Overview of Illinois Sales Tax for Medical Appliances vs. Diagnostic Equipment
The Department held in a Private Letter Ruling (PLR) that diagnostic equipment does not qualify as a medical appliance that is entitled to receive a lower sales tax rate.
Applicable Illinois Law on Sales Tax
Under Illinois law, products that qualify as medical appliances are subject to a reduced state sales tax rate of 1 percent plus any applicable local taxes. Items that do not qualify for this lower rate are taxed at the general merchandise rate of 6.25 percent plus applicable local taxes.
Definition of Medical Appliance under Illinois Regulation
A medical appliance is defined by regulation as an item that directly substitutes for a malfunctioning part of the human body, such as:
- Artificial limbs
- Dental prostheses and orthodontic braces
- Crutches and orthopedic braces
- Wheelchairs
- Heart pacemakers
- Dialysis machines
Corrective medical appliances such as:
- Hearing aids
- Eyeglasses
- Contact lenses
also qualify for the lower state rate. However, diagnostic equipment is not deemed to be a medical appliance.
Summary of the PLR Decision
Background of the Taxpayer’s Business
In this PLR, the taxpayer developed and marketed a lab-on-a-chip system that enables eye care practitioners to improve their standard of care by objectively and quantitatively testing for dry eye disease.
Details of the Taxpayer’s Product
The taxpayer proposed that its test product—consisting of a single-use, individually packaged, non-sterile, polycarbonate microchip designed to work with this system—should be subject to the reduced sales tax rate.
Department’s Determination
The Department determined that the test product was part of diagnostic equipment and was not a medical appliance taxed at a lower rate.
Tax Implication
Thus, the test product would be taxed at the general merchandise rate of 6.25 percent plus any applicable local taxes.
Key Takeaway: Diagnostic equipment, regardless of its medical application, is not considered a medical appliance under Illinois law and remains subject to the standard sales tax rate.
Frequently Asked Questions
What qualifies as a medical appliance under Illinois sales tax law?
A medical appliance is defined as a device that directly substitutes for a malfunctioning part of the human body. This includes items such as artificial limbs, hearing aids, contact lenses, and wheelchairs. These items are subject to a reduced state sales tax rate of 1% plus applicable local taxes.
Is diagnostic equipment eligible for the reduced sales tax rate?
No, diagnostic equipment is not considered a medical appliance under Illinois law and therefore is not eligible for the reduced sales tax rate. It is taxed at the general merchandise rate of 6.25% plus applicable local taxes.
Why was the lab-on-a-chip system taxed at the higher rate?
The Illinois Department of Revenue classified the lab-on-a-chip test product as diagnostic equipment, not a medical appliance. As a result, it was not eligible for the reduced tax rate and was subject to the general merchandise tax rate.
How does Illinois distinguish between medical appliances and diagnostic tools?
Illinois distinguishes medical appliances based on their direct substitution for a body part or function. Diagnostic tools, even if used in medical settings, are evaluated based on their function of identifying or measuring medical conditions and do not qualify as replacements or substitutes for body parts.
What is the sales tax implication for companies selling diagnostic medical products in Illinois?
Companies selling diagnostic medical products in Illinois should expect their products to be taxed at the standard 6.25% rate, unless they can clearly demonstrate that their product functions as a qualifying medical appliance under the state’s regulatory definition.