TAX EXEMPTION: DENTAL PROSTHESIS S.B. 566 & 567:
ANALYSIS AS PASSED BY THE SENATE
Senate Bills 566 and 567 (as passed by the Senate)
RATIONALE
According to the Department of Treasury, Michigan law has exempted various prosthetic devices from sales and use taxes since 1955. In 1985, the Department issued a Letter Ruling addressing sales of a specific type of dental prosthetic. (A Letter Ruling is a formal document issued by the Department to a taxpayer on one or more specific tax matters.)
Specifically, according to a June 2017 Department publication, Letter Ruling 1985-20 found that, "when a dental lab manufacturers a device in accordance with specifications provided by a dentist it provides a non-taxable service rather than making a [taxable] sale to the ultimate consumer." Therefore, dental prosthetics were exempt from sales and use tax. As of July 1, 2017, however, the Department revoked the Letter Ruling, citing the definition of "prosthetic device" enacted by Public Acts 172 and 173 of 2004, which excluded dental prosthetics. (Those Acts made a number of changes to the Use Tax Act and the General Sales Tax Act, respectively, as part of a package of legislation implementing Michigan's participation in the multistate Streamlined Sales Tax Project.)
Some believe that revoking the dental prosthetics tax exemption improperly increases the already burdensome medical costs that consumers face. In addition, since oral health is considered to be a critical component of a person's overall health, some feel that it is inappropriate to tax the sale of these devices. Therefore, it was suggested that the exemption be reinstated.
CONTENT
Senate Bills 566 and 567 would amend the Use Tax Act and General Sales Tax Act, respectively, to exempt from taxation under those Acts the sale or purchase of dental prostheses.
Specifically, the Acts exempt from taxation the sale or purchase of a prosthetic device, durable medical equipment, or mobility enhancing equipment. The Acts define "prosthetic device" as a replacement, corrective, or supportive device, other than contact lenses and dental prosthesis, dispensed according to a prescription, including repair or replacement parts for that device, worn on or in the body to do one or more things listed under the Acts. The bills would delete reference to dental prosthesis from the exception to the term in both Acts.
Each bill would take effect 90 days after its enactment.
205.51a (S.B. 567)
ARGUMENTS
(Please note: The arguments contained in this analysis originate from sources outside the Senate Fiscal Agency. The Senate Fiscal Agency neither supports nor opposes legislation.)
Supporting Argument
Research has shown the importance of oral health for a person's overall health. According to the Mayo Clinic, oral health problems have the ability to affect the rest of a person's body. Besides the more obvious oral problems that can develop due to poor oral health care, such as gum disease or tooth decay, oral health may contribute to endocarditis (an infection of the inner lining of the heart), cardiovascular disease, and premature birth or low birth weights. Other conditions, such as diabetes, HIV/AIDS, osteoporosis, and Alzheimer's disease also may affect a person's oral health.
Maintaining one's oral health can be expensive. According to bankrate.com, approximately 2.3 million dental implants are made each year to replace lost teeth. The website states that the two most common options for replacing a missing tooth or teeth are implants and dentures. While dentures tend to be less expensive than implants, they can still cost around $2,500, and dentures wear down over time, meaning they will need to be replaced for an additional $2,500. In contrast, an implant starts at $3,000, and replacing multiple teeth with implants may increase the cost to well over $10,000, although implants do not need to be replaced as often as dentures. Regardless of the prosthetic the consumer chooses, he or she is faced with an expensive decision.
The bills would reduce burdensome medical costs, make necessary dental prosthetics more affordable, and improve the health of consumers.
Legislative Analyst: Drew Krogulecki
FISCAL IMPACT
The bills would reduce State General Fund and School Aid Fund revenue, and local unit revenue from constitutional revenue sharing, by approximately $8.1 million per year. Under current law, labs may claim an industrial processing exemption for property used in manufacturing dental prosthetics and the sales tax is paid on the transaction from the labs to the dentists. Based on national data, the value of shipments from dental labs increased 2.8% between 2007 and 2012. Applying the same growth rate to the 2012 data, the most recent data available, suggests that sales and use tax revenue would decline by approximately $8.1 million if the bills were effective for all of 2017.
The distribution of the impact between the General Fund, School Aid Fund, and constitutional revenue sharing would depend on the amounts exempted under the sales tax relative to the amounts exempted under the use tax. The School Aid Fund receives approximately 73.3% of sales tax revenue, while constitutional revenue sharing receives 10%, and the remainder is directed to the General Fund. However, the School Aid Fund receives one-third of use tax revenue, and the remainder of any reduction lowers General Fund revenue. (Use tax collections providing revenue to the Local Community Stabilization Authority would be unaffected by the bills.) The bills' potential impact is expected to affect mostly sales tax revenue. If 100% of the bills' impact were under the sales tax, the bills would reduce School Aid Fund revenue by approximately $6.0 million per year, constitutional revenue sharing to local units by approximately $0.8 million per year, and General Fund revenue by approximately $1.4 million per year.
This analysis was prepared by nonpartisan Senate staff for use by the Senate in its deliberations and does not constitute an official statement of legislative intent.