Are Prescription Medications Taxed? What You Need to Know
Understand how prescription medications are taxed, including state variations and key distinctions from over-the-counter drugs.
Sales tax applies to many everyday purchases, but when it comes to prescription medications, the rules vary. Whether these drugs are taxed depends on state laws and how they are classified.
Understanding these tax rules can help patients avoid unexpected costs and ensure they’re being charged correctly.
Basic Tax Status of Prescription Medications
Prescription medications are generally exempt from sales tax at the federal level in the United States, but state and local governments set their own policies. Most states exempt these drugs, recognizing them as necessities. However, some states take a different approach. Illinois taxes prescriptions at a reduced rate of 1%, while Georgia exempts most but applies tax to those dispensed directly by a physician rather than a pharmacy.
Local governments can also impose additional taxes, meaning a medication might be tax-free in one city but subject to a small local tax in another. These variations can lead to confusion when patients see unexpected charges on pharmacy receipts.
State Sales Tax Variations
While many states exempt prescription medications, the structure of these exemptions varies. Some states apply broad exemptions covering all prescribed drugs, while others impose conditions. Texas exempts prescriptions but taxes certain medical supplies unless they qualify under state law. For example, insulin may be tax-free, but syringes or glucose monitors could still be taxed.
How states define and categorize prescriptions also affects taxation. In New York, most prescription drugs are exempt, but compounded medications—custom-made by pharmacists—must meet specific criteria. If a compounded drug is not dispensed under a valid prescription, it may be taxed. Minnesota exempts most prescriptions but does not always extend that exemption to dietary supplements or vitamins.
The method of distribution can also impact taxability. In California, prescriptions are exempt when dispensed by a licensed pharmacist, but if the same drug is provided by a healthcare provider as part of a medical service, it may be taxed differently. This can lead to price differences depending on where a patient obtains their medication.
Distinguishing Prescriptions vs. Over-the-Counter
A medication’s classification determines whether it qualifies for a tax exemption. Prescription drugs require authorization from a licensed provider, while over-the-counter (OTC) medications do not. Many states exempt prescriptions but still tax non-prescription drugs, even if a doctor recommends them.
Some states offer partial exemptions for OTC drugs in specific cases. Florida exempts certain non-prescription medications labeled for “medicinal purposes,” such as aspirin or antihistamines. However, personal care products like medicated shampoos or fluoride toothpaste remain taxable, even if they contain active ingredients. This creates situations where similar products are taxed differently despite their intended use.
Retailers also influence how medications are taxed. Pharmacies and grocery stores may have different tax collection procedures depending on whether a product is processed through a prescription system. In some cases, an OTC drug may be tax-exempt if dispensed with a prescription, while the same product purchased off the shelf is taxed. Consumers who regularly buy medications like allergy relief or pain management drugs might reduce their tax burden by requesting a prescription from their doctor.
Documentation Requirements
Proper documentation ensures the correct tax treatment of prescription medications, especially for individuals seeking reimbursement through health savings accounts (HSAs), flexible spending accounts (FSAs), or itemized tax deductions. The Internal Revenue Service (IRS) allows prescription drug costs to be deducted as qualified medical expenses, but only if taxpayers retain itemized receipts and pharmacy statements. Without these records, deductions or reimbursement claims may be denied.
Pharmacies typically provide detailed receipts listing the medication name, prescriber information, and classification as a prescription drug. These receipts are necessary for substantiating medical expenses, particularly for taxpayers whose total medical costs exceed the adjusted gross income (AGI) threshold for deductions. In 2024, the IRS permits deductions for medical expenses exceeding 7.5% of AGI, making accurate record-keeping important for those with high healthcare costs.