treat the overall effects of diabetes on the body, constitute a significant concern for many diabetics. While the Tennessee sales and use tax exemptions for insulin, insulin pumps, needles and syringes are beneficial in reducing the cost of diabetes, patients nonetheless face increased daily costs, because many items required to live with diabetes are not exempted from sales and use tax. Table 1 presents the taxable and non-taxable supplies used to treat diabetes.

Tennessee's application of sales tax on diabetes-related supplies imposes a substantial economic burden on many diabetics in Tennessee, and exempting test strips alone would result in significant savings. In a January 2010 article in the Diabetes Forecast, a magazine published by the American Diabetes Association, the author estimated that test strip costs ranged from $104 to $1,820 per year depending on the amount of testing by the patient.¹¹ Applying the mid-range of Tennessee's sales tax rates - 9.5 percent - the tax on the test strips would average between $9.88 and $172.90 per year per patient.

Fiscal notes prepared by the Tennessee Legislature also state that exempting test strips from sales tax in Tennessee would result in nearly $3.5 million in annual savings to diabetics. As introduced during the 2010 session of the Tennessee General Assembly, House Bill 2771 proposed to exempt only diabetic test strips, while House Bill 2901 proposed to exempt both test strips and testing equipment.¹² Although neither Bill became law, each Bill contained a fiscal note that estimated the decrease in revenue that would result if such a Bill were enacted as law. The estimated fiscal impact of the proposed exemption of test strips in House Bill 2771 was nearly a $3.5 million decrease in state and local option sales tax revenue.¹³ In regard to House Bill 2901, because the Tennessee Department of Revenue could not determine the total industry sales for all diabetic testing equipment and supplies, the fiscal impact was estimated as exceeding the nearly $3.5 million state and local tax decrease listed for House Bill 2771.¹⁴

As noted by representatives at the Tennessee Department of Revenue, both fiscal notes erroneously assumed that a sales tax exemption applied to test strips used by prescription in hospital settings.¹⁵ Applying this erroneous assumption, the Fiscal notes estimated that 40% of test strips sold in Tennessee were used by prescription in hospital settings and were therefore exempt.¹⁵ This error likely resulted in a significant reduction in stated fiscal impact of House Bills 2771 and 2901. While Department of Revenue representatives agreed that test strips sold to tax-exempt hospitals for use by such hospitals were exempt from sales and use tax, such representatives opined that no sales tax exemption applied to patient users.¹⁵ The percentage of test strips sold for use by tax-exempt hospitals is unknown. However, if the fiscal notes were recalculated to remove the presumption that 40 percent of test strips sold in Tennessee were exempt, a tax decrease of as much as $5.8 million could result by exempting test strips.

During the 2011 session, House Bills 564 and 1052 were introduced along with companion Senate bills to exempt test strips.¹⁶ The fiscal notes on both sets of bills were identical at a combined state and local revenue loss of nearly $6 million.¹⁷ All of the bills failed to make it out of committee.

Although none of the bills were enacted during the 2010 and 2011 sessions, the Legislature's adoption of Streamlined Sales Tax Project definitions in the tax code may nonetheless exempt test strips from sales and use tax. Tennessee currently exempts from sales and use tax the sale of drugs dispensed for human use pursuant to a prescription.¹⁸ In 2008, the Legislature adopted the Streamlined Sales Tax Project definition of the term "drug," which Tenn. Code Ann. § 67-6-102(35) now defines as a compound, substance or preparation and any component of a compound, substance or preparation, other than food and food ingredients, dietary supplements or alcoholic beverages:

1. Recognized in the official United States Pharmacopoeia, official Homeopathic Pharmocopoeia of the United States, Or official National Formulary and supplement to any of them;
2. Intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease; or
3. Intended to affect the structure or any function of the body

When purchased by an individual pursuant to a prescription, test strips should constitute an exempt drug for purposes of Tennessee sales and use tax. Specifically, the generally recognized design of diabetic test strips consists of a plastic test strip with a small spot impregnated with glucose oxidase, or some other substance, which undergoes a chemical change when mixed with glucose in a blood sample collected within the strip.¹⁹ Accordingly, a test strip constitutes a drug because it (1) contains "a compound, substance or preparation, other than food and food ingredients, dietary supplements or alcoholic beverages, " and (2) in regard to diebetics, is obviously "intended for use in the diagnosis ... treatment, or prevention of disease."²⁰

Although, as set forth above, test strips should constitute exempt drugs when sold pursuant to a prescription, the Tennessee Department of Revenue has thus far declined to recognize any exemption for test strips. Specifically, after the adoption of the Streamlined Sales Tax definitions, a Tennessee company asked the Department of Revenue if diabetic meters, lancets, lancet devices, diabetic strips and control solution were exempt when "[a]ll of the Taxpayer's customers are patients with a prescription for the equipment and supplies rented and sold." In Tennessee Letter Ruling No. 08-15, dated Feb. 27, 2008, the Department stated the following: Lancets, lancet devices, diabetic strips and control solution, are not included in any statutory exemption; therefore, they are taxable for purposes of the sales and use tax. Diabetic meters, or blood glucose meters, are durable medical equipment as defined by Tenn. Code Ann. §67-6- 102(29); however, a diabetic meter does not qualify for the exemption because it is not primarily intended "for home use" as required by Tenn. Code Ann. § 67-6-314(2) (Supp. 2007). Rather, a blood glucose meter is intended for use everywhere and is meant to be taken with the patient and used in any place the patient goes.²¹

Parties seeking to change the Department of Revenue's position regarding the application of sales and use tax to test strips have the option of proceeding legislatively or judicially. As recently proposed in the 2011 session of the Tennessee General Assembly, House Bill 564 also seeks to exempt the sale of diabetic test strips, lancets and diabetic urine test strips from sales and use tax.²² However, successfully lobbying to enact such legislative changes to the current taxation of diabetic supplies will likely be difficult given Tennessee's current budget constraints as legislation with large negative fiscal impacts are unlikely to gain support. In order to proceed judicially, a retailer would need to either challenge an audit assessment of sales tax on test strip sales or request a refund of sales tax previously collected and remitted to the Department on such sales. However, in instances where the retailer collected sales tax from customers, the tax code requires that the retailer challenging the tax issue tax refunds or credits to purchasers. Thus, a successful challenge through the courts would produce no economic advantage to the retailer. Furthermore, a retailer of test strips who chooses to litigate this issue would also not gain a competitive advantage since all retailers would be exempt if the courts ruled favorably.

Footnotes

1 American Diabetes Association Diabetes Statistics, http://www.diabetes.org/diabetes-basics/diabetes-statistics/ (last visited Jan. 20, 2011); Juvenile Diabetes Research Foundation International General Diabetes Facts, http://www.jdrf.org/index.cfm?fuseaction=home.viewPage&page_id=71927021-99EA-4D04-92E8463E607C84E1 (last visited Jan. 20, 2011).

2 American Diabetes Association Estimated Prevalence and Cost of Diabetes in Tennessee, http://www.diabetesarchive.net/advocacy-and-legalresources/cost-of-diabetes-results.jsp?state=Tennessee&district=0&DistName=Tennessee+%28Entire+State%29 (last visited Jan. 20, 2011).

3 Tenn. Ltr. Rul. 00-27 (Aug. 14, 2000); Maxwell Medical, Inc. v. Chumley, M2009- 1693-COA-R3-CV, 2010 WL 4024890 (Tenn. Ct. App. Oct. 12, 2010) (decided pursuant to the version of the Tennessee Code Annotated in effect between 2001 and 2003).

4 Tenn. Code Ann. § 67-6-314(7); Tenn. Ltr. Rul. 08-15 (Feb. 27, 2008).

5 Tenn. Ltr. Rul. 00-27 (Aug. 14, 2000)

6 Tenn. Code Ann. § 67-6-320(b)(1); Tenn. Ltr. Rul. 08-15 (Feb. 27, 2008). As stated in the Tennessee Department of Revenue's Healthcare Products List, dated January 1, 2008, no prescription is required in order for insulin to be exempt from sales and use tax.

7 Tennessee Department of Revenue Healthcare Products List (Jan. 1, 2008).

8 Ruled exempt by the Tennessee Department of Revenue in Tenn. Rev. Rul. 92-11 (July 30, 1992), Tenn. Rev. Rul. 97-37 (August 15, 1997), and Tenn. Rev. Rul. 97-06 (Apr. 10, 1997); Tennessee Important Notice 07-22, 12/1/07 (also considering insulin pumps to be exempt as prosthetic devices); Tennessee Department of Revenue Healthcare Products List 1/1/08 (listing insulin pumps as exempt). In addition, the Department, construing prior law, held in Tenn. Rev. Rul. 92-11 that glucometers could constitute exempt prosthetic devices "if used in connection with and necessary for proper use of an insulin pump".

9 Tenn. Code Ann. § 67-6-314(1); Tenn. Ltr. Rul. 08-15 (Feb. 27, 2008). The shoes are exempt as a prosthetic device; however, prior to the adoption of Streamlined Sales Tax definitions, shoes were specifically mentioned in the statute.

10 Tenn. Code Ann. § 67-6-102(73)(A) Defines "prosthetic device" to include a "supportive device" to "support a weak or deformed portion of the body".

11 Kelly Bunker, Blood Glucose Meters, DIABETES FORECAST, Jan. 2010, http://forecast.diabetes.org/magazine/features/blood-glucose-meters.

12 H.B. 2771, S.B. 2893, 106th General Assembly (Tenn. 2010); H.B. 2901, S.B. 3047, 106th General Assembly (Tenn. 2010). House Bill 2771 exempted "[t]he sale of test strips for blood glucose monitors and of visual reading and urine test stripes for diabetes", while House Bill 2901 exempted "[a]ny diabetic test equipment or supplies for human use".

13 Fiscal Review Committee, Fiscal Note HB 2771-SB 2893, 106th General Assembly (Tenn. 2010).

14 Fiscal Review Committee, Fiscal Note HB 2901-SB 3047, 106th General Assembly (Tenn. 2010).

15 Email from David Gerregano, General Counsel, Tennessee Department of Revenue, to Kirk Low, Certified Public Accountant (July 30, 2010, 13:41:00 CST) (on file with author); Email from Ray Todd, Taxpayer Services, Tennessee Department of Revenue, to Kirk Low, Certified Public Accountant (July 31, 2010, 09:46:00 CST) (on file with author).

16 H.B. 564, S.B. 338, 107th General Assembly (Tenn. 2011); H.B. 1052, S.B. 1064, 107th General Assembly (Tenn. 2011). House Bill 564 exempted "[t]he diabetic supplies of blood glucose monitor test strips, lancets and visual reading and urine test strips from the sales and use tax," while House Bill 1064 exempted "[d]iabetic testing supplies, including but not limited to lancets, test strips for blood glucose monitors and visual reading and urine test strips, sold pursuant to a prescription for human use".

17 Fiscal Review Committee, Fiscal Note SB 338-HB564, 107th General Assembly (Tenn. 2011) and Fiscal Review Committee, Fiscal Note HB 1052-SB 1064, 107th General Assembly (Tenn. 2011)..

18 Tenn. Code Ann. § 67-6-230(a). The Legislature adopted the Streamlined Sales Tax Project definition of the term "prescription", which Tenn. Code Ann. § 67-6-102(70) now defines as an order, formula or recipe issued in any form of oral, written, electronic, or other means of transmission by a duly licensed practitioner authorized by the laws of this state ...

19 See The Merck Manual of Medical Information, p. 969 (2nd Ed. 2003); Glucose Meter, http://en.wikipedia.org/wiki/Glucose_meter (last visited Jan. 25, 2011).

20 Tenn. Code Ann. § 67-6-102(35). This would not change the taxation of test strips for doctors and for for-profit hospitals. Tennessee Comp. R. & Regs. 1320-5-1-.26(1) states:

Hospitals and sanitariums are primarily engaged in the business of rendering services, and are the consumers or users of all tangible personal property or taxable services purchased for use or consumption in connection with the operation of the institution. The sellers of tangible personal property, other than prescription drugs or medicines, or taxable services to these institutions must collect from them the appropriate tax, but this provision does not apply to a hospital or sanitarium which is otherwise exempt from paying the Sales or Use Tax by virtue of its being a charitable or other like institution.

21 Tenn. Ltr. Rul. 08-15 (Feb. 27, 2008).

22 H.B. 564, S.B. 338, 107th General Assembly (Tenn. 2011).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.