Are Supplements Taxable? Sales Tax vs. FSA/HSA Rules

The taxation of dietary supplements is complex and often confusing. Their tax treatment is not uniform, depending on state sales tax classification and eligibility as medical expenses for tax-advantaged accounts. Understanding these distinctions requires navigating varying regulations.

Sales Tax Applicability

Sales tax on dietary supplements varies by state. Most states classify supplements as general merchandise, subjecting them to standard sales tax. This is because supplements are generally not considered “food products” or prescription medicine for sales tax.

The distinction often hinges on a product’s label and intended use. Products with a “Nutrition Facts” label, like food, may be treated differently than those with a “Supplement Facts” label, which are typically taxed. Some states exempt or tax food items at a lower rate but exclude dietary supplements. Conversely, a few states might consider certain “edible” supplements as food, while others in pill, capsule, or liquid form are taxed as non-food items. Product composition also influences classification; for instance, a protein bar might be taxed as food or a supplement based on its claims and ingredients.

States also differ on whether a prescription influences sales tax. While some states might exempt dietary supplements if prescribed by a licensed medical practitioner, most do not. This means a healthcare provider’s recommendation typically won’t prevent sales tax unless the state has a specific exemption for prescribed non-drug items. The point of sale, online or in-store, does not change taxability; sellers must follow the sales tax rules of the delivery state. Due to this variability, determining a specific supplement’s sales tax treatment requires consulting relevant state regulations.

Qualifying for Tax-Advantaged Accounts

Beyond sales tax, supplements’ eligibility for reimbursement through Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) follows IRS rules. An expense must qualify as “medical care,” meaning it’s primarily for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any body structure or function. Expenses merely beneficial to general health, like routine vitamins, are typically not eligible medical expenses.

Most over-the-counter (OTC) dietary supplements require a Letter of Medical Necessity (LMN) to qualify as an eligible medical expense. An LMN is a document from a licensed healthcare provider, like a physician, confirming the supplement is recommended to treat a specific medical condition. This letter substantiates the expense is for a medical purpose, not general well-being.

The LMN must include specific details to be valid. It outlines the patient’s diagnosed medical condition, how the supplement helps treat it, and the treatment duration. For example, an LMN could make an iron supplement eligible if prescribed for iron-deficiency anemia, or a specific vitamin for a diagnosed deficiency. Without such a letter, purchasing most supplements from an FSA or HSA would not meet IRS requirements for qualified medical expenses, potentially leading to taxes and penalties.

Documentation for Reimbursement

Once a supplement is eligible for FSA or HSA reimbursement, proper documentation is required. Primary documents needed are an itemized receipt and the Letter of Medical Necessity (LMN) from a healthcare provider. The itemized receipt must show the product, purchase date, and amount paid.

The LMN should detail the specific medical condition, exact supplement recommended, and treatment duration. This ensures the expense aligns with the IRS definition of a qualified medical expense. Retain all supporting documentation, including the LMN and itemized receipts, for IRS audit purposes. Keep these records consistent with tax retention guidelines, typically at least three years, or longer if the account remains open.

Submit these documents to the FSA or HSA administrator via online portal or mail. While some FSA debit card transactions are automatically approved, many claims, especially with an LMN, require manual submission for review. HSA users are responsible for maintaining records to substantiate qualified medical expenses for IRS inquiry, even if administrators don’t require immediate receipt submission.