On June 26, 2024, the South Carolina Supreme Court ruled that the state sale tax exemption for O&P was unconstitutional.1 The ruling has significant implications for O&P facilities and other durable medical equipment (DME) providers in the state, and the issues it raises may be worth consideration in other states as well.
History and Background
Since 2007, South Carolina law had exempted certain DME and related supplies from sales tax. To qualify for the exemption, the equipment had to meet specific criteria:
- Be defined as DME under federal and state Medicaid and Medicare laws
- Be paid for directly by state or federal Medicaid or Medicare funds
- Be sold by a provider whose principal place of business was in South Carolina and who held a state retail sales license
The exemption was designed to reduce costs for providers and patients, particularly those relying on Medicaid and Medicare. However, it included language that treated in-state and out-of-state providers differently.
The Decision
Two cases were reviewed that highlighted the clause requiring DME sellers to have their principal place of business in South Carolina to qualify for the tax exemption. The court ruled this clause unconstitutional because it discriminated against interstate commerce, violating the dormant Commerce Clause in the United States Constitution.
Although only part of the exemption was deemed unconstitutional, the court found that the discriminatory language was not severable from the rest of the statute. As a result, the entire exemption was invalidated. Sellers of DME, whether in-state or out-of-state, are now required to collect and remit sales tax on these items.
Sales Tax Collection
As a result of the ruling, all sellers of DME, including O&P facilities, must now collect and remit a 6 percent sales tax (the current rate under South Carolina law) on their sales within the state. This applies to both in-state and out-of-state providers who sell DME in South Carolina.
Reimbursement
The Centers for Medicare & Medicaid Services (CMS) specifies that the Medicare fee schedule includes any applicable sales tax. Therefore, the imposition of a 6 percent sales tax on DME in South Carolina effectively reduces the net reimbursement for O&P providers by 6 percent, as the fee schedule does not provide additional compensation to cover this tax.
In summary, due to the inclusion of sales tax within the Medicare fee schedule and the recent enforcement of a 6 percent sales tax on DME in South Carolina, O&P providers are experiencing a net 6 percent decrease in their reimbursement rates.
What’s Next
The court has indicated that a new DME sales tax exemption could be enacted if it is worded differently to avoid discrimination against interstate commerce. This process may take time, potentially one to two years, as stakeholders draft new legislation that complies with constitutional requirements.
FAQs
- Are there any other states that charge sales tax for O&P devices?
Most states exempt O&P devices from sales tax, with some conditions. For example, most states exempt O&P when the devices are dispensed or sold with a prescription from a licensed medical provider.
- What percentage of the device payment would be considered labor and not required to be included when paying a sales tax?
In South Carolina, the sales tax applies to the total sales price of tangible personal property, which includes both materials and associated labor costs. However, if a significant portion of the sale pertains to custom labor—such as the creation of custom devices—it’s possible to allocate a percentage of the total price to labor, which may be exempt from sales tax. The South Carolina Department of Revenue does not provide a standardized percentage for labor allocation in such cases.
In conclusion, the South Carolina Supreme Court’s decision marks a significant shift in the state’s taxation of DME. O&P providers who provide devices for patients in South Carolina must act quickly to adapt to the new requirements and minimize disruptions to operations and patient care.
By staying informed and proactive, O&P facilities can navigate this new landscape while continuing to serve their communities effectively.2
Erin Cammarata is president and owner of CBS Medical Billing and Consulting. She can be contacted at [email protected].
References
- https://dor.sc.gov/resources-site/lawandpolicy/Advisory%20Opinions/IL24-10.pdf
- CMS Internet Only Manual (IOM), Publication 100-04, Medicare Claims Processing Manual, Chapter 23, Section 80.3.1)
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