Pharmacists certainly know the high cost of glucose test strips. A January 2010 Diabetes Forecast article published by the American Diabetes Association noted that the yearly cost of test strips to an individual typically range from $104 to $1,820, depending upon the frequency of testing. Some states exempt test strips from sales tax when they are purchased by individuals, but these states pay a high price. If all the states with a sales tax imposed their tax on test strips sold to individuals and medical providers, the resulting sales-and-use tax revenue would total approximately a quarter of a billion dollars per year.
SSTP states all over the map
Twenty-four states currently participate in the Streamlined Sales Tax Project (SSTP), which seeks to simplify sales tax laws in order to overcome a U.S. Supreme Court decision that state sales-and-use tax systems are so complicated that states cannot justifiably require out-of-state catalog and internet sellers to collect such tax unless the sellers have a physical presence within the state.
To reduce sales-and-use tax complexity among states, the SSTP has developed uniform definitions — such as the definition of a "drug." However, neither the SSTP definitions nor the healthcare item lists related thereto define or otherwise address diabetic test strips, leaving SSTP states to independently determine the taxability of the test strips, with varying results.
SSTP states such as Arkansas, Georgia, Indiana, Iowa, Kentucky, Minnesota, New Jersey, North Dakota, Ohio, and Wisconsin, maintain specific exemptions for test strips. Kansas, Nebraska, North Carolina, South Dakota, Utah, and West Virginia exempt the test strips if they are purchased with a prescription.
Michigan and Vermont classify test strips as a component of blood glucose meters, which constitute exempt durable medical equipment in those states. Rhode Island exempts test strips "as they are considered used in the diagnosis of a disease" under the Streamlined definition of a drug.
Other SSTP states tax test strips. Oklahoma imposes tax unless reimbursed under a Medicaid or Medicare program, while Tennessee, Nevada, and Wyoming tax test strips sold to individuals on the basis that such items do not qualify as exempt durable medical equipment.
Nevertheless, because SSTP states exempt prescription drugs purchased by individuals, an argument exists in SSTP states taxing test strips that such test strips constitute exempt drugs when purchased by an individual holding a prescription.
Test strips typically consist of a plastic test strip with a small spot impregnated with glucose oxidase, or some other substance, which undergoes a chemical reaction when mixed with glucose in a blood sample. As defined by the SSTP, a "drug" generally includes "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;'... [i]ntended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease." According to this definition, a test strip should constitute a drug because it (1) contains "a compound, substance or preparation, other than food and food ingredients, dietary supplements or alcoholic beverages," and (2) with regard to diabetics, it is obviously "intended for use in the diagnosis . . . treatment, or prevention of disease."
A solid argument
Parties seeking to change a state's taxation of test strips may proceed legislatively or judicially. However, successfully lobbying to enact legislation exempting test strips is likely to be difficult, due to the large negative fiscal impact on a state's budget. To proceed judicially, a retailer must either challenge a sales tax assessment on test strip sales or request a refund of sales tax previously collected and remitted on such sales.
As discussed, litigants in states adopting the SSTP's "drug" definition have a solid argument that test strips constitute drugs exempt from sales-and-use taxation when provided pursuant to a prescription. However, a successful judicial challenge will typically produce no economic advantage to a retailer, unless they challenge a significant sales tax audit assessment on test strip sales, nor would any real competitive advantage materialize, since all retailers would benefit from a favorable ruling.
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.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.