Alabama – Taxability of Medical Products

SALT Report 1936 – The Alabama Department of Revenue issued a ruling regarding the taxability of two products used to heal musculoskeletal injuries and diseases. The Taxpayer who requested the ruling is a biotechnology company that sells its products to hospitals and surgical centers in Alabama.

The first product is an FDA approved Class II device that is sold to patients by prescription only.  It is made from a flexible, synthetic material that, when combined with bone marrow can seal bone voids and repair fractures. Once combined with the bone marrow, the product is shaped to fit the patient’s anatomy to provide a solid surface for bone restoration. This product does not get absorbed by the body, nor do its properties change within the body.

The second product consists of two separate components that are used in hind foot and ankle surgeries.  During surgery, the two components are mixed together and applied to gaps between bones to enable bone fusion. After surgery, the product is gradually used, absorbed, and consumed by the body and is eventually replaced by healthy bone tissue. This product is pending FDA approval as a Class III medical device.

Alabama Code §40-23-4.1(b) provides an exemption from sales tax for, “medicines prescribed by physicians for human consumption or intake that are filled by licensed pharmacists or sold to the patient by a physician. The exemption applies to medicines purchased by hospitals, infirmaries, sanitariums, nursing homes, medical clinics and physicians for use or consumption in rendering medical services to patients and sales of exempt medicines are exempt regardless of whether they are diagnostic in nature or they are used in preventing, treating or mitigating diseases.”

Based on the above regulation the Department determined the Taxability of the two products as follows:

The Taxpayer’s sales of the first product are not exempt from sales and use tax under Alabama Code §40-23-4.1(b) because the product simply creates a surface for bone restoration therefore, it is not considered a medicine.  Further, the Department notes that the this product is similar to other devices used in surgical procedures such as stents, rods, and plates, which under Alabama law are not considered medicines or drugs, and do not qualify for the exemption either.

When the second product is prescribed by a physician and filled by a licensed pharmacist or sold to a patient by a physician, sales of this product to hospitals and surgery centers are exempt from sales and use tax under Alabama Code §40-23-4.1(b) because it is consumed by the body and replaced by bone.

For Further Information:

Alabama Department of Revenue – Revenue Ruling No. 2012-002