Publication 45, Hospitals and Other Medical Facilities
Other Tax Issues

How Payment Sources—Such as Insurance, Medi-Cal, and Medicare Payments—Affect Tax Liabilities

Insurance company payments

There is no effect on the application of tax to a sale if payments are made by an insurance company. Such payments are treated as though they had been made directly by the patient.

Medi-Cal payments

As with insurance payments, Medi-Cal payments are treated as though the payment was made directly by the patient. They do not affect the application of tax.

Medicare payments

Part A payments

Tax does not apply to the sale of property if payment for the property is made under Part A of the Medicare Act. Under Part A, you, the healthcare provider, have a contract with the U.S. government to provide certain services. Therefore, sales of medicines, devices, appliances, and supplies in which payment is made under Part A qualify as an exempt sale to the U.S. government.

As explained under General Application of Tax, hospitals and medical facilities are generally consumers of the property they provide to patients in connection with medical services. Accordingly, no deduction may be taken as a sale to the U.S. government when hospitals and medical facilities are consumers of the property. Hospitals and other medical facilities owe tax on their purchase of consumable items.

Deductions for Sales to the United States government. If your sale is already exempt (such as the sale of an exempt medicine), a second deduction is not allowed under Sales to the United States government. In addition, since Medicare reimburses for a reasonable cost, only amounts received from the government are allowable under this deduction.

Part B payments

Sales made under Part B of the Medicare Act do not qualify as exempt sales to the U.S. government. Under Part B, the hospital or other medical facility does not have a contract with the U.S. government. The contract is between the patient and the U.S. government, and unless the sale is otherwise exempt (such as the sale of an exempt medicine), the hospital or other medical facility must report and pay tax on the transaction.

Research Grants

You may receive funding from government or private sources to initiate or continue research in the development of cures or treatments for human illnesses or diseases. You are the consumer of all equipment and supplies used for such research. As a consumer, you will generally pay tax to your supplier (see exception below). If you purchase from an out-of-state vendor that does not collect tax, you will be liable for the use tax and you must report the purchase price on your return under Purchases Subject to Use Tax.

Exception—property purchased for the U.S. government. Tax does not apply to your purchase of property used for research if you purchase the property for the U.S. government and title to the property passes to the government prior to use.

Recordkeeping

You are required to keep business records so that we can:

  • Verify the accuracy of your sales and use tax returns.
  • Determine if you have correctly paid the tax due on your sales and purchases.

Your records must include:

  • The normal books of account, which can include information stored on computers.
  • Documents of original entry (bills, receipts, invoices, job orders, contracts, or other documents supporting the entries in the books of account).
  • All schedules or working papers used to prepare tax returns.

You should also retain resale and exemption certificates and any other information needed to substantiate exemptions and deductions.

You must keep records pertaining to sales and use tax liabilities for a period of four years unless we give you written authorization for their earlier destruction. If we are auditing your records, you should retain all records for the period being audited until the audit is completed.

Prescriptions

Prescriptions must be retained by any pharmacy (including those within a health facility) to support exemptions for deductions claimed on sales of prescription medicines. For more information, see Prescription Defined.

Items "deemed to be dispensed on prescription."

Some items, when sold by a pharmacist as directed by a physician, are "deemed to be dispensed on prescription." The following information is needed for such sales:

  • Name of purchaser
  • Name of physician
  • Date of sale
  • Item sold
  • Selling price

Reimbursement for Sales Tax

Although you are required to pay and report sales taxes to us, you may be reimbursed by the purchaser for the amount of tax you owe on a sale. For example, if you are required to pay $10.00 in sales tax, you may pass that cost on to the purchaser, provided it is agreed to as part of the sale. It is presumed that the customer agrees to pay the addition of tax if:

  • You list a separate amount for sales tax reimbursement on your receipts or invoices, or
  • You post a sign on your premises stating that sales tax reimbursement will be added to all prices of taxable merchandise, or make a similar statement on price tags, advertising material, and other printed material directed to the purchaser, or
  • The sales agreement specifically calls for the addition of sales tax reimbursement.

If you include sales tax reimbursement in your prices rather than itemizing it separately on your invoices or receipts, you must inform the buyer that tax is included. You can post this information at your premises in a location that is visible to purchasers, or you can include it on a price tag or in an advertisement (whichever is applicable). Use one of the following statements:

  • All prices of taxable items include sales tax reimbursement computed to the nearest mill, or
  • The price of this item includes sales tax reimbursement computed to the nearest mill.

Deductions and Exemptions

Sales for resale

You may sell or trade in equipment or sell supplies to others who intend to resell the merchandise. You must obtain a valid resale certificate from the purchaser to document the sale as nontaxable. For more information on the acceptance or use of resale certificates, see publication 73, Your California Seller's Permit, and publication 103, Sales for Resale.

Tax-paid purchases resold

If you have paid an amount for sales or use tax on a purchase and make a taxable sale of the property prior to using it, you can take a deduction on your return to recover the tax amount paid. When you report the sale, enter your cost (purchase price excluding tax) for the item under Cost of tax-paid purchases resold prior to use.

Bad debts

If you have reported and paid tax on a sale and have been unable to collect payment, you may claim a bad debt deduction. The deduction can only be taken for the amount of taxable sales, excluding any applicable tax, and excluding any fees for uncollectible accounts or bad checks. The bad debts must be written off for income tax purposes, or if you are not required to file income tax returns, they must be written off in accordance with generally accepted accounting principles.

Please note: There are many rules that govern deductions for bad debt losses. For more information, please see Regulation 1642, Bad Debts.

Other common deductions and exemptions

As explained in other parts of this publication, certain hospital and other medical facilities' sales are not subject to sales and use tax. You may take a deduction on your sales and use tax return for these sales, including:

Revision June 2026