The state tax implications of telehealth
INSIGHT ARTICLE |
Telehealth, described as providing medical services remotely by a doctor, nurse or other medical professional to a patient that is physically at home or in another remote location, has increased exponentially in the past 18 months. Even before the COVID-19 pandemic, telehealth was discussed as an alternative to in-person medical visits. The benefits of remote medical care are numerous, including offering medical treatment to the elderly or otherwise immobile patients from the comfort of their home, avoidance of potential transfer of unrelated sicknesses while visiting a medical facility, increased accessibility of care to patients in rural or otherwise remote locations and reduction of time and cost associated with in-person office visits. Telehealth has also thrived as an excellent medium for behavioral treatment such as for anxiety and depression, particularly coming out of the pandemic. While many patients have not yet utilized telehealth as an alternative to in-person visitations, the number of telehealth mobile apps have skyrocketed, with the technology embraced by insurance companies, employers and patients as a cost-saving and convenient measure.
Providing and receiving medical services without regard to physical locations raises various questions from a state and local tax perspective. Medical providers traditionally hire practitioners in a specific location like a practice office or among several offices in a small geographic region. However, the location of the medical practitioner or the patient is irrelevant for remote services (setting aside state and local regulatory and licensing considerations, many of which have already been relaxed). Providers have increasingly greater opportunity to hire talented caregivers without regard to where they are physically located in addition to providing greater access to an expanded base of patients. To the extent that a doctor or other medical professional provides medical services or supplies remotely to a patient, state and local tax compliance obligations can result such as establishing nexus in new states, creating additional withholding obligations and altering income tax apportionment.
A medical provider that hires a telehealth medical professional in a state different from the provider’s location likely has established nexus, or created a tax return filing obligation, in the state where the professional is located. Nexus for income, franchise, sales and use, gross receipts and other tax purposes is almost always created by a physical presence, whether by having inventory, offices or employees in a state. Hiring professionals without regard to where they are physically located, because they will be seeing patients only in a virtual environment, creates state and local tax filing requirements in those locations.
Recently, more states have adopted ‘economic nexus’ which does not require a physical presence in order to create a filing obligation. Nexus may exist if a certain threshold of revenue from a state is earned during the year. For example, New York requires a corporation that has $1 million or more of in-state revenue to file an income tax return and pay tax to the state. If a medical provider has patients in New York and the service revenue from those patients rises to $1 million or more during a year, that provider will be required to file a corporate income tax return, without having ever set foot in the state. For sales tax purposes, nexus is created in most states when a business has as little as $100,000 in sales to the state during the year, sometimes without regard to the taxability of those sales.
Medical providers that are focused on telehealth and moving towards a more virtual platform must continuously analyze and track where its professionals are located, where patients are receiving the telehealth services and the volume of patients and related revenue generated. While telehealth expands, the population from which providers can hire medical professionals becomes more unrestricted and therefore nexus considerations that must be monitored in real time.
Income/Franchise Tax Apportionment
States that impose income or franchise taxes divide income amongst taxpayer operating states based on property, payroll and/or receipts in-state compared to property, payroll and/or receipts everywhere, commonly referred to as apportionment. Many states have transitioned to a more heavily-weighted sales factor or a single-receipts factor.
Sourcing receipts from services varies from state to state but in general, states use either a market-based approach or a cost-of-performance approach. Market-based states look to where the recipient of the service is located. Cost-of-performance states look to where the service is being performed. Prior to the expansion of telehealth, medical professionals provided services to their patients in person so both sourcing methods would yield the same result, i.e., the service being performed in the same location as the recipient of the service (i.e., patient). However, under a telehealth platform, the locations may be in different states (assuming no regulatory restrictions) and therefore, the states’ approach to sourcing of receipts for apportionment purposes may yield different results. For example, a doctor located in South Carolina (a cost-of-performance state) that provides virtual medical services to a patient located in Georgia (a market-based state) may result in both states claiming those receipts as sourced to their state. Alternatively, a doctor in Georgia providing services to a patient in South Carolina may result in neither state claiming those receipts. Knowing where both the medical professional and patients are located is critical to determining the correct apportionment factors for state income and franchise tax purposes.
Most states exempt medical services provided to patients and specified medical supplies purchased by the provider or sold to the patient from the sales tax. However, many states impose a tax on certain medical supplies sold or provided to patients, including those provided by their doctors. For example, Illinois taxes medical-related equipment such as blood pressure monitors, pacemakers and prosthetics at a reduced rate of 1% that must be collected and remitted when provided to patients in the state. A medical provider may not have previously been treating patients in Illinois or other states that impose sales tax on medical supplies. Telehealth services may expand a provider’s sales tax footprint, requiring new state sales tax registrations and different taxability treatment for services or items provided. The states greatly differ in how they treat the taxability of medical equipment purchased by a provider or equipment and services sold to a patient.
Telehealth requires investment in technology by the medical provider, specifically as it relates to confidentiality and cybersecurity. Patients are entitled to full confidentially when consulting with their doctor. Conducting sensitive discussions over the internet and the sharing of personally identifiable information creates a risk of unsecured transmission. In order to maintain confidentially, telehealth providers will need to invest in cybersecurity measures to secure mobile platforms and the various connections in between when complying with federal laws and regulations and satisfying patient confidentiality concerns.
Many states offer credits and sales and use tax exemptions for certain types of property that are used for certain purposes. For example, New York’s Qualified Emerging Technology Company credit is available to companies that are conducting research and development activities in the state. The QETC includes software development and is refundable. Other states, such as Georgia, also have research related tax credits that may apply to software and other technology investment. Telehealth providers that are making these investments should consider the availability of many state and local tax incentives.
As telehealth continues to expand, medical providers should consider the state tax implications of such expansion. It is unlikely that a medical provider will alter its expansion plans in order to manage its state tax liabilities. With the states’ ever expanding audit powers and focus on cloud-based services, providers utilizing telehealth must consider what new state and local tax exposure could result from expansion into remote healthcare.