96-139
Response
October 2, 1996
Request
August 7, 1996
XXXXX
Utah State Tax Commission
210 North 1950 West
Salt Lake City, UT 84134
Dear XXXXX:
Our firm represents a client located outside of your
state who is involved in the manufacture of products used primarily in the
health care and sports medicine areas.
These products are sold primarily to hospitals, physicians, medical
dealers and occasionally directly to the patient.
While little doubt exists that several of these
products are exempt from tax, we have broken our primary products into four
categories and request you advise us in writing as to the taxability of each
item in your state.
The four categories of products they offer are:
1. Braces - They manufacture a wide range of braces
to treat a wide variety of injuries.
Products are available that treat everything from tennis elbow to stable
fractures of the lower leg. The
cornerstone of the business is a line of ankle braces used to treat various
sprains and strains. The braces
stabilize the ankle inside and outside, but allow movement up and down. The braces aid a bodily function, alleviate
physical incapacity, support part of the human body, are a supportive devise
external support prescribed for the purpose of correction or injuries to the
bone, restore the function of the human skeletal system, are designed for
individual personal use, correct or alleviate physical illness or incapacity,
are an apparatus designed to activate or supplement a weaken or atrophied limb
or function. Because the products are
classified by the FDA as limb orthosis (Class I) devices, a prescription is not
necessary. 98% of all sales are based
on a physician's order or advice.
2. Cold
Compression Therapy - These units apply controlled compression to minimize
hemorthrosis (blood filling joint cavities) and swelling along with the cold to
minimize pain. The system has three
basic components - a cuff which holds the cold water and covers the injured
area, a cooler that holds enough water and ice for 6-8 hours of cryotherapy,
and a tube to exchange the water between the cooler and the cuff. Cuffs are available for almost every part of
the body. This devise is used for acute
sprains, strains, post operative surgery, trauma, rehabilitation, contusions
and other soft tissue injuries. This
devise alleviates physical incapacity, is designed for individual personal use,
and corrects or alleviates physical illness or incapacity. This is also
classified by the FDA as Cold pack (Class I) devise and does not need a
prescription. It is however, sold under
a doctor's recommendation.
3. Product #3
- This hospital based system helps prevent blood clots from forming in the
veins of the lower leg, a possibility following most surgery. This system increases blood flow velocity to
prevent clot formation. It may be used
after surgery in lieu of anticoagulants.
The system has three components - a pump which provides graduated,
sequential compression to the air cells, the cuff which covers the leg and
houses the air cells, and the tube assembly that exchanges air between the pump
and cuff. The product is classified as
a Compressible limb sleeve (Class II) devise and is prescribed for a patient
only under the direction of a physician.
The manufacturer retains ownership of the pump and sells the cuffs to
the hospital (A set of cuffs is used for each individual patient and then
discarded). Distribution is stringently
regulated by the FDA with a required 510k filing.
4. Product
#4 - This system is used to treat lymphedema, venous ulcers, and associated
complications. It treats the condition
of chronic accumulation of excess fluid in the extremities, found especially in
the lower legs. The system has three
basic components - a pump that applies graduated, sequential compression to the
air cells, the leg brace that supports the leg and houses the aircells, and the
tube assembly that exchanges air between the pump and the brace. This product is primarily used by diabetic
patients with compromised circulation of the lower limbs. This devise
alleviates malfunction of a body part, aids a bodily function, alleviated
physical incapacity, is designed for individual personal use, corrects or
alleviates physical illness or incapacity, and is an apparatus designed to
activate or supplement a weakened or atrophied limb or function. Distribution is stringently regulated by the
RDA with a classification as a Compressible limb sleeve (Class II_ device with
a 510k filing.
Our final area of concern is the tax treatment of
shipping charges. All products are
shipped via United Parcel Service with the company paying for all ground
shipments. If a customer requests
overnight or 2nd day service, they are billed for these charges.
It would be greatly appreciated if you could respond
to us at your earliest convenience as to the taxability of our clients'
products, as well as, to the taxability of the shipping/delivery charges.
Thank you in advance.
Respectfully requested,
XXXXX
XXXXX
Re:
Taxable status of medical equipment
Dear XXXXX:
We
received your request for an advisory opinion on certain medical products that
your client manufactures. Although you
asked that we identify the taxable status of each item on your list, we cannot
do so. Liability from the Utah Sales tax
depends more on the type of transaction than on the nature of the product being
sold.
The
Utah Legislature recently passed a law providing a sales tax exemption for home
medical equipment. The Utah Code
defines this exemption.
Utah
Code Ann. § 59-12-104 states, “The following sales and uses are exempt from the
taxes imposed by this chapter . . . (40) sale or rentals of home medical
equipment and supplies . . . .” Utah
Code Ann. § 59-12-102 defines home medical equipment by stating:
(9) (a)
“Home 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) “Home medical equipment and supplies” does not
include:
(i) equipment and supplies purchased by, for, or on
behalf of any health care facility, as defined in Subsection (9)(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.
(c) For purposes of Subsection (9)(b)(i), “health
care facility” includes:
(i) a clinic;
(ii) a doctor’s office; and
(iii) a health care facility as defined in
Subsection 26-21-2(11)(a)
Utah Code Ann. § 26-21-2(11)(a) states:
“Health care facility” means general acute
hospitals, specialty hospitals, home health agencies, hospices, nursing care
facilities, residential health care facilities, assisted living facilities,
birthing centers, ambulatory surgical facilities, small health care facilities,
abortion clinics, facilities owned or operated by health maintenance
organizations, end stage renal disease facilities, and any other health care
facility which the committee designates by rule.
Concerning
Medicare and Medicaid (Title 18 and 19 of the federal Social Security Act)
eligibility, we find ourselves in the position of relying on outside experts to
help us make that determination. In our
short experience with Medicare and Medicaid guidelines, we have learned that
eligibility often depends upon the individual circumstances of the person for
whom the equipment is prescribed. Your
client’s products may qualify for the home medical equipment exemption only
when the transaction meets the requirements specified in the statutes. Therefore, your client will have to decide,
case by case, whether the sales of their products meet these requirements.
You
have identified your client’s customers to include doctors and hospitals. The home medical equipment exemption does
not apply to these sales. However, two
other exemptions might apply to sales of your client’s products. These two exemptions are the resale
exemption and the religious or charitable institution exemption. First, the resale exemption provides that
property purchased for resale is tax exempt. Utah Code Ann. §
59-12-104(27). If a hospital or health
care provider purchases your client’s products to resell the products to
patients, then your client’s sale is tax exempt. The idea behind the Utah Sales tax is that the final consumer of
a product, not the retailer, pays the sales tax.
Second,
some hospitals and health care providers in our state qualify for a religious
or charitable institution exemption set out in sections 59-12-104(9) and 104.1
of the Utah Code. To qualify for this
exemption the purchaser must qualify as a 501(c)(3) organization with the IRS,
register with the Tax Commission for a religious or charitable institution
exemption number, and the sales of the institution must occur in the normal
conduct of the organizations activities.
To
claim any of the exemptions described above, your client must obtain an
exemption certificate (form TC-721, the same form applies to all three
exemptions-home medical equipment, resale, and religious and charitiable
institutions) from the party claiming the exemption. The form must be kept with your client’s tax records and receipt
of the form will release your client from tax liability on these specific
sales. A copy of form TC-721 is
enclosed. Your client may copy it as
needed.
For
sales tax purposes, rental transactions are taxed under the same precepts as
sales transactions. Also, regarding
shipping charges, Utah law provides a tax exemption for intrastate delivery and
freight charges. Utah Code Ann. §
59-12-104(17)(a). In accordance with
the Federal Constitution, the Tax Commission has extended this exemption to
interstate delivery and freight charges.
Essentially the exemption applies to delivery and freight charges except
those where the shipment of the property occurs before the passage of title and
the shipping costs are included in the sale price of the item. For specific details of the exemption see
the copy of Utah Admin. Code R864-19S-71, enclosed with this letter.
Hopefully
this information will help your client determine which sales are tax exempt and
which are not. If your client requires
more specific advice, please contact us again for help. You may also call our customer service line
at (801) 297-7500.
For
the Commission,
Alice
Shearer,
Commissioner