Illinois – Preferred Drug Providers Liable for Service Occupation Tax

SALT Report 2985 – The Illinois Department of Revenue issued a general information letter regarding the application of tax to sales of prescription drugs to prescription drug providers under the Medicare Part D Prescription Plan.  The Taxpayer is a nationwide Medicare Prescription Drug Plan provider and requested a ruling to clarify information found in two previously issued GIL’s that conflicts with federal law, 42 CFR § 423.440.

The GIL’s provide that sales made to Medicare and Medicaid are exempt from tax as sales made to the government, however they also make a distinction between the government and prescription drug providers.  Specifically, the Department determined that “PDP’s operate as private insurance companies under contract with the government. They, not the government, are responsible for purchasing drugs for their beneficiaries. Since these sales are made to the PDP’s and not directly to the government, the drug sales do not qualify for the government tax exemption.”

However, federal law provides that “payments received by Medicare Part D plans for prescription drugs do not relate to net income or profit and cannot be assessed a tax, fee or other similar assessment.”  Therefore, the Taxpayer concluded that under the provisions of 42 CFR § 423.440 the State of Illinois would be prohibited from collecting tax on prescription drugs.

In its response, the Department stated that sales made to Medicare and Medicaid are exempt from tax as sales to a government body so long as the exemption is properly documented. However, although no tax is due on payments made directly to the vendor by Medicare or Medicaid, tax is due on the portion of the bill paid by the individual or the private insurance company that is not covered by Medicare and Medicaid.  For example, when Medicare pays 80% of the medical bill and the remaining 20% is billed to the patient or the insurance company, the 80% is exempt as a governmental payment while the remaining 20% is taxable.

On the other hand, the Medicare Part D Prescription Plan is organized differently. The government provides funds on a per capita basis to the PDP’s who operate as private insurance companies under contract with the government.  In this case, they, not the government, are responsible for purchasing drugs for their beneficiaries. Since these sales are made to the PDP’s and not directly to the government, the drug sales do not qualify for the government tax exemption.

Additionally, the Department noted that according to the U.S. Department of Health and Human Services, sales tax cannot be added to a beneficiary’s co-payment under the Plan. As a result, sales tax is due on drugs sold under the Medicare Part D Plan, but it may not be charged to the beneficiary. The same applies to Illinois’ Rx Program.

Lastly, Illinois pharmacists must calculate their tax liability under one of the State’s four sales tax Acts, which are not considered premium taxes, fees, or other assessments. Therefore, the collection of tax under one of the sales tax Acts is not prohibited by 42 CFR § 423.440 as it only excludes the imposition of a “premium tax, fee, or other similar assessment.”

For Further Information

Illinois Department of Revenue – General Information Letter ST 13-0037-GIL