01-1233 & 01-1234
BEFORE THE UTAH STATE TAX COMMISSION
PETITIONER 1 & PETITIONER 2 ) FINDINGS OF FACT,
) CONCLUSIONS OF LAW,
) AND FINAL DECISION
v. ) Appeal Nos. 01-1233 & 01-1234
) Account Nos. ##### & #####
AUDITING DIVISION OF )
THE UTAH STATE TAX ) Tax Type: Sales Tax
) Judge: Phan
Marc B. Johnson, Commissioner
Jane Phan, Administrative Law Judge
For Petitioner: PETITIONER REP, Esq.
PETITIONER REP, CPA
For Respondent: Clark Snelson, Assistant Attorney General
Scott Smith, Assistant Director, Auditing Division
Barry Vincent, Manager, Sales and Use Tax Auditing
STATEMENT OF THE CASE
This matter came before the Utah State Tax Commission for a Formal Hearing on May 20, 2002. Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. Petitioners are appealing audit deficiencies of additional sales tax and interest for the audit period of January 1, 1998 through December 31, 2000.
2. Petitioners contest only the portions of the audit deficiency which pertained to medical skin creams and lotions which represented $$$$$ in taxable value, as well as 80% of the saline breast implants which Petitioner purchased in the amount of $$$$$ in taxable value.
3. The medical skin creams and lotions at issue are used to treat acne, premalignant and other lesions and other conditions and are sold directly to physicians. They can not be sold over the counter and they are not sold with a prescription through a pharmacist. The medical creams for the removal of lesions are caustic, they remove lesions that otherwise would have to be burned or surgically removed. A doctor's supervision is necessary for treatment. Lotions are used to help the healing process. With the acne creams initial treatments take place in the doctor's office, then patients take these creams for use at home, but patients must return to the doctor's office for follow up care. Respondent did not question or refute Petitioners' contention that these medical creams were used for these two purposes. The Commission concludes that both of these uses would be considered treatment of human ailments and medical creams and lotions used for these purposes are a type of medicine.
4. The saline breast implants at issue are highly regulated by the Food and Drug Administration and may only be sold to a licensed physician. There are a variety of types and sizes of these saline implants. PETITIONER 1 purchases these items for his patients. Typically PETITIONER 1 will order a specific set of implants for a specific patient, he does not keep an inventory on hand. In the event the procedure is canceled prior to the use of the implants, the implants are often returned to the supplier, although occasionally they may be retained if another patient needs the same type and size. Once they are implanted, they are registered to the patient and the patient is given a registration card which she can take to the next doctor if there are ever any concerns about the implants.
5. In Petitioners' practice, 10% to 20% of the saline breast implant surgeries are performed for what PETITONER 1 considered to be purely cosmetic reasons. To be conservative Petitioners attributed 20% of the implants as purchased for cosmetic reasons and argued that the remaining 80% of the implants were purchased to be implanted for medical reasons. This is the reason Petitioners appealed only 80% of the audit deficiency related to the saline implants.
6. PETITIONER 1 testified that 25% of the breast implant surgeries he performed were for congenital or birth defects. About 53% of the implant surgeries he performed he categorized into two groups, developmental deformities and pain relieving procedures. Developmental deformities included sagging due to age and/or breast feeding, as well as other conditions. Pain relieving procedures included treatment of some diseases, removal of scar tissue from previous implant surgeries, and removal and replacement of failing or broken implants.
7. Less than 2% of Petitioners' patients have the surgery performed to reconstruct their breasts after a mastectomy. Federal law requires that insurance companies pay for this type of surgery and Petitioners had been reimbursed by insurance companies for performing these types of surgeries. These surgeries were performed at a hospital rather than Petitioners= clinic.
8. From the information presented at the hearing, other than the 2% or less described above, all of Petitioners' patients personally paid Petitioners up front for their surgeries. Although the cost of the saline implants varied depending on type and/or size, the amount that Petitioners charged each patient for the surgery was a flat fee.
9. The Commission concludes that some percentage of the surgeries performed by Petitioner had a medical purposes. However, the evidence presented did not support Petitioners= contention that 80% of the breast implant surgeries were medically necessary or done for a medical purpose. The Commission declines to make finding as to what percent of the surgeries would be medically necessary. The issue of whether the surgeries are medically necessary or performed for a medical purpose is not the dispositive issue in this matter.
10. During the audit period, all patients signed a Consent to Surgery form. The form was the same for all patients regardless of their reason for having the surgery. The consent form states in part, "I understand that this operation is not an emergency nor is it medically necessary to improve or protect my physical health."
11. PETITIONER 1 is a licensed physician and is authorized to prescribe medical treatments.
12. Some of the implant procedures performed by PETITIONER 1 would be listed as eligible for payment under Title 18 of the federal Social Security Act or under the state plan for medical assistance under Title 19 of the federal Social Security Act. Eligibility would depend on the reason for the surgery. The Utah Administrative Rule R414-10-5(13) provides that certain cosmetic and reconstructive services are eligible for payment when they are done to correct a congenital anomaly. Clearly, some of the surgeries performed by Petitioners fit into this category. One the other hand, those surgeries which were performed merely for cosmetic reasons do not appear from the regulations provided by the parties to be listed as eligible for payment. Many of the surgeries performed by PETITIONER 1 fall somewhere in between and it is unclear whether they would be considered as listed as eligible for payment.
A tax is imposed on the purchaser as provided in this part for amounts paid or charged for the following transactions: (a)retail sales of tangible personal property made within the state; . . . (Utah Code Ann. Sec. 59-12-103(1)(a).)
The following sales and uses are exempt from the taxes imposed by this chapter: . . (10) sales of medicine; . . . (39) sales or rentals of home medical equipment; . . . (Utah Code Ann. 59-12-104 (10) & (39).)
(a) AMedicine@ means: (i)insulin, syringes, and any medicine prescribed for the treatment of human ailments by a person authorized to prescribe treatments and dispensed on prescription filled by a registered pharmacist, or supplied to patients by a physician, surgeon, or podiatric physician; . . . (Utah Code Ann. Sec. 59-12-102(16).)
(a) AHome medical equipment and supplies@ means equipment and supplies that: (i) a licensed physician prescribes or authorizes in writing as necessary for the treatment of a medical illness or injury or as necessary to mitigate an impairment resulting from illness or injury; (ii) are used exclusively by the person for whom they are prescribed to serve a medical purpose; and (iii) are listed as eligible for payment under Title 18 of the federal Social Security Act or under the state plan for medical assistance under Title 19 of the federal Social Security Act.
(b) AHome medical equipment and supplies@ does not include: (i)equipment and supplies purchased by, for or on behalf of any health car facility, as defined in Subsection (12)(c), doctor, nurse, or other health care provider for use in their professional practice; (ii)eyeglasses, contact lenses, or equipment to correct impaired vision; or (iii) hearing aids or hearing aid accessories. (Utah Code Ann. Sec.59-12-102(12).)
The issue presented in this matter is whether the saline implants and medical creams purchased by PETITIONER 1 for use in or on his patients are exempt from sales tax. The Commission notes that all sales of tangible property are subject to sales tax under Utah Code Ann. Sec. 59-12-103(1)(a) unless the sale meets the requirements of an express sales tax exemption. The sales tax exemptions are adopted by legislation and are listed at Utah Code Ann. 59-12-104. In addition, the Commission notes that exemptions are strictly construed against the taxpayer. The only exemptions that might apply to the sales at issue are exemptions for "medicine" at Utah Code Ann. Sec. 59-12-104(10) and for "home medical equipment and supplies" at Utah Code Ann. 59-12-104(39).
The Commission first considers the issue of whether the medical creams and lotions supplied by PETITIONER 1 to his patients qualify for exemption from sales tax as Amedicine@ pursuant to Utah Code Ann. Sec. 59-12-104(10). For purposes of the exemption, Amedicine@ is limited by Utah Code Ann. Sec. 59-12-102(16)(i), to be Aany medicine prescribed for the treatment of human ailments by a person authorized to prescribe treatments and dispensed on prescription filled by a registered pharmacist, or supplied to patients by a physician, surgeon, . . .@ In addition to being dispensed by a pharmacist or supplied by a physician, medicine dispensed in a hospital under the direction of physician can qualify as well for the exemption under Utah Code Ann. Sec. 59-12-102(16)(ii) .
After a careful reading of the exemption, whether the medical creams and lotions are "medicine" for purposes of Utah Code Ann. Sec. 59-12-102(16)(i), the following statutory requirements must be met: 1) the medical creams and lotions must be medicine; 2) that are prescribed; 3) for the treatment of human ailments; 4) by a person authorized to prescribe the treatment; and 5) dispensed on prescription by a pharmacist or supplied to patients by a physician or surgeon. Clearly in this matter each of the statutory requirements have been met. These medical creams are a type of medicine and the fact that they were used for the treatment of human ailments was not refuted by Respondent. The evidence indicated that they were used for the treatment of acne and premalignant or other lesions which are Ahuman ailments.@ Since it was not an issue presented by the parties in this appeal, the Commission does not consider the tax treatment of creams and lotions which are used for cosmetic reasons. The creams and lotions at issue were prescribed by PETITIONER 1 who is a person authorized to prescribe the treatment and they were supplied by PETITIONER.
Respondent points out that much of the treatments with the creams and lotions took place at PETITIONER 1's clinic, as opposed to personal use by the patient at the patient's residence. However, for the purpose of the statutory exemption for "medicine" this distinction is irrelevant. There is no requirement in the statute that the "medicine" be used at the patient's home.
The second issue in this appeal is whether PETITIONER 1=s purchases of the saline breast implants are exempt from sales tax pursuant to Utah Code Ann. Sec. 59-12-104(39) as Ahome medical equipment and supplies.@ AHome medical equipment and supplies@ means equipment and supplies that meet certain criteria defined at Utah Code Ann. Sec. 59-12-102(12). Respondent argues that within the plain language of the statute the implants are not home medical equipment or supplies.
As Respondent noted, the Commission has issued an advisory opinion on this issue. In Tax Commission Advisory Opinion 01-005, the Commission considered whether pace makers, bone and cornea implants, and hip, shoulder, and knee replacements and their accompanying attachment hardware qualified for the exemption from sales tax as Ahome medical equipment and supplies.@ Like the breast implants, all of these items are surgically implanted into the human body. Unlike a number of the breast implant surgeries, there is little question as to whether the bone and cornea implants, pace makers, and hip, shoulder and knee replacements are medically necessary. In the advisory opinion, the Commission concluded that the implanted items lost their identity as tangible personal property and were consumed by the medical provider in providing professional medical services such that they were items purchased for use in a professional practice and excluded from the exemption under Utah Code Ann. Sec. 59-12-102(b)(i). That section specifically provides that Ahome medical equipment and supplies@ does not include equipment and supplies purchased by, for or on behalf of any doctor or health care provider for use in their professional practice.
CONCLUSIONS OF LAW
1. Medical creams and lotions purchased by Petitioners and used by PETITIONER 1 or his staff to treat acne and premalignant or other lesions are "medicine" within the meaning of Utah Code Ann. Sec. 59-12-102(16) and are, therefore, exempt from sales tax pursuant to Utah Code Ann. Sec. 59-12-104(10).
2. Breast implants purchased by PETITIONER 1 for surgical implantation into his patients are not exempt from sales tax as "home medical equipment and supplies" as they are specifically excluded from the exemption as equipment and supplies purchased by the health care provider for use in his or her professional practice. Utah Code Ann. Sec. 59-12-102(12)(b)(i).
DECISION AND ORDER
Based upon the foregoing, the Tax Commission abates that portion of the audit that pertains to the sales tax on the medical creams and lotions at issue. The audit is sustained as to the portion that pertains to the breast implants. It is so ordered.
DATED this 22nd day of August , 2002.
Administrative Law Judge
BY ORDER OF THE UTAH STATE TAX COMMISSION:
The Commission has reviewed this case and the undersigned concur in this decision.
DATED this 22nd day of August , 2002.
Pam Hendrickson R. Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc B. Johnson
PETITIONER 1 did testify that whether Medicaid would pay for breast augmentation surgery was based on the decision of the patient=s case worker and made on a case by case basis. He testified that occasionally Medicaid would pay for the surgery when done for purely cosmetic reasons.
Parsons Asphalt Prods., Inc. v. Utah State Tax Comm=n, 617 P.2d 397, 398(Utah 1990).
As Petitioner pointed out, the Commission also issued Advisory Opinion 01-006 in which it considered whether a prosthetic eye was exempt from sales tax under the exemption for home medical equipment and supplies. The Commission concluded in that case the prosthetic eye was exempt. The Commission finds the breast implant issue to be more similar to Advisory Opinion 01-005 concerning other medical items that are surgically implanted into the body. Furthermore, the prosthetic eye typically can be removed from time to time by the patient and can be replaced without surgery.