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As part of medical plan, we provide members $100/yr of OTC products. Are we required to pay sales tax on our transfer of OTC?

Full Question: As part of their medical plan offerings, three of our insurance-company clients provide, to their plan member-beneficiaries, an annual amount ($100 / year) of OTC products (toothbrushes, vitamins). The client and our company negotiate the OTC product list, and the price we charge upon receiving an OTC order from a plan member (cost + fulfillment fee + per-member-per-month fee). The insurance-company does not separately charge its members for this benefit (i.e., the cost is part of the health-plan policy price the insurance company charges its member-beneficiaries). Our insurance-company client produces & distributes an OTC catalog under their name. We fulfill the order from inventory we have purchased for the OTC program. We can return unused inventory to our distributor. We do not pay sales tax on our purchase. We do not accept returns from plan members. We don't collect sales tax because we are a wholesaler, or alternatively, we are providing a service (fulfillment). Given the background presented, are we required to pay sales tax on our transfer of the OTC products to the plan-member beneficiaries of our insurance-company clients? Our position has been "no", under the rationale that we are providing a service (fulfillment).

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Answer:

Diane Yetter photoThe general rule is likely that you are selling OTC items to the insurance company. If I understand your billing process you invoice the insurance company for the cost of the OTC item plus the fulfillment cost plus a per month charge. Unless the OTC item qualifies for an exemption based on the nature of the item, the charge is likely taxable on your invoice to the insurance company in the state where you ship the goods to the plan member. If you charge a lump sum amount for all three components to the insurance company, then the entire price is likely the tax base. If you were to separately state the per member per month charge, that component likely could be exempted as a service. However, the fulfillment charge is really a handling charge and would be included in the tax base in virtually every state. If you need assistance researching this in all states, we can assist you with this upon request. Diane Yetter

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