Therefore, barring any judicial test as to the validity of the regulation, the true question is when must a taxpayer maintain inventory. As a general rule, a taxpayer is required to maintain inventory on its books for tax purposes when the taxpayer produces income from the manufacture or purchase, and later sale, of merchandise. Under the Code, no method of accounting other than the accrual method will result in a clear reflection of income derived from the sale of inventory. The fact that this component is small in comparison to the practice's overall revenues is not necessarily controlling, although it certainly can be helpful in defending against an IRS attack. There is a distinction between merchandise maintained by physicians, which drags the practice into the IRS's lair, and supplies, which even according to the IRS need not be maintained as inventory.
Supplies are items consumed during the process of providing services.
Merchandise, on the other hand, is distributed to the patient during the process of providing services. A clear line in some ways, but not so clear in others. In a traditional business setting, it is usually easy to distinguish supplies from merchandise under the above definitions. However, when focusing on the medical community, the lines become blurred. Whether the IRS will abandon this project is anyone's guess.