Sales Tax for Digital Health Companies: What Founders Need to Know Before It is Too Late

If you are building a digital health company, sales and use tax is probably not top of mind. You are focused on product, patients, and your next funding round. But this is exactly where many healthtech startups get caught off guard, and by the time they realize it, the exposure has grown into something that can seriously complicate a raise or an exit.

Why Digital Health Is a Sales Tax Gray Zone

Digital health companies rarely fit neatly into one taxable category. Most fall somewhere across three buckets: providing medical or clinical services, selling or providing medical devices for remote monitoring, or offering a SaaS platform or software product. Plenty of companies are a mix of all three.

That matters because each of those components can be taxed very differently from state to state. Clinical services may be considered non-taxable in many states if certain requirements are met. SaaS platforms are subject to sales tax in many states. Medical devices? It depends. When you bundle them together under a single subscription or care pathway price, one taxable element can potentially make the entire charge taxable, unless the components are clearly and separately priced.

States do not focus on how your customer experiences your product. They focus on what is being sold, what is the intended use, how it is invoiced, who pays for it, and how it is defined in your contracts and terms of service to name just a few of the characteristics the states consider when it comes to sales tax taxability. That gap between the integrated product experience and how tax law reads it is where a lot of companies get tripped up.

The Bundling Problem

Bundling is one of the most common sales tax traps in digital health. Many telehealth companies charge a single fee that covers platform access, remote monitoring devices, clinical services, and sometimes even pharmacy or data access. When these different services and products are bundled together as one charge, state tax law may require the entire transaction to be treated as taxable if any part of the bundle is taxable.
There are two main frameworks states use to analyze these transactions:

Bundled transactions: When two or more tangible products are sold together and one is taxable, the whole thing may be taxable unless you can document that the taxable portion does not exceed 10% of the total package value. It is important to note that this type of de minimis exclusion is not uniformly adopted, and only certain states allow the 10% threshold to be applied.
Mixed transactions: When services are sold alongside tangible personal property or software, some states apply a “true object” test or an all-or-nothing rule to determine taxability. These concepts may be labeled differently depending on the jurisdiction and do not apply uniformly across all states or industries, with some states limiting their application based on the nature of the transaction or the taxpayer’s line of business.

Even if 80% of a solution is a non‑taxable medical service, the inclusion of a taxable software component or remote monitoring device, if not separately stated, can contaminate the full charge. As a result, how you structure pricing, invoices, and contracts often determines tax outcomes more than founders expect.

Nexus: Where You Owe and Why It Keeps Expanding

Nexus is the term used to describe having enough of a presence in a state to trigger a filing obligation. In the context of sales tax, it can be established in two main ways:

Physical nexus: This includes having employees (including remote employees), 1099 contractors, property including real estate and business property, a headquarters, performing maintenance or repairs, or even attending trade shows in a state.
Economic nexus: Exceeding a certain threshold of sales or transactions in a state which can vary by state and jurisdiction. Most states have adopted this standard following the 2018 South Dakota v. Wayfair Supreme Court decision.

For digital health companies, nexus can multiply before you realize the threat. Your users’ locations, clinicians’ licenses, tech access points, and remote workers can all expose you to new states. Two identical offerings can be fully taxable in one state, exempt in another, and partially taxable in a third—leaving you just one step away from a costly audit or unexpected tax bill.

This applies to a wide range of common purchases: software tools from out-of-state vendors, remote monitoring devices used in pilots, equipment shipped to multiple states, marketing materials, and even laptops sent to remote employees. Use tax may also be due when there are purchases or manufacturing of tangible personal property for use as samples and demonstrations where the property is not resold in a taxable transaction.

Most startups are not actively tracking use tax obligations, which allows liabilities to quietly accumulate over multiple years. Investors know exactly where to look for this exposure during diligence, and states often view it as low‑hanging fruit in an audit.

Sales Tax Is a Trust Tax, and Personal Liability Is Real

The reality that often stops founders cold is this: sales tax is a “trust tax.” States can, and do, hold not only the business, but individuals personally liable for errors. If sales tax is not collected and remitted properly, the exposure can extend beyond the company and create personal financial risk, threatening both the business and the founder’s own finances.

Unlike many other business liabilities, sales tax obligations are not fully shielded by an LLC or C‑corporation structure. When a company fails to collect and remit, that liability can follow responsible individuals personally.

What Happens When Diligence Finds It

Sales and use tax exposures are among the most common findings in tax diligence for digital health companies. When buyers or investors uncover issues, such as unfiled states, improper taxability treatment, or years of unreported use tax, the consequences can materialize quickly. That often results in purchase price adjustments, escrows, or holdbacks, and in some cases delayed closings while the exposure is quantified and resolved.

In early‑stage raises, investors often require a remediation plan or adjust valuation to reflect contingent liabilities. Since most digital health companies are operating at a loss through Series A–C, income tax is rarely the concern; sales tax is exactly where diligence attention is focused. The challenge is that most of these issues are readily addressable early on yet become significantly more expensive and disruptive when discovered in the middle of a transaction.

Getting Ahead of It: The Right Approach

Whether you are just getting started or already operating across multiple states, the path forward typically involves three steps:

Establishing the nexus footprint: Understanding where you have created filing obligations based on your physical presence and economic nexus.
Understanding the taxability: A state-by-state analysis of how your specific revenue streams, including SaaS, information services, data processing services, medical devices, clinical services, and subscription bundles, are treated under each state’s law.
Gap analysis and remediation: Comparing what you should be doing versus what you are actually doing today, then building a plan to get compliant, including registering in new states and potentially addressing historical exposure through voluntary disclosure agreements or other mitigating methods where available.

Voluntary disclosure agreements, also known as VDAs, allow companies to proactively approach states, often on an anonymous basis, to disclose past activity. In return, the state may limit the look-back period, waive some or all of the penalties, and bring the Company into full compliance. It is a meaningful and strategic tool for cleaning up the past while getting compliant going forward, but it does take time and resources, which is why starting early is always the better move.

The Bottom Line

Sales and use tax in digital health is not something you want to figure out during diligence. The rules are nuanced, they change by state, and they evolve as your business model evolves. Getting your pricing structure, product packaging, and compliance processes right from the beginning is significantly easier and less expensive than unwinding them later.