Published: March 25, 2024

Prescription Drugs:  To Tax or Not to Tax…
Here are the Answers

State Taxation of Prescription Drugs

Great News!! Understanding State Taxation of Prescription Drugs

State Taxation of Prescription Drugs: While most states exempt prescription drugs when purchased for human use, there are several caveats to be aware of.

Variations in Exemptions in State Taxation of Prescription Drugs

Illinois taxes prescription drugs at a reduced sales tax rate of 1%. Some states only exempt prescription drugs when sold directly to the patient, but tax prescription drugs sold to hospitals and medical facilities when used for the treatment of patients, including Hawaii and South Carolina.

Specific Exemptions in State Taxation of Prescription Drugs

For example, South Carolina’s prescription drug exemption is limited to drugs sold on prescription. This means that the prescriptions you fill at your neighborhood drug store qualify for the exemption. However, this also means that most prescription drugs purchased by a South Carolina hospital are taxable because they are not sold to the hospital or other medical facility on written prescription.

Eligibility Criteria

In order for doctors, nursing homes, hospitals and medical institutions to qualify for the prescription medicine exemption, the medicine must be used to prevent respiratory syncytial virus (RSV); to treat and/or to relieve the effects of rheumatoid arthritis, cancer, lymphoma, leukemia or related diseases; or are given to a Medicare Part A patient living in a nursing home.

Over-the-Counter Complexity

Some states exempt drugs like acetaminophen, ibuprofen, cetirizine and hydrocortisone cream that can typically be purchased over the counter when purchased with a prescription. A smaller number of states exempt all over-the-counter drugs, including some heavily populated states like Texas, Florida, and New York. Meanwhile, several states, including Arkansas, Georgia, Nebraska, Ohio, Oklahoma, and Wyoming, tax ALL over-the-counter drugs with or without a prescription.

Insulin and Diabetic Supplies

About 7.4 million adults in America take insulin. Insulin, which is available without a prescription, adds more complexity to the taxation of over-the-counter drugs. All states exempt the sale of insulin on a prescription of a physician except Illinois, where it’s taxed at a reduced sales tax rate of 1%. However, many states exempt the purchase of insulin and diabetic supplies when sold without a prescription. Exceptions to this are California, Connecticut, Florida, Hawaii, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, North Dakota, New Mexico, Utah, Wisconsin, and West Virginia.

State-Specific Regulations

As with all things related to sales and use taxes, the details are important. For example, even though over-the-counter drugs are exempt in the Lone Star State of Texas, they must be labeled with a “Drug Facts” panel to qualify. The Pelican State of Louisiana does not charge sales tax on prescription drugs at the state level, but most Louisiana parishes charge tax on the sale of drugs. Periodically, Louisiana legislators propose eliminating local taxes on prescription drugs, but these efforts have died in the legislature.

Cosmetic Procedures

Just when you think you have the taxation of drugs figured out, states throw in another wrinkle. The taxability of drugs used in cosmetic procedures can be taxable, even in states that exempt prescription and over-the-counter drugs. Some states define drugs and medicines as substances intended for use in the cure, mitigation, treatment, or prevention of illnesses. Cosmetics are defined as articles intended to be rubbed, poured, sprinkled, sprayed on, or applied to the body for beautifying, making attractive, or altering appearance. States including Alabama, Arizona, Connecticut, Florida, Hawaii, Illinois, Massachusetts, Maryland, Maine, Missouri, New York, South Carolina and Virginia don’t consider products that are primarily cosmetic in nature and contain medicinal ingredients as “medicine.” The same product that is exempt when used to treat a disease, such as a dermal filler, can be taxable when used for a cosmetic purpose.

Minnesota’s Unique Approach

Finally, Minnesota manages the taxability of drugs differently from other states. Though they do not charge sales tax on drugs, a gross receipts tax called the MinnesotaCare Tax applies to wholesale drug distributors who sell or distribute Legend Drugs. Legend drugs are drugs required by federal law to be sold or dispensed in a container labeled “Rx only.” Additionally, legend drugs have to be classified as such by the FDA and not as a device. Minnesota allows wholesale drug distributors to transfer and recover the cost of the MinnesotaCare Tax or the tax expense, by passing it through to buyers of the legend drugs. Pharmacies and sellers of legend drugs may also pass on the tax to insurers or pharmacy benefits managers.

About Clarus Partners

Clarus Partners is a leading consultancy firm specializing in tax advisory services. With a team of experts dedicated to navigating the complex landscape of state taxation, Clarus Partners provides invaluable insights to businesses and individuals alike. Stay informed with Clarus Partners for all your tax-related inquiries and ensure compliance with ever-changing regulations. Contact us today!