Sales Taxes and Exemption Revenue Rulings

September 29, 2009

To avoid distorting consumer decisions, sales taxes should apply to all retail sales once and only once. Wholesale sales and inputs purchased by businesses should thus be exempt, because to tax them would result in multiple taxation of retail sales.

Of course, most states don’t do this. Vast swaths of consumer sales are exempted from sales tax (more than half), often for political reasons. At the same time, many business inputs are subject to tax, meaning that some retail items are taxed multiple times and some not at all. This micromanagement of consumer decisions disrupts what would otherwise be decisions made on economic factors, not tax incentives.

Because they don’t apply the basic overarching rule, state revenue officials spend a good amount of time (and taxpayer dollars) issuing revenue rulings, clarifying what is taxed and what isn’t. So, for instance, this one out of Louisiana (PDF):

As part of an endoscopy procedure a physician will furnish an ingestible medical diagnostic capsule (hereinafter referred to as “capsule”) to patients for oral ingestion. Physically the capsule resembles a large vitamin capsule. The single-use capsule contains a micro camera, which when ingested travels through the body collecting images and data.[…]

In addition to the medical device exemption, Capsule A and Capsule B sales will qualify under La. R.S. 47:305(D)(5)(b), as part of a professional service, if the capsules are sold to facilities where patients are not regularly kept as bed patients for twenty-four hours or more. Therefore, no Louisiana sales and use tax is due when Capsule A and Capsule B are sold to physicians, hospitals and other health care facilities for the diagnosis of human beings.

The ruling is right, but is only necessary because Louisiana (and many other states) have such mixed-up sales taxes. These contribute to business uncertainty, which can harm economic growth (and limit the spread of amazing medical advances).

Related Articles