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Generally, sales or rentals of medical equipment are subject to retail sales tax. Medical equipment includes durable medical equipment, such as hospital beds, IV stands, and heart lung machines. It also includes mobility enhancing equipment, such as wheelchairs, walking canes, lifting chairs, and crutches. A common question is whether a medical supply vendor may “back out” retail sales tax from the amount received when the customer is covered by insurance, or whether the vendor must pay the retail sales tax calculated on the total amount received.

The method of reporting retail sales tax for medical equipment is determined by the contract between the medical supply vendor and the insurance company. RCW 48.43.290 requires health plans (issued after January 1, 2011), that provide coverage for medical equipment, to include the retail sales tax or use tax calculation in the plan payment.

Consequently, for state tax purposes, the vendor will be allowed to back out the retail sales tax from the amount received from the insurance company if the:

  • Contract between the medical supply vendor and the insurance company is for a fixed amount, and
  • Vendor is not entitled to collect the balance from the covered person (or other persons).

“Backing out” the retail sales tax

To calculate the taxable amount of a payment that includes retail sales tax, the vendor would:

  • Add 1 to the retail sales tax rate; then
  • Divide the amount of the payment by the sum determined in #1 above. (Refer to the scenarios below.)

The following scenarios represent how medical supply vendors report sales of medical equipment. Each scenario that represents an “insured” person assumes that the contracts between the medical supply vendors and the insurance companies are in compliance with RCW 48.43.290. Each scenario also assumes an 8 percent sales tax rate.

Scenario 1

An uninsured person buys medical equipment from a medical supply vendor. The selling price of the equipment is $1,000 plus sales tax of $80. The uninsured person pays the vendor $1,080.

The vendor reports $1,000 under both the retailing B&O tax and retail sales tax classifications, and remits the $80 of retail sales tax collected.

Scenario 2

An insured person buys medical equipment from a medical supply vendor. The selling price of the equipment is $1,000 plus sales tax of $80. The contract between the insurance company and the medical equipment vendor indicates that the retail sales tax must be separately stated and the insurance payment is not for a fixed amount. The insurance company pays the vendor $1,080.

The vendor reports $1,000 under both the retailing B&O tax and retail sales tax classifications, and remits the $80 of retail sales tax collected.

Scenario 3

An insured person buys a wheel chair from a medical supply vendor. The insurance company is billed $200 plus sales tax of $16. The medical supply vendor is paid $100 per terms of their contract with the insurance company. Under her private coverage, the purchaser is obligated to pay the vendor the balance of $116, ($216 - the $100 payment by the insurance company), which the purchaser pays.

The vendor reports $200 under both the retailing B&O tax and retail sales tax classifications, and remits the $16 of retail sales tax collected.

Scenario 4

An insured person buys a walking cane from a medical supply vendor. The insurance company is billed for $200 plus sales tax of $16. The vendor’s contract with the insurance company states that the insurance company is under no obligation to remit more than the contractual amount of $200 and the vendor must accept this as payment in full. The medical supply vendor is paid $200 by the insurance company.

Under this circumstance, the vendor will not receive the additional sales tax from the insurance company due to the contract language. However, the vendor may back out the retail sales tax from the amount paid by the insurance company.

Selling Price Calculation
Amount paid / 1 + sales tax rate
$200 / 1.08 = $185.19
   
Sales Tax Calculation $185.19 X .08 = $14.81 or $200 - $185.19 = $14.81

 

 

 

 

The vendor reports $185.19 under both the retailing B&O tax and retail sales tax classifications, and remits the $14.81 of retail sales tax.

Scenario 5

An insured person buys medical equipment from a medical supply vendor. The insurance company is billed for $500 plus sales tax of $40. The vendor’s contract with the insurance company states that the insurance company is under no obligation to remit more than the contractual amount of $400 and the vendor must accept this as payment in full. The medical supply vendor is paid $400 by the insurance company.

Under this circumstance, the vendor will not receive the additional $100 of the selling or the sales tax of $40 from the insurance company due to the contract language. In this case, the vendor may back out the retail sales tax from the amount paid by the insurance company.

 

Selling Price Calculation
Amount paid / 1 + sales tax rate
$400 / 1.08 = $370.37
   
Sales Tax Calculation $370.37 X .08 = $29.63 or $400 - $370.37 = $29.63

 

 

 

 

The vendor reports $370.37 under both the retailing B&O tax and retail sales tax classifications, and remits the $29.63 of retail sales tax.