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Audit: Doctors Owe Taxes for Free Drugs

June 21, 2008

By Jeff Mills, News & Record, Greensboro, N.C.

Jun. 21–GREENSBORO — You know those free boxes of medicine samples you sometimes get at the doctor’s office?

Turns out, they’re not so free for the doctor.

The Guilford County Tax Department billed Greensboro-based Eagle Physicians and Associates for unpaid taxes Thursday after an audit last spring revealed the group’s doctors didn’t list free drug samples on their tax returns from 2003 to 2007.

The bill isn’t huge, but it has to be paid, said Francis Kinlaw, Guilford County’s tax director.

“This is a very small portion of (Eagle’s) tax obligation. It’s far less than 10 percent of their tax liability,” Kinlaw said. “The only thing I could do would be to purposely ignore a state law that applies to all counties in North Carolina.”

That won’t happen, Kinlaw said.

“Our department is simply in a situation where we have a state law, and we’re responsible for conducting ourselves under the law,” he said. “As long as it’s law, we really don’t have any option.”

The law was news to Eagle and its accountants at Sharrard, McGee & Co. The doctors group is disputing the bill.

“Per physician, it’s not a big impact. It’s the principle,” said Fran Sembert, Eagle’s director of managed care. “Our CPAs have a number of medical firms they do this for, and they knew nothing about this portion of the law.

“We’re asking for clarification and direction. If it’s there, show it to us. If it’s not, then this needs to go away.”

At issue is what, exactly, the free pharmaceuticals are.

A directive issued May 26, 2006, by the N.C. Department of Revenue says because the medicines are not for sale, they are not considered inventory — which is tax exempt.

Instead, the drugs are considered to be office supplies. That makes them personal property of the medical office and subject to taxation.

“It affects every practice that has samples, which effectively means every single one of them,” Sembert said. “A lot of physicians are running scared. They don’t want to keep samples in the office if they’re going to pay taxes for them.”

Eagle operates 13 practices in Guilford County and employs 64 doctors. Every one of them is affected by this audit, Sembert said.

There are 33 pages of listings for “Physicians and Surgeons” in the Greater Greensboro Yellow Pages.

Attempts to get doctors from other practices to talk about free sample medicines were not successful Friday.

“I’m sure the word has gotten around the medical community. We will be conducting future audits,” Kinlaw said. “I don’t know how common (free drug samples) would be. But if we know free drug samples are on hand, we’re obligated to tax them.”

Kinlaw said Eagle was not singled out for an audit.

“We audit, periodically, all kinds of businesses. It’s random,” he said. “We don’t audit medical practices one year, and service stations the next. … We try to audit businesses in Guilford County every five years. I might add that in dollar figures, compared to some audits, this was not a big discovery.”

The money figure is low because the law applies only to supplies the doctor’s offices had on hand Jan. 1 of the audit years.

The money is not the point, Sembert said.

“We have not received the bill yet, but we have an idea of what it will be,” she said. “Per physician it’s not a big deal. It’s the principle of the whole audit.

“I’d say most practices do (dispense free samples). We keep them on hand because it’s a huge benefit to our elderly patients or uninsured patients who really have a hard time paying for medicine. Prescription drugs are expensive. These (samples) are life-saving drugs to a lot of patients.”

Contact Jeff Mills at 373-7024 or jeff.mills@news-record.com

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