As a provider of personal services, a dentist’s services are expressly exempt from sales tax. However, if your practice sells tangible personal property to patients such as mouthwash, whiteners and toothbrushes, or purchases products such as Invisalign or similar products, you must collect sales tax on these items.
To make matters worse, dentists can be consumers of tangible personal property and services as well. Your practice is responsible for paying sales tax on purchases of supplies and equipment as well as items that are consumed when rendering your services, such as crowns, braces, brackets and implants. If the vendor you purchased these items from did not charge sales tax, you must pay use tax to the Ohio Department of Taxation.
The opposite of a sales tax, a use tax is imposed when you purchase a taxable item but don’t pay sales tax on it. And thanks to rapidly rising deficits, state taxing authorities are looking closely at Ohio dental practices for unpaid use tax for items purchased from vendors that have not charged sales tax.
We find that many dental practices have no idea that they are at risk of exposure to this tax. Yet what you don’t know can hurt you – and your practice. If you’ve never filed a sales or use tax return, the state can audit your practice all the way back to the date it started business.
The magnitude of unpaid sales and use taxes, plus interest and penalties, could be enormous. We recently helped defend a practice that was audited and owed approximately $65,000 of unpaid tax, interest and penalties. This financial hardship resulted from unpaid tax stemming from taxable purchases made seven years earlier. In this case, the taxpayer was purchasing laboratory items from an out-of-state lab that was not charging Ohio sales tax. As a result, the taxpayer should have been paying Ohio use tax.
Here another example of how use tax works. Let’s say your practice purchased Invisalign. Did you pay Ohio sales or use tax? Did you charge your patients sales tax? Depending on the facts and circumstances, your dental practice could have significant Ohio sales and use tax exposure. Remember, a dentist’s services are not subject to sales tax. However, a dentist’s purchases of consumables are subject to sales tax. Additionally, in the case of Invisalign, the state could find that a practice is merely reselling the item to the patient in the same form that it is buying it. Therefore, the dental practice would charge the patient sales tax.
What if You’re Not in Compliance?
It’s certainly to your benefit to approach the use tax proactively. Your accounting professional can review your purchases to help ensure that your practice remains in tax compliance. If your accounting team does find tax liability, you may be able to enter into a Voluntary Disclosure Agreement (VDA) with the state. A VDA is a binding agreement that allows a taxpayer to proactively disclose tax liabilities in exchange for more favorable tax treatment. Typically, the VDA results in a limited look-back period and a waiver of penalties.
In the initial inquiry for the VDA, your tax professional would make an anonymous request to report the sales and tax that is due. The state would then determine the amount of tax and interest due. Your practice would be revealed once the agreement is reached. As mentioned previously, the benefit of using a VDA is that it limits the length of time the state can go back to review your practice’s purchase records (usually 36 months), lessening the liability your practice might otherwise face. Also through the VDA, most states waive penalties, and after you’ve paid the tax and interest, your practice can move forward with a clean slate.
Since the state’s penalty for past-due sales and use tax is 50 percent of the tax owed, the total amount owed by a practice can climb very easily – making it doubly important to be proactive, rather than waiting for a notice from the Ohio Department of Taxation. Based on our experience, entering into a VDA can reduce the total amount of exposure by approximately 60 percent for practices that have been in existence for more than four years.
If your accounting professional hasn’t discussed the possibility of exposure to sales and use tax to your dental practice, be sure to bring it up in your next consultation. Just like you provide preventive care to your patients, proactively reviewing your exposure to sales and use taxes can help ensure the health of your practice.
Dental Practice Tax Planning
If you have any questions or need to talk through your current tax situation, contact Rea & Associates. Our team of dedicated, knowledgeable Dental CPAs is ready to help you approach your tax situation proactively.
Chad Bice, CPA, also contributed to this post.