Are Medical Service Providers Really Exempt from Tennessee's Business License Tax?

By Kirk Low, Jr., CPA and Brett R. Carter. Esq.

With the focus on Tennessee business tax as the State's Department of Revenue beginning administration of the tax occurs in 2010, providers of medical services may be interested to know that there are some sales on which medical providers would be subject to business tax for certain items of tangible personal property sold to patients. This may be news to some in the healthcare industry in Tennessee because the state business tax provides a specific exemption for medical, dental and healthcare services.

After two Attorney General rulings that included the materials used in hip and joint replacements as subject to the business tax, the Legislature changed the definition of taxable "tangible personal property" to not "include any materials, substances or other items of any nature inserted into or affixed to the human body by duly licensed physicians or dentists or otherwise dispensed by them in the treatment of patients;..." The change in the statute exempted the drugs, appliances, and medical supplies used during treatment.

Generally, any person in business for profit selling tangible personal property or providing taxable services who has gross receipts of $3,000 a year or more must have a business license. With the exemption for the items used during treatment and the exemption for medical services "excluding services by persons engaged in the business of making dentures and artificial teeth", many medical practices are not subject to business tax, except when they sell items not "inserted into or affixed" to their patients or "dispensed" to their patients.

Several medical products and services are specifically exempt from business tax, as follows:

• the practice of audiology,
• sales of prescription eyewear, including eyeglasses, contact lenses and other related tangible personal property, dispensed by an ophthalmologist or optometrist in conjunction with professional services rendered to patients,
• orthopedic and artificial limbs, and
• services furnished by persons engaged in the practice of veterinary medicine, dentistry, or surgery.

There has not been a formal interpretation on what is considered "other related tangible personal property" when sold by an ophthalmologist or optometrist. Also, guidance has not been issued on if the eyewear is "dispensed" by an ophthalmologist or optometrist when the optical store is in a separate entity from the medical practice, yet owned and supervised by the ophthalmologist or optometrist.

The business tax is set forth in a completely different section of the Tennessee Code and has its own set of rules and regulations. Until this year, the business tax has been administered by local county clerks and municipal tax collectors and has gone largely unnoticed by many in the business community. Many of the issues that have been resolved for sales and use tax have been unanswered because the tax rate was low before the additional state business tax was added to the local business tax a few years ago.

For medical providers, one of the unanswered questions is what is subject to business tax when a medical practice sells additional products to patients. What about the dermatologist that sells non-prescription skin care products, or the chiropractor that sells pillows, or the dentist that sells sonic toothbrushes? These products are subject to Tennessee's sales tax, but there has not been a ruling on if the revenue from these products is subject to business tax.

So, what should you do? Physicians and healthcare institutions selling items such as those referenced in this article or similar items may want to consider whether there is any potential tax exposure and whether they need to seek clarification from the Department of Revenue on the application of the business tax to their sales. While the medical practice may deduct personal property taxes from their business tax liability up to 50% of the liability, the remaining tax and cost of filing the return can be significant in some practices. To the extent that a potential liability may exist, there is also a voluntary disclosure program being offered by the Department that would allow a taxpayer to comply with the tax, while limiting liability and avoiding penalties.