March 16, 2021

State Tax Considerations for Telemedicine

By John Bonk, National State & Local Tax Leader

State Tax Considerations for Telemedicine Healthcare

A remote workforce has long been a significant state tax issue for businesses. With the growth of telemedicine during the pandemic, the topic takes on new relevance. Taxpayers need to consider the implications of a remote workforce and client base for their state sales, income and payroll tax requirements.

Determining Nexus

Nexus is a state’s ability to impose a tax on a taxpayer and is limited by the U.S. Constitution. Generally, having an employee in a state is enough to create nexus, which means that the taxpayer may have to register and remit taxes, even if it does not have a physical presence in that state. This includes physicians and other medical service providers.

Beyond the physical presence of a telemedicine physician in a given state, for example, there are other items to consider, such as whether a physician is required to be licensed in a state or whether the physician is renting equipment, such as patient monitoring devices. States may also claim that nexus is created by the use of mobile health apps in their states. After the U.S. Supreme Court ruling on June 21, 2018, in South Dakota v. Wayfair, Inc., states have become more aggressive. In many instances, exceeding a sales threshold amount is enough to create nexus in a state.

Telemedicine & Sales Tax

Telemedicine could be subject to sales tax in some states. While most states do not subject all services to sales tax, they identify specifically taxable services. A number of states tax all services unless they are specifically exempt. Furthermore, the use of a telemedicine platform could be considered an information or data service, which is taxable in many states. Rental of patient equipment could also be subject to sales tax.

State Income Tax Considerations

For state income tax purposes, the location of patients and physicians both matter. State income taxes are computed by adjusting federal income using state formulas and multiplying by an apportionment percentage.

The apportionment percentage is comprised of a combination of property, payroll, and sales. The most common apportionment percentage is based solely on sales. When determining 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 using market-based sourcing, cost-of-performance sourcing, or a proportional cost method of accounting.

Market-based sourcing looks at revenue based on where the benefit was received. For telemedicine, this would likely be the location of a patient. For a cost-of-performance state, the revenue is sourced to where the majority of the costs are incurred; this location could vary in telemedicine and could be the location of the physician or the headquarters of the tax-paying entity. The proportional cost method generally sources revenue to a state based on proportional costs associated with that revenue; therefore, if 10% of the cost is incurred in a state, 10% of the revenue is in that state.

Depending on each taxpayer’s specific details, correctly applying the sourcing rule has a significant impact on the potential state tax liability.

Payroll Taxes

Payroll-related taxes are another issue that will arise from a remote workforce for a telemedicine business. The company will likely be required to register and file returns in all of the states where it has employees.


The facts and circumstances of each business are different. Taxpayers should discuss their unique circumstances with their tax advisors to ensure they address any potential state tax requirements. Marcum’s Healthcare Services group includes state and local tax specialists who are available to guide organizations engaged in telemedicine through these potential tax complications.