When are medical-supply payments involving Medicare, Medicaid, or Illinois HFS exempt from Illinois sales tax?

Plain-English summary

Direct payments from Medicare, Medicaid, or the Illinois Department of Healthcare and Family Services were exempt when the government exemption was properly documented with an active exemption identification number. The exemption followed the payer and payment path, not merely the patient's coverage status.

Split government and private payments

If Medicare paid 80% of a medical bill directly to the provider and the remaining 20% was billed to the patient or a private insurer, the GIL treated the direct 80% government payment as exempt and the other 20% as taxable.

A payment made by a patient or insurance company was not exempt merely because a government agency later reimbursed that patient or insurer. The government had to pay the provider or vendor directly.

Reduced rate for qualifying items

The GIL also stated that medicines and medical appliances were not taxed at the normal 6.25% Illinois state rate then in effect. They used a reduced 1% state rate under 86 Ill. Adm. Code 130.310.

What this means for you

Medical-supply vendors

Separate direct government payments from patient and private-insurer payments. Retain the active exemption identification number and documentation supporting the government-paid portion.

Medicare Part B transactions

Coverage alone did not control. A payment sent to the patient and then paid to the vendor remained different from a payment made directly by Medicare to the vendor.

Common questions

Q: Is an entire bill exempt when Medicare pays only part of it directly?
A: No. The GIL's example exempted the direct government-paid portion and taxed the patient or insurer portion.

Q: Does later government reimbursement make a patient's payment exempt?
A: No.

Q: What rate applied to medicines and medical appliances in this 2011 letter?
A: The GIL stated a reduced 1% Illinois state rate. Verify the current rate before relying on that historical figure.

Citations and references

• 86 Ill. Adm. Code 130.310 — reduced rate for medicines and medical appliances.
• 86 Ill. Adm. Code 130.2080(a) — sales directly to government bodies.
• 86 Ill. Adm. Code 130.2005 and 130.2007 — exempt organizations and exemption identification numbers.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2011/st-11-0074.pdf

Original ruling text

ST 11-0074-GIL 09/13/2011 EXEMPT ORGANIZATIONS
Please be advised retail sales made directly to Medicare and Medicaid are exempt from tax as
sales to a government body so long as the exemption is properly documented. See 86 Ill. Adm.
Code 130.2080(a). (This is a GIL.)

September 13, 2011

Dear Xxxxx:
This letter is in response to your letter dated August 24, 2011, in which you request
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website
at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
The purpose of this letter is to request information regarding the application of Illinois
sales tax to sales of medical supplies made to Medicare patients. Specifically, we are
requesting a General Information Letter regarding the application of Illinois sales tax
on sales of medical supplies to patients covered under Medicare Part A and Medicare
Part B.
Based on previous GILs issued by the Department specifically addressing Medicaid and
Medicare patients (ST 10-0098-GIL, ST 09-0141 GIL, and ST 99-0147-GIL), we
understand that sales made to the federal government are exempt from tax as sales
made to a government body. Such exempt sales must be documented through the use
of an active exemption identification number.
Under the traditional Medicare and Medicaid plan, sales made to Medicare and
Medicaid are exempt from tax as sales to a government body. No tax is due on
payments made directly to vendors by Medicare or Medicaid. However, tax is due upon
any portion of the bills paid by individuals not covered by Medicare or Medicaid. (See
ST 09-0141 GIL) While the statement extracted from the GIL may be read in one of two
ways, it appears that the Department means to associate ‘not covered by Medicare or
Medicaid’ to the ‘portion of the bills paid’ and not to the ‘individuals’.

Under Medicare Part A, all payments are made by the federal government directly to the
provider/vendor. However, under Medicare Part B, payments are made by the federal
government either to the patient or directly to the provider/vendor. Medicare Part B
patients are covered by Medicare, irrespective of whether payments under Medicare
Part B are paid to the provider/vendor or the patient.
For example, Patient X is covered under Medicare Part B where Medicare pays the
vendor directly. Patient Y is covered under Medicare Part B where Medicare pays the
patient. Both patients ‘purchase’ $100 of medical supplies. Medicare will pay 80% of
the charge or $80 – either directly to the vendor for Patient X or to the patient for Patient
Y.
We look forward to your clarification of the treatment of sales made to Medicare
patients. If you require any additional information, please call me.

DEPARTMENT’S RESPONSE:
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property to purchasers for use or consumption. Please note
that medicines and medical appliances are not taxed at the normal rate of 6.25%. These items are
taxed at a lower rate of 1%. See the Department’s regulation at 86 Ill. Adm. Code 130.310 which can
be found on the Department’s website.
Under the traditional Medicare and Medicaid plan, sales made directly to Medicare and
Medicaid are exempt from tax as sales to a government body so long as the exemption is properly
documented through provision of an active exemption identification number. See 86 Ill. Adm. Code
130.2080(a). While no tax may be due on payments made directly to vendors by Medicare, Medicaid,
or the Illinois Department of Healthcare and Family Services, tax is due upon any portions of bills paid
by individuals or private insurance companies not covered by Medicare, Medicaid, or the Illinois
Department of Healthcare and Family Services. This means, for example, when Medicare directly
pays 80% of the medical bill and the remaining 20% is billed to the patient or his insurance company,
assuming proper documentation of the exemption, the 80% is tax exempt as a governmental payment
while the 20% is taxable. 86 Ill. Adm. Code 130.2005 and 130.2007.
It is important to note that payments will only be exempt from tax when they are paid directly to
the provider/vendor by the government agency that has been issued an active exemption
identification number by the Department. It is not enough that a payment to the provider/vendor is
made by a patient or insurance company and then the patient or insurance company is reimbursed by
the government agency.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,

Debra M. Boggess
Associate Counsel
DMB:msk