What orthotic and prosthetic manufacturers may be overlooking in their Sales & Use Tax practices.
Orthotic and prosthetic devices are often erroneously assumed to be exempt from Sales & Use Tax. Unfortunately, it is not that straight forward, and the Sales & Use Tax treatment varies by state, customer type, product classification, and how a device is billed to the final customer.
For manufacturers, these differences can create two costly problems: uncollected sales tax that increases audit exposure and overpaid tax that may be recoverable.
Even the same device can be taxable in one transaction and exempt in another.
Where Manufacturers May Have Sales & Use Tax Exposure
Customer Type Matters
Sales to distributors, hospitals, clinics, and patients may receive different tax treatment. A device purchased by a patient may qualify for an exemption, while the same device purchased by healthcare facility may be taxable. Missing or invalid exemption certificates will create additional exposure.
Product Classification Isn’t Always Straightforward
State-specific requirements related to prescriptions, product characteristics, and medical use can make applying one tax code across an entire product line risky.
Payment and Billing Can Change Taxability
In certain states, exemptions depend on prescription requirements, insurance coverage, or how transactions are billed. Manufacturers selling through multiple channels may need different tax treatment for otherwise identical products.
Business Growth Creates New Obligations
New customers, distribution channels, facilities, and affiliates can trigger additional state tax obligations. Existing tax processes may not keep pace with expanding operations and changing nexus requirements.
Where Manufacturers May Be Missing Tax Savings
Manufacturing Equipment & Machinery
Production machinery, fabrication equipment, and other qualifying purchases may be eligible for state Sales & Use Tax exemptions.
Materials & Components
Raw materials, components incorporated into finished devices, and even the utilities used for the manufacturing process may qualify for purchase exemptions, reducing production costs.
Although not related to the manufacturing process, the packaging materials are an integral component of ensuring orthotics and prosthetics reach their intended destination in working conditions. Accordingly, states have exemptions drafted covering packaging materials.
Research & Development
Certain equipment and purchases used in qualifying product development, testing, and innovation activities may be eligible for additional state Sales & Use Tax exemptions.
Overpaid Tax Recovery
Incorrectly taxed purchases may represent refund opportunities, including Sales & Use Tax paid on qualifying equipment, materials, and other business expenses.
Are You Collecting Too Little or Paying Too Much?
A few questions worth asking:
- Are we applying the correct Sales & Use Tax treatment across our products, customers, and states?
- Do we have the documentation needed to support our exemptions?
- Are we taking advantage of available manufacturing and R&D exemptions?
- Could we be paying Sales & Use Tax on purchases that should be exempt?
If you’re unsure of the answers, there may be an opportunity worth exploring.
At Source Advisors, we help manufacturers take a closer look at their Sales & Use tax practices to identify potential exposure, uncover overlooked savings, and strengthen compliance.
Whether it is evaluating product taxability, identifying potential refunds, reviewing manufacturing exemptions, or addressing historical liabilities, our goal is to help you avoid unnecessary tax costs and gain greater confidence in your tax position.
