Diabetic test strips and state tax laws

SSTP states all over the map

SSTP states such as Arkansas, Georgia, Indiana, Iowa, Kentucky, Minnesota, New Jersey, North Dakota, Ohio, and Wisconsin, maintain specific exemptions for test strips. Kansas, Nebraska, North Carolina, South Dakota, Utah, and West Virginia exempt the test strips if they are purchased with a prescription.

Michigan and Vermont classify test strips as a component of blood glucose meters, which constitute exempt durable medical equipment in those states. Rhode Island exempts test strips "as they are considered used in the diagnosis of a disease" under the Streamlined definition of a drug.

Other SSTP states tax test strips. Oklahoma imposes tax unless reimbursed under a Medicaid or Medicare program, while Tennessee, Nevada, and Wyoming tax test strips sold to individuals on the basis that such items do not qualify as exempt durable medical equipment.

Nevertheless, because SSTP states exempt prescription drugs purchased by individuals, an argument exists in SSTP states taxing test strips that such test strips constitute exempt drugs when purchased by an individual holding a prescription.

Test strips typically consist of a plastic test strip with a small spot impregnated with glucose oxidase, or some other substance, which undergoes a chemical reaction when mixed with glucose in a blood sample. As defined by the SSTP, a "drug" generally includes "a compound, substance or preparation, and any component of a compound, substance or preparation, other than 'food and food ingredients,' 'dietary supplements,' or 'alcoholic beverages;'... [i]ntended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease." According to this definition, a test strip should constitute a drug because it (1) contains "a compound, substance or preparation, other than food and food ingredients, dietary supplements or alcoholic beverages," and (2) with regard to diabetics, it is obviously "intended for use in the diagnosis . . . treatment, or prevention of disease."

A solid argument

Parties seeking to change a state's taxation of test strips may proceed legislatively or judicially. However, successfully lobbying to enact legislation exempting test strips is likely to be difficult, due to the large negative fiscal impact on a state's budget. To proceed judicially, a retailer must either challenge a sales tax assessment on test strip sales or request a refund of sales tax previously collected and remitted on such sales.

As discussed, litigants in states adopting the SSTP's "drug" definition have a solid argument that test strips constitute drugs exempt from sales-and-use taxation when provided pursuant to a prescription. However, a successful judicial challenge will typically produce no economic advantage to a retailer, unless they challenge a significant sales tax audit assessment on test strip sales, nor would any real competitive advantage materialize, since all retailers would benefit from a favorable ruling.

Chris Wilson is a tax practice associate at the Waller Lansden Dortch & Davis law firm in Nashville, Tenn. (chriswilson@wallerlaw.com
). Kirk Low is a certified public accountant in Pleasant View, Tenn. (kirk@kirklowcpa.com
).