This guide is for independent medical clinics not operated by a hospital or under a hospital's license.
For medical clinics operated by a hospital or under a hospital’s license, visit our Hospital guide.
July 10, 2017
Taxes on clinic purchases
General taxes on providing healthcare services
Generally, the gross income from providing healthcare services is subject to B&O tax under the Service and Other Activities B&O classification.
The law also states that independent physicians and other health care professionals who perform healthcare services are subject to service and other activities B&O tax.
Many clinics provide medical care without charge or cancel some portion of the charge. In other cases, clinics bill medical care to patients at "standard" rates. Sometimes clinics need to later adjust these rates based on contracts established with Medicare, Medicaid, or private insurers. In these situations, the gross income includes the total amount billed to the patient. However, when the clinic’s records clearly indicate the income amount its entitled to through insurance carriers, clinics need to only report that amount. When clinics file tax returns based on gross charges, they may take an adjustment on future tax returns after they adjust their records to reflect what they actually collected. The clinic may not reduce the amount of its current gross income by amounts they didn’t previously report on the excise tax return.
Tax implications when a medical clinic contracts with an independent contractor
When a clinic uses an independent contractor (service provider) to provide medical services on its behalf, the clinic cannot deduct from their gross income the amount they paid to the service provider. However, the clinic may deduct from the amount they receive and pay to the service provider when the following three items are met:
- the patients are solely liable for paying the service provider; and
- the clinic is not obligated to provide the medical services to the patient; and
- the clinic acts as an agent with no liability for paying the service provider (except as an agent).
The medical service provider is also subject to service and other activities B&O tax on what they earn from the clinic. If the service provider subcontracts with a third party, such as a physician or nurse, to help provide medical services, the service provider may not deduct amounts paid to the subcontractor, unless the three items above are met.
B&O tax deductions for contributions, donations, and endowment funds
When clinics receive contributions, donations, and endowment funds (including grants), these amounts are exempt from B&O tax as long as the clinic does not perform a specific service as a condition to receive the funds (RCW 82.04.4282). For example, a clinic can take a B&O tax deduction on a donation as long as the donors do not receive any goods, services, or any business benefits in return.
B&O deduction for prescription drugs that a medical service provider administers
Clinics can take a deduction on income from prescription drugs that a physician or agent administers for human use. (RCW 82.04.620)
This deduction only applies when the following takes place:
- Clinics separately state the amount on invoices or other billing statements;
- The amounts do not exceed the current federal rate; and
- Federal or state government subsidized health care service program cover or requires these amounts.
The law limits the deduction amount for how much the federal government reimburses providers (clinic or licensed physician). Medicare Part B covers a limited set of injectable and infusible drugs that are not usually self-administered. This includes vaccines, anticancer and chemotherapy drugs. The federal rate is the rate at or below which the federal government or its agents reimburse providers for prescription drugs administered to patients.
Clinics that claim a deduction must maintain records that support their deduction entitlement. Supporting documentation should include invoices or other billing statements that confirm that the charges are separately stated and do not exceed the federal rate.
Tangible personal property that clinics use when providing medical services to patients
Retailing B&O tax and sales tax do not apply to patient charges for tangible personal property used in providing medical services to the patient, even if separately billed. Tangible personal property used in providing medical services is not considered to have been sold separately from the medical services simply because those items are separately billed or itemized. The state considers these charges, even if separately itemized, as providing medical services.
For example, when a medical clinic charges a patient for drugs physically administered by a licensed physician or their agents, the charges to the patient are subject to B&O tax under the Service and Other Activities B&O tax classification.
On the other hand, retailing B&O tax and sales tax apply to charges for drugs sold to people or their caregivers, either for self-administration or administration by a caregiver other than the medical clinic. This applies unless specifically exempt by law (WAC 458-20-18801).
Tangible personal property sales
Retailing B&O tax applies to sales of tangible personal property sold and billed separately from the performance of personal or professional services by medical clinics and similar health care facilities. This includes charges for making copies of medical records. The clinic must collect sales tax from the buyer/patient and send the tax to the department unless the sale is specifically exempt by law.
Taxes on clinic purchases
Purchases for resale. Purchases of tangible personal property for resale without intervening use are not subject to retail sales tax. Clinics must furnish a copy of their reseller permit to the seller to document the wholesale nature of the sale.
Purchases for use in providing medical services. The law requires clinics to pay sales tax or use tax on purchases they use when providing medical services. This includes office equipment, medical supplies, surgical devices, electronics, computer equipment, digital automated services, furnishings, etc.
However, the following purchases are exempt from sales tax or use tax:
- prescription drugs and over-the-counter drugs
- disposable devices used to deliver drugs
- dietary supplements dispensed pursuant to a prescription
- medicines of mineral, animal and botanical origin prescribed, administered, dispensed, or used by a licensed Naturopath to treat someone
- drugs and devices used for family planning purposes
- medically prescribed oxygen
prosthetic devices prescribed, fitted, or furnished by a licensed health care professional worn on or in the body to artificially replace a missing portion of the body, prevent or correct a deformity or malfunction, or support a weak or deformed portion of the body. Examples include but are not limited to:
- pressure garments
- orthotic devices
- prescription lenses and frame dental prostheses, including but not limited to, dentures, crowns, fillings, braces, retainers, etc.ostomic items used by colostomy, ileostomy, or urostomy patients
- kidney dialysis devices for use pursuant to a prescription
- human blood, tissue, organs, bodies and body parts for medical research and quality control testing purposes
- certain medical supplies, chemicals, or materials purchased by comprehensive cancer centers, organ procurement organizations, and qualifying blood and tissue banks
- certain laboratory reagents and other diagnostic substances.
Clinic’s responsibility to send and pay deferred sales or use tax
If the clinic’s vendor or supplier does not collect sales tax, the clinic must pay the sales tax (commonly referred to as "deferred sales tax") or use tax directly to the department unless the law states the purchases are specifically exempt.
Law and Rule references
RCW 82.04.4282: Deductions - Fees, dues, charges.
WAC 458-20-111: Advances and reimbursements.
WAC 458-20-18801: Medical substances, devices, and supplies for humans - Drugs prescribed for human use - Medically prescribed oxygen - Prosthetic devices - Mobility enhancing equipment - Durable medical equipment.
WAC 458-20-178: Use tax and the use of tangible personal property.
WAC 458-20-168: Hospitals, nursing homes, assisted living facilities, adult family homes and similar health care facilities.