Sales and use tax regulations present substantial challenges for life sciences companies due to the complex and specialized nature of their products and services. These taxes affect the sale, purchase, and use of goods and services, often creating complications for companies in pharmaceuticals, biotechnology, medical devices, and research.
Understanding R&D TAX CREDITS, EXEMPTIONS, and EXCLUSIONS available to life sciences companies is essential. It’s critical to verify that sales are for resale or qualify for exemptions, such as sales made for R&D or to hospitals, nonprofits, and government entities. Additionally, a robust use tax accrual procedure is vital, as many products are purchased and consumed during research rather than resold.
Non-compliance risks are high: missteps can lead to costly penalties, operational disruptions, increased regulatory scrutiny, and potential audits and fines. Partnering with tax professionals who understand the intricacies of life sciences taxation is crucial for maintaining compliance and mitigating potential risks.
Thompson Tax’s Three Most Important Rules of Engagement for Life Sciences Companies
- D.O.T.S. (Depends on the State) – Each state has its own set of rules. It is imperative to know the rules of each state where you are conducting business.
- Documentation! Documentation! Documentation! – Make sure to document all sales properly. Proper documentation is the key to positively responding to an audit.
- As new products are developed in this area, it may be important to obtain a legal opinion or Private Letter Ruling (PLR) for the state or states involved.
How Sales Tax Applies to the Life Sciences Industry
For life sciences companies, sales tax typically applies to:
- Tangible Products: Medical devices, laboratory equipment, and pharmaceuticals sold to customers.
- Certain Services: Digital services, including SaaS, digital goods, and other technology licenses, installation, maintenance, and repair services for equipment.
- Pharmaceuticals and Medical Devices: When acquiring medical devices and equipment off the balance sheet, beware of the specific rules regarding leases and sale and lease-back transactions.
- Prescription Drugs: Each state exempts drugs either by its product definition or to whom it is sold.
- Over-the-counter drugs and Nutritional Supplements: Taxability varies by state; some states tax over-the-counter medications, while others do not. The taxability of nutritional supplements is a difficult issue on its own and must be reviewed on a case-by-case basis, as labeling often determines taxability.
- Medical Devices: States do not necessarily follow the federal taxation rules of DME. The taxability of medical devices depends on their use and classification. Devices sold to hospitals or directly to consumers may be treated differently.
How Use Tax Applies to the Life Sciences Industry
For life sciences companies, use tax may apply to:
- Out-of-State Purchases: When equipment, supplies, or raw materials are purchased from out-of-state vendors without paying sales tax, use tax is due upon bringing those items into the state.
- Self-Produced Goods: If a company manufactures goods for internal use and does not pay sales tax on the materials, use tax may be due on the value of the goods.
Exemptions and Special Considerations
Research and Development Exemptions
Many states offer exemptions for purchases related to R&D activities. Life sciences companies engaged in research should explore these exemptions, which can include purchases for equipment, chemicals, and supplies used directly in research.
Manufacturing Exemptions
Companies that manufacture pharmaceuticals, medical devices, or other products may qualify for sales tax exemptions on machinery, equipment, and materials used in the manufacturing process.
Nonprofit Organizations
Life sciences companies that are nonprofit organizations may be eligible for sales tax exemptions on certain purchases. Proper documentation and exemption certificates are required.
Compliance and Record-Keeping
Importance of Accurate Records
Maintaining accurate records is crucial for compliance with sales and use tax regulations. Records should include:
- Purchase invoices and receipts
- Resale and exemption certificates
- Documentation of out-of-state purchases
- Contracts and billing statements
Audits and Penalties
Failure to comply with sales and use tax regulations can lead to audits, fines, and penalties. Regularly review your tax practices and consult with tax professionals to ensure compliance.
Common Mistakes Encountered in the Industry
- Not reviewing state statutes to take full benefit of R&D tax credits for sales, use, income, and property tax
- Not reporting use tax or having a use tax accrual process in place
- Not collecting and reviewing Resale/Exemption certificates on a regular basis
- Not obtaining a PLR for new drugs and processes before they come to market
Thompson Tax Is Here to Help
Staying up to date with sales and use tax regulations is essential for life sciences companies to avoid costly mistakes and ensure compliance. Understanding how these taxes apply to different aspects of your business, from selling medical devices to engaging in R&D activities, will help you manage your tax obligations effectively.
Reach out to Thompson Tax today for specific guidance and advice tailored to your Life Science company’s specific needs. We are just a phone call away.
FAQs on Sales and Use Tax for Life Sciences Companies
What is the difference between sales tax and use tax?
- Sales Tax: Collected by the seller at the point of sale on the purchase of goods and services.
- Use Tax: Applies to the purchaser for use, storage, or consumption of goods when sales tax has not been paid, typically on out-of-state purchases.
Do I need to collect sales tax on medical devices?
The taxability of medical devices depends on their classification and use. Some states exempt medical devices sold to hospitals or used for specific medical purposes, while others may tax them. Verify your state’s regulations.
Are laboratory supplies subject to sales tax? Are there R&D exemptions available?
The taxability of laboratory supplies depends on their use. Supplies used directly in R&D activities may be exempt in some states. Many states offer exemptions for purchases related to R&D activities. These exemptions can include equipment, chemicals, and other supplies used in research. Check your state’s specific rules for R&D exemptions.
Are services related to medical equipment installation and maintenance taxable?
The taxability of installation and maintenance services varies by state. Some states tax these services, while others do not. Verify the rules in your operating states.
How are digital products, software, and SaaS taxed?
The taxability of digital products and software, including packaged and electronically delivered software, varies by state. Some states tax these products, while others do not. The tax treatment of cloud-based services, including SaaS, depends on state-specific rules as well. Check your state’s specific regulations.
What are the tax implications of self-produced goods?
If your company manufactures goods for internal use and does not pay sales tax on the materials, use tax may be due on the value of the goods.
Can I get a refund for overpaid sales tax?
Yes, if you have overpaid sales tax or paid tax on exempt items, you can file a claim for a refund with the state tax authority and/or the vendor. Documentation will be required to support your claim. *Keep in mind that you may be approached by a customer seeking a refund as well.