Durable Medical Equipment Sales Tax Exemptions: What a Michigan Court Teaches Medical Sellers

If you sell medical products, you’ve probably thought at least once: “It’s medical, it’s prescribed, surely it’s exempt from sales tax.” It’s a reasonable assumption. Unfortunately, it’s also a really expensive one to get wrong.

The latest cautionary tale comes from Michigan, where the Court of Appeals just told a medical supply company that bandages, incontinence briefs, medical tape, and wound dressings—despite being prescribed by licensed providers to patients with disabilities—don’t count as prosthetic devices under state law. The company thought it was on solid ground. The court disagreed. Now, there are years of back taxes owed.

Let’s dig into what happened, why it happened, and how to keep your business off the next court docket.

FAQ: Is Medical Equipment Exempt From Sales Tax?

The Case: Rehab & Mobility Systems v. Michigan Department of Treasury

Sales tax exemptions rarely come in black and white, and this case is a great example of that.

Here’s the setup: Rehab & Mobility Systems, LLC (RMS) sold prescription incontinence briefs, medical tape, wound dressing materials, gauze, gloves, lubricants, underpads, and body wipes—all prescribed by licensed healthcare providers to patients with disabilities—and treated the sales as exempt. RMS leaned on Administrative Rule 89, which had listed items like pressure pads, bandages, and orthotic supports as exempt “prosthetic devices” when sold under a written prescription.

The Michigan Department of Treasury audited RMS for 2017-2019 and disagreed, assessing tax on those sales. RMS appealed, and things got procedurally messy along the way (including a misapplied overpayment credit). But the central question made it all the way to the Court of Appeals: were these items actually “prosthetic devices”?

The court’s answer was a firm no. Under MCL 205.54a(1)(k), an exempt device has to be a “replacement, corrective, or supportive device.” RMS never showed its products did any of those three things.

So why did an “in effect until 2023” rule not save RMS’ sales?

This is the real lesson of the case. An administrative rule can’t broaden a statutory exemption beyond what the legislature actually wrote. Because MCL 205.54a(1)(k) is strict about what qualifies as a prosthetic device, Rule 89 couldn’t stretch the definition to cover RMS’s products, even while the rule was technically still valid. RMS had built its tax position on guidance that had quietly drifted out of step with the underlying law. The rule said one thing. The statute said another, narrower thing. And the statute always wins.

This Isn’t Just a Michigan Problem

This might look like an isolated, unlucky break, but it isn’t. Courts and tax authorities across the country have been drawing the same tight line around “prosthetic device” and similar exemption categories for years—and it’s usually the seller who takes the hit.

Let’s take a closer look at these:

Minnesota found that wound care products meeting the definition of a “dressing” were exempt, but a large batch of other items in the same product line that weren’t specifically dressings didn’t qualify—leaving the seller on the hook for a meaningful chunk of back tax.

Missouri drew a sharp line around what “replace” really means. Soft tissue products used in reconstructive surgery were ruled taxable because Missouri defines an exempt prosthetic device as one that replaces all or part of an internal body organ—and these products repaired or supplemented existing tissue rather than replacing an organ. Medically essential? Absolutely. Statutorily exempt? Nope.

South Carolina has hit this wall more than once. In one case, breathing equipment and nutritional formulas were denied exemption because the state didn’t consider the breathing apparatus a prosthetic device, and the formulas weren’t sold under a prescription. In a separate ruling, a company selling prescription TENS units for pain relief learned that a prescription and a Medicaid classification still wasn’t enough. The units weren’t “medicine” and didn’t replace a missing body part, so sales tax applied. In other words, even a federal or clinical label can have zero bearing here.

How Medical Items Are Actually Taxed

The common thread across these rulings: the outcome hinges on whether the specific product satisfies the specific statutory definition—not on how “medical” it feels, and not on how the federal government classifies it. That said, a few broad patterns hold up across the country.

Category matters

Sales tax applications shift across broad categories like durable medical equipment, mobility-enhancing equipment, prosthetic devices, and general medical supplies. It can shift again within a category, depending on the specific product. Oxygen delivery equipment, enteral feeding systems, dialysis systems, eyeglasses, hearing aids, and diabetic supplies can each get different treatment even inside the same state.

Prescriptions are common requirements

Arkansas, for instance, exempts durable medical equipment, mobility-enhancing equipment, prosthetic devices, and disposable medical supplies prescribed by a physician—but only when sold to a specific patient under a prescription written before the sale. Timing matters more than most sellers assume.

Some states stack on an insurance requirement

Alabama, for example, generally taxes medical devices unless the item both treats an illness/injury (or replaces a body part), and is purchased under a valid prescription, and is billed to Medicare, Medicaid, or a health benefit plan. That’s three boxes that need to be ticked before an exemption can be legal.

A federal or Medicaid classification doesn’t guarantee exemption

Items treated as durable medical equipment for federal reimbursement purposes can still be fully taxable at the state level, because the state’s own statutory definition—not the federal label—controls the sales tax outcome.

Administrative guidance can fall out of sync

Exactly as it did in Michigan, administrative guidance and legislative statute don’t align 100% of the time. When that happens, courts side with the statute almost every time.

Not sure where your products actually fall? Between shifting definitions, prescription requirements, and insurance stacking rules, exemptions aren’t a one-state answer. If you’re selling medical equipment or supplies across multiple states, SalesTaxSolutions.US can help you pin down exactly how your products are taxed in every state where you have nexus, before an auditor does it for you.

How to Get Medical Exemptions Right as a Seller

If this all feels needlessly convoluted, you’re not wrong. The gap between “feels medically exempt” and “meets the legal definition of exempt” can be wide, and it’s different in every state.

A few habits can keep you out of an expensive audit:

1. Read the actual statutory definition, not your product’s marketing description. “Medical,” “prescribed,” and “prosthetic” get used interchangeably in everyday language. They are not interchangeable in tax law.
2. Check whether the guidance you’re relying on is still current. Administrative rules, bulletins, and FAQs can lag behind statutory amendments for years. If a rule seems to grant a broader exemption than the statute itself, be suspicious. You can be sure a court will be too.
3. Document your exemption position item by item, not category by category. “Wound care” isn’t specific enough, as Minnesota’s split ruling showed. Some dressings qualify, others in the same line don’t. In states that require exemption certificates, collect them every time.
4. Treat multi-state selling as multi-state analysis. The same product can be exempt in one state and taxable in the next, purely based on how narrowly each defines “replace” or “prosthetic.”

Medical exemptions exist to ease the tax burden on genuinely necessary health items. But necessary and exempt are legally distinct concepts, and states—backed by their courts—are consistently unwilling to blur that line in the taxpayer’s favor. When in doubt, don’t guess. Confirm.

Confirming shouldn’t mean guessing alone. If you’re a medical equipment or supply seller and you’re not 100% certain your exemption positions would hold up under audit, SalesTaxSolutions.US can review your product taxability determinations and your nexus footprint so you’re relying on current law, not outdated assumptions.