Does Texas's prescription-drug sales tax exemption apply to drugs sold in Louisiana to individuals covered by Texas Worker's Compensation insurance?

Plain-English summary

The taxpayer asked whether prescription drugs sold in Louisiana to individuals covered by Texas Worker's Compensation -- and paid for by various insurance carriers -- could qualify for Texas's sales tax exemption on prescription drugs and medicines. The stub's inherited title, "Prescription Drugs — Sold Oos To Individuals Covered By Texas Worker'S Compensation," is a slightly garbled STAR heading ("Oos" apparently stands for "Out of State"), but it accurately reflects the letter's actual subject, so no correction was needed beyond cleaning up the phrasing in subject_title.

The Comptroller explained that Texas's prescription drug exemption covers sales made in Texas and the importation of prescription drugs from another state into Texas -- but it does not reach sales that occur entirely in another state. Because the drugs in question were sold in Louisiana to Louisiana residents, Louisiana's sales tax law governs the transaction, even though the patients happened to be covered by Texas Worker's Compensation. That means the insurance carriers paying for the drugs would owe Louisiana sales tax, not receive a Texas exemption.

The letter also rejected a governmental-purchaser theory. Texas exempts purchases by the United States government and by the State of Texas and its political subdivisions, but it does not extend that exemption to other states, nor does it treat a purchase as being "by" the State of Texas merely because the Texas Worker's Compensation Commission ultimately pays the bill. The Comptroller noted that the sales are legally made to the patients, not to the State of Texas, so the fact that a state agency foots the bill doesn't convert the transaction into an exempt government purchase.

What this means for you

Insurance carriers and employers handling out-of-state workers' comp claims

If an injured worker covered by Texas Worker's Compensation fills a prescription in another state, don't assume Texas exemption rules travel with the claim. The state where the sale physically occurs controls the sales tax treatment, so carriers should expect to pay that state's tax (here, Louisiana's) on drugs purchased there, even though the underlying claim and payer are Texas-based.

Accountants and tax professionals

This letter is a useful reminder that Texas's tax-exempt-purchaser rules (for the U.S. government and Texas government entities) are narrowly limited to purchases made by those governments themselves. A state program merely paying or reimbursing a private individual's purchase does not convert the sale into an exempt governmental purchase -- the legal purchaser (here, the patient) still matters.

Pharmacies selling to out-of-state patients

Texas's prescription drug exemption only reaches sales made in Texas or the importation of prescription drugs into Texas from elsewhere. A sale completed entirely in another state is taxed (or not) under that state's own law, regardless of any Texas nexus in the payer or patient's coverage.

Common questions

Q: Does the Texas prescription drug exemption cover drugs bought in another state?
A: Only if the drugs are imported into Texas. A sale that occurs entirely in another state, like Louisiana in this letter, is governed by that state's tax law, not Texas's exemption.

Q: Does it matter that the patient is covered by Texas Worker's Compensation?
A: No. The Comptroller found that being covered by Texas Worker's Compensation doesn't change where the sale legally occurs or who the purchaser is -- the sale is still to the patient, made in Louisiana, so Louisiana tax law applies.

Q: Could the Texas Worker's Compensation Commission's payment for the drugs make the purchase exempt as a government purchase?
A: No. The Comptroller explained the sales are made to the patients, not to the State of Texas, so the fact that a state commission ultimately pays for the prescriptions does not make the sales exempt.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9205L1171A13

Original ruling text

May 11, 1992

Dear **:

Thank you for your letter of April 16, 1992, concerning the taxability of
prescription drugs sold in Louisiana to individuals who are covered by Texas
Worker's Compensation and paid by various insurance carriers.

The Texas Tax Code exempts the sale and purchase of prescription drugs and
medicines. This exemption pertains to sales of drugs in this state and to the
importation of prescription drugs from another state.

You state that the State of Louisiana taxes the sale and purchase of
prescription drugs. If the drugs are sold in Louisiana to residents of
Louisiana who happen to be covered by Texas Worker's Compensation, the
Louisiana tax law prevails. This means that the insurance carriers would be
required to pay the Louisiana sales tax on the prescription drugs.

The Texas Tax Code exempts the purchase of taxable items by the United States
of America, its unincorporated agencies and instrumentalities and corporations
that are wholly-owned by the United States of America. The Texas Tax Code also
exempts the State of Texas, its unincorporated agencies and instrumentalities,
and political subdivisions of the State of Texas. The Texas Tax Code does not
exempt sales of taxable items to or purchases of taxable items by other states.

Furthermore, the sales of prescription drugs are to the patients, not to the
State of Texas. The fact that the Texas Worker's Compensation Commission pays
for the prescriptions does not make the sales exempt.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call toll free 1-800-252-5555 if you have any questions or need more
information. You may write to Tax Administration Division, Comptroller of
Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division