The growth of telemedicine services due to the COVID-19 pandemic brings new considerations and concerns to provider organizations over state tax liability. Those providers that deliver telemedicine services beyond their home state must consider other states’ requirements for state sales, income, and payroll taxes.

More States Establishing Nexus to Collect Taxes

“Nexus” refers to the connection between a taxpayer organization and the states in which it operates that require the organization to remit tax payments. The organization must meet certain requirements for nexus to exist and the requirements vary state by state.

Although the U.S. Constitution poses some limits on nexus, the U.S. Supreme Court ruled in favor of South Dakota in South Dakota v. Wayfair (June 2018). This decision cleared the way for states to impose sales and use tax requirements, including those applicable to out-of-state businesses, even if they have no physical presence in the state. Since the Wayfair decision, states have become more aggressive in establishing nexus to collect sales and use tax.

In many states, the delivery of telemedicine services may be subject to state taxes. Nexus can apply to physicians and other medical service providers who reside in the state, as well as to physicians who are licensed to practice in the state, or for the use of rented medical equipment such as patient monitoring devices. In some states, exceeding a certain sales threshold may trigger nexus.

For each of the states where an organization is providing telemedicine services, it is important for the provider to review state requirements and nexus for sales, income, and payroll taxes.

State Sales Tax

Although services generally are not subject to state sales tax, some states identify certain services that are taxable. Several states tax all services unless they are specifically exempted by state law. Also, some states may view telemedicine as a data or information service, making it liable for taxation. Patient equipment rental also may be subject to sales tax.

State Income Tax

The location of both physicians and patients is an important consideration for determining state income tax liability. State income taxes are calculated by adjusting federal income using state formulas and multiplying by an apportionment percentage.

The apportionment percentage is comprised of a mixture of sales, property, and payroll, although sales alone are most commonly used. To determine the amount of sales transacted within a given state, different methods may be applied to determine the amount for services provided.

States determine the amount of services delivered by viewing location for the services using one of three methods. Depending on each taxpaying organization’s specific details and tax profile, correctly applying the sourcing rule has a significant impact on the potential state tax liability. These sourcing methods are:

  • Market-based sourcing looks at revenue based on where the benefit was received. The location of the patient would be used for telemedicine services.
  • Cost-of-performance sourcing views the revenue as originating where the majority of the costs are incurred. For telemedicine services, this could be the location of the physician or the headquarters of the tax-paying entity.
  • The proportional cost method allocates revenue to the state based on proportional costs associated with that revenue. For telemedicine, if 20% of the cost is incurred in a state, 20% of the revenue is allocated to that state.

Payroll Taxes

The rise in telecommuting during the pandemic has highlighted the issue of payroll taxes for remote workers. Thus, payroll-related taxes for telemedicine service providers are another issue that organizations must address. Healthcare providers likely will be required to register and file tax returns in all states where they have employees.


Each organization providing telemedicine services has different characteristics and circumstances, and each state has set its own requirements for tax nexus. Taxpaying organizations are advised to discuss their business operations and unique circumstances with their tax advisors to ensure they address any potential state tax liabilities.

If you have further questions about Telemedicine Services that may be taxed, please contact DMJ.

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