Biological (Tax) Warfare in South Carolina

June 29, 2012

South Carolina recently passed a modification to its tax code which exempts biologic and injectable drugs from sales and use taxation, but only when a physician or kidney dialysis facility administers them. Many prescription drugs and medical supplies are already exempt from South Carolina sales tax, but the rules are complex. Take the rules on exemptions for prescription drugs, for instance:

In order for this exemption to be applicable, the medicine must be of a type that requires a prescription, the sale must require a prescription, and must actually be sold by prescription. As such, sales of medicine to a hospital, nursing home, or a similar institution or doctor are not exempt since such sales do not require a prescription.

The South Carolina tax code treats the same exact product differently, depending on how it is sold. When an individual purchases a drug at a pharmacy, they do not pay sales tax. When a doctor or hospital purchases the same drug, however, they pay sales tax. Since doctors and hospitals purchase drugs for their businesses, the sales tax on these purchases is really a business input tax. Many economists oppose this type of tax because of a concept called pyramiding. In this situation, a product is taxed multiple times in the production process because its inputs are subject to sales tax. In addition, one blog indicates that the sales tax on biologics was sometimes a significant burden on doctors and hospitals when administering expensive drugs to Medicare patients:

One South Carolina practice reported that, because of the state's sales tax on physician-administered drugs, that they pay $140 in tax for every injection of Lucentis, while getting reimbursed $120 by Medicare for doing it, which doesn't sound like much of a way to make a living.

The exemption South Carolina just passed joins a list of several others for specific types of drugs and medical devices. The full list is available here. Under the newly passed bill, most biologics will be exempt from sales tax, whether purchased via prescription or by a physician. The FDA indicates that “most biological products also meet the definition of ‘drugs,’” and the primary difference is their composition. The bill defines biologics as:

…the products that are applicable to the prevention, treatment, or cure of a disease or condition of human beings and that are produced using living organisms, materials derived from living organisms, or cellular, subcellular, or molecular components of living organisms.

This draws an arbitrary distinction in the tax code between two extremely similar products. If a patient buys a prescription drug, biologic or not, at a pharmacy, there is no sales tax. If a physician’s office or hospital buys that same drug, South Carolina charges sales tax on the purchase unless the drug was made from a living organism. It is unclear why such similar products require such different tax policies. While it is beneficial to remove a business input tax, the appropriate response is simply to tax all final sales equally.

More on South Carolina here.

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