Tennessee Property Tax Due on Drug Inventories of Doctors & Healthcare Providers

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

Doctors and other healthcare providers should be aware that year-end inventories of drugs are subject to the Tennessee personal property tax based on a little-known 2003 ruling issued by the State's property tax board. In that ruling, the board concluded that prescription drugs and medicines stocked by a Memphis dialysis clinic for patient use were not inventories of merchandise held for sale and were therefore subject to Tennessee property tax.

The ruling highlights the unique interplay between Tennessee's property tax and the separately imposed, local business license tax, which taxes sales of tangible property and most services. The property tax exempts inventories that are held for sale, provided the sale of inventory is subject to the business license tax. As a result, sellers of tangible goods typically do not pay the property tax on inventories. Healthcare providers, on the other hand, are service providers, and the business license tax includes a specific exemption for medical, dental, and other health services providers, including providers of sanitorial, convalescent and rest home care. In the ruling, the board ultimately concluded that because the dialysis clinic was exempt from the business license tax, it was not "subject to the business tax" and, therefore, had to pay property tax on the prescription drugs.

Paying personal property taxes on year-end inventory is definitely preferable to being subject to the business tax for most doctors. As an example, assuming a doctor in Memphis, which has one of Tennessee's highest property tax rates, has an inventory of drugs of $1,000,000 on January 1, the assessment date, and administered $6,000,000 of drugs during the same year, the property tax would be approximately $21,000 as compared to a business license tax of $236,000.

There is some opportunity for doctors to lower personal property taxes on these prescription drugs and other medical supplies by reducing inventories on hand on January 1 of each year - the date local jurisdictions use as the measurement date for the value of tangible personal property that is subject to tax. This may not be a realistic option for some doctors considering the holidays and the possibility that new shipments of prescription drugs after the first of the year could be delayed due to inclement weather. However, it is worth discussing with providers. Maintaining adequate records of inventory on January 1 is also essential as auditors will often attempt to use average inventory levels to determine the tax in the absence of sufficient records.

Ultimately, this is an issue that may not be obvious to many tax return preparers filing personal property tax returns, especially considering the board's decisions are not easily accessible. As this is a topic that state auditors will raise during routine property tax audits of medical service providers, extra care should be taken when evaluating drug inventories to avoid unnecessary assessments.