98-066
Response
September 24, 1998
REQUEST
LETTER
98-066
September 24, 1998
Ruling Request for Exemption from Sales Tax
Under Utah Code Annotated, 1953, Sections
59-12-104(10) and (39)
Dear Mr. Chapman;
We respectfully submit for your consideration a
request for a ruling that, under Utah law, a product, which is dispensed only
by prescription, that stimulates bone growth and enhances the healing of
nonunion fractures is exempt from sales tax under Utah Code Annotated, 1953,
(Utah Code Ann.) Sections 59-12-104(10) and/or (39).
Discussion
The item for which we seek a ruling is a bone growth
stimulator. It is used in conjunction with an external cast or brace, which
keeps the fractured bone immobilized. The device uses low energy magnetic
fields to stimulate bone growth in fractures that have not shown progressive
signs of healing. The bone growth stimulator results in the production of bone
cells, hence treating the diseased bone and the nonunion fracture. The bone
growth stimulator has been approved by the Federal Food and Drug Administration
(FDA) as a Class III device and can only be obtained from a licensed physician
pursuant to a prescription. It is widely accepted by the medical community for
treatment of patients who have suffered non-union fractures. The bone growth
stimulator is consumed in its use and is not able to be reused once the
patient's treatment has been completed.
It is our assertion that the bone growth stimulator satisfies
the requirements of Utah Code Ann. Sections 59-12-104(10) and/or (39) as one or
both of the following: prescription medicine for human ailments or home medical
equipment. We will address each definition separately.
Home Medical Equipment
Utah Code Ann. §59-12-104(39) provides an exemption
from sales tax for "home medical equipment and supplies" which are
defined by Utah Code Ann. §59-12-102(9) as 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.
The law specifically excludes 'equipment and
supplies purchased by, for, or on behalf of any health care facility, ...
doctor, nurse, or other health care provider for their use in their
professional practice."
The bone growth stimulator is an orthopedic device
designed and purchased to be worn exclusively by the patient to treat an
injury. It is a Class III medical device regulated by the FDA. This class
includes cardiac pacemakers, replacement heart valves, intraocular lenses for
implantation in cataract patients eyes, and many other similar items. The
product can only be purchased upon the written prescription or order of a
licensed physician and is eligible for payment under federal Medicare
provisions. As such the bone growth stimulator meets the criteria of Utah Code
Ann. §59-12-102(9).
The Utah Code does not define the terms, "home
medical equipment and supplies," but rather focuses on the requirement
that the equipment be prescribed or authorized by a physician. The bone growth
stimulator can only be obtained from a licensed physician pursuant to a
prescription. The reason for this is that the use of the device is not
appropriate for individuals with certain other ailments or physical conditions.
The bone growth stimulator is designed for use by only a particular individual
and the licensed physician is trained to recognize when use of the device is
indicated. The treatment released by the bone growth stimulator is
individualized. Each patient must be trained in the proper use of the device
and how to recognize when the device is not providing sufficient magnetic field
treatment to ensure proper bone growth stimulation.
The Code emphasizes that the exemption only applies
to items which are prescribed or authorized for the treatment of an injury and
not to items purchased by physicians for their use in their professional practice.
Presumably this restriction was meant to exclude items which are used by
physicians and hospital personnel in the performance of their daily activities
such as rubber gloves, tongue depressors, etc. The bone growth stimulator Is an
item, which is sold to a particular individual for that individual's use. It is
not used or consumed by physicians in the performance of their duties and it is
not used for multiple patients. The patient owns the device and administers the
treatment at home as directed by the physician. The bone growth stimulator is
discarded once the patient's treatment ends.
As is required by Utah Code Ann. §59-12-102(9) the
bone growth stimulator is (I) an item of medical equipment purchased on a written
prescription issued by a licensed physician for the treatment of an injury; (2)
it is designed to be used exclusively by the person for whom it is prescribed;
and (3) it is eligible for payment by Medicare. Accordingly the bone growth
stimulator should be exempt from Utah sales tax.
Medicine
Pursuant to Utah Code Ann. §59-12-104(10), sales tax
does not apply to the "sales of medicine." Medicine is defined by
Utah Code Ann. §59-12-102(13) as:
(a)(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...
(b)
Medicine does not include; (I) any auditory,
prosthetic, ophthalmic, or ocular device or appliance; or (ii) any alcoholic
beverage.
It is our assertion that the bone growth stimulator
satisfies the requirements of Utah Code Ann. §59-12-102(13) and is exempt from
sales tax forte following reasons. First, the bone growth stimulator can only
be obtained directly from a physician or a prescription written by a physician
which is filled by a licensed pharmacist, as is required by Utah Code Ann.
§59-12-102(13). Generally, once a physician has determined that a patient has a
nonunion fracture and can benefit from the bone growth stimulator, the
physician sells the bone growth stimulator directly to the patient. This method
of prescription distribution is best suited for this medicine because instruction
is provided by the physician during the initial application and all subsequent
applications are administered by the patient at home.
Second, the bone growth stimulator is medicine
because it is used in treating a human ailment. A nonunion fracture is the
result of impaired hone. The bone cells at the fracture site have slowed or
ceased producing insulin-like growth factors. However, with the biophysical
stimulation provided by the bone growth stimulator, insulin-like growth factors
are produced causing bone cells at the fracture site to divide and to produce
collagen, the precursor to bone. The bone growth stimulator results in the
production of bone, hence treating the impaired bone arid the nonunion
fracture.
Finally, the bone growth stimulator satisfies the
requirements of Utah Code Ann. §59-12-102(13) because it falls within the
definition of medicine by the Utah Code. The bone growth stimulator is a
medical device which releases medical treatment-a low energy magnetic field. It
is the magnetic field, which stimulates cell growth. The magnetic field is the
medicine and the bone growth stimulator is the vehicle that delivers the
medicine to the patient. Utah law specifically excludes prosthetic devices and
equipment designed to assist the eyes and ears. However, no other types of
devices are excluded. Rather, Utah law includes syringes in its
definition of medicine. Syringes are not drugs but they are instruments that
deliver drugs and other medications to the patient. The bone growth stimulator,
like a syringe, is a device that delivers a treatment to the patient. If the
legislature had intended to exclude devices which release electronic impulses
or magnetic fields or similar types of treatment from the definition of
medicine, it would have done so.
In recognizing that drugs come in many forms,
several states have adopted a 'catch-all" category within the definition
of drugs. For example, North Carolina Code § 105-164.13(13) states that
"medicines sold on prescription of physicians and dentists are exempt from
tax." North Carolina Rule 1401 states, "the exemption for prescribed
medicines applies to tonics for internal use, vitamins, ointments, liniments,
antiseptics, anesthetics, serums, and other remedies having preventative or curative
properties in medical treatment" (emphasis added). Thus, under
North Carolina law, a product used to cure nonunion fractures would be
classified as a drug, and therefore exempt, since it internally achieves the
same results as would a prescription drug which came in pill form. Likewise,
Utah Code Ann. §59-12-102(13) is a hybrid "catchall" for medicine
excluded from Utah sales tax. It is a hybrid catchall because the exemption has
the qualification that the medicine can only be obtained by prescription from a
licensed physician. This noninvasive drug is consumed by the human body,
particularly at the nonunion fracture site, by means of biophysical
stimulation. Therefore, the bone growth stimulator should be included in the
catch-all category of tax-exempt medicine under Utah law because it meets the
statutory requirements of Utah Code Ann. §59-12-102(13).
As additional support for the position that the bone
growth stimulator qualifies under the drug exemption, federal law indicates that
the word "drugs" should not be limited in substantive form to pills,
tablets, powders, capsules and liquids. According to the United States Code,
Title 21, Chapter 9, Federal Food, Drug, and Cosmetic Act Definitions Section
(g)(1), "drugs" are defined as:
(A)
articles recognized in the official United States
Pharmacopoeia, official Homeopathic Pharmacopoeia of the United States, or
official National Formulary, or any supplement to any of them; and
(B)
articles intended for use in the diagnosis, cure,
mitigation, treatment, or prevention of disease in man or other animals.... (emphasis
added).
Hence, under this definition, property, which is
purposely used in the diagnosis, cure, mitigation, treatment, or prevention of
disease in human beings and animals would constitute a drug. Clearly, a product
intended to enhance the healing of nonunion fractures in human beings would be
considered a drug under the federal meaning of the word "drugs"
because of its ability to provide noninvasive treatment of nonunion fractures.
Utah has adopted, similar to the federal law, a definition of the term
"drug" that is flexible enough to take into account advances made in
the field of medicine with regard to the substantive forms of drugs. Therefore,
the bone growth stimulator should be exempt from sales tax because it achieves
the same results as drugs that come in pill and liquid form, but does so in a
noninvasive way.
In addition, federal court cases have examined the
scope of the statutory definition of "drug" as contained in the
Federal Food, Drug and Cosmetic Act. One notable U.S. Supreme Court case on
point is United States V. An Article of Drug Bacto-Unidisk, in which the
Court specifically addressed the meaning of the term "drugs." In that
case, the Court concluded that
"Congress intended to define 'drug' far more
broadly than does the medical profession"
(emphasis added).
The Court stated that, “the word 'drug' is a term of art for purposes
of the Act, encompassing far more than the strict medical definition
of that word. If Congress had intended to limit the statutory definition
to the medical one, it could have so stated explicitly, or simply have made
reference to the official United States Pharmacopoeia." Thus, federal
courts have taken a broad stance on the types of products which would be
considered drugs. Hence, the federal courts would agree that a prescribed
product consumed by a patient for the enhancement of bone growth healing would
be classified as a drug because the Congressional intent of the meaning of the
word is broad in scope and includes all forms of products designed to aid in
healing.
Correspondingly, under Utah law, it appears that the
Utah legislature intended that the classification of medicine not be limited by
the medical definition of medicine. This is evidenced by the requirement that
the medicine be dispensed through a prescription. Consequently, pursuant to
both federal arid Utah law, the bone growth stimulator should be classified as
a medicine, and exempt as such, given that the product is used to enhance the
healing of nonunion fractures and is dispensed only by prescription.
In the Bacto-Unidisk decision, the Supreme
Court also noted that the historical expansion of the definition of the word
"drug" suggests, "that Congress fully intended that the Act's
coverage be as broad as its literal language indicates -and equally clearly,
broader than any strict medical definition might otherwise allow."
This broad definition takes into account the technological advances which are
constantly occurring in the field of medicine. In the past, most drugs were
consumed in the form of a pill or liquid; however, drugs come In various forms
and &e administered in various ways. Cutting-edge products such as this one
are considered drugs by the federal government and most states for this very
reason. Products such as the bone growth stimulator are subject to regulation
by the FDA. As a result, FDA approval was required before the bone growth
stimulator could be dispensed to patients. To claim that such products are not
drugs would be to deny medical progress and inhibit the changing nature of
medical treatment as technology progresses and changes.
Although there is limited authority in Utah
specifically addressing this product, the legislative interpretation of the
term "medicine" appears broad, for while it explicitly excludes,
auditory, prosthetic, ophthalmic, and ocular devices, it does not exclude
equipment which releases treatments to patients. Instead, Utah law focuses on
the requirement that the medicine must be dispensed pursuant to a prescription.
Many other states would classify this product as medicine and, therefore,
consider it exempt for sales tax purposes. The bone growth stimulator renders
medical assistance to patients as do conventional drugs and its
similarity to conventional medicine is demonstrated by its FDA approval and its
acceptance by the medical community. Finally, similar to conventional drugs,
the bone growth stimulator is consumed In its use and is not able to be
reused once the patient's treatment has been completed. Hence, the bone
growth stimulator, for the above-stated reasons, qualifies as medicine
prescribed by a physician for human consumption for purposes of; Utah Code
Ann. §59-12-102(13) and should be exempt as such from Utah sales tax.
Ruling Requested
We respectfully request a ruling on whether the sale
of the bone growth stimulator is exempt from Utah sales tax because it
constitutes home medical equipment or a drug prescribed by a physician and, as
such, is exempt under Utah Code Ann. Sections 59-12-104(39) and/or (10).
We assert that the product for which we seek a
ruling meets the requirements of Utah Code Ann. Sections 59-12-104(39) and (10)
for the following reasons:
-
it is prescribed by a physician or sold to the
patient by the physician for treatment of an injury as required by Utah Code Ann.
Section 59-12-102(9)(I);
-
it is used exclusively by the person for whom it is prescribed
to serve a medical purpose as required by Utah Code Ann. Section
59-12-102(9)(ii);
-
it is eligible for payment under Title 18 of the
federal Social Security Act as required by Utah Code Ann. Section
59-12-102(9)(iii); and
-
it is prescribed by a physician or supplied to
patients by a physician to treat a human ailment as required by Utah
Code Ann. Section 59-12-102(13).
As we are awaiting your response on this matter in
an attempt to comply with the sales and use tax laws of Utah, we respectfully
request that you advise us of your conclusions on these issues as soon as
possible. We look forward to hearing from you very soon and appreciate your
assistance in this matter. Please feel free to contact me with any questions or
comments you may have regarding this ruling request at #####.
Sincerely,
NAME
November
30, 1998
NAME
COMPANY
RE: Advisory
Opinion - Sales Tax Exemption for Bone Growth Stimulator
Dear NAME,
We have
received your request for an advisory opinion as to whether a bone growth
stimulator (“stimulator”) is eligible for a sales tax exemption in Utah. You assert that the stimulator should be
exempted either under Utah Code Ann. §59-12-104(10), which exempts sales of
medicine, or under Utah Code Ann. §59-12-104(39), which exempts sales of home
medical equipment.
Utah
Code Ann. § 59-12-102(9)(a) defines home medical equipment and supplies as
those items 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.
In
your letter, you state that the stimulator can only be obtained from a licensed
physician pursuant to a prescription for treatment of a medical injury
(non-union bone fractures). In
addition, you state that each stimulator is designed for use by only one
patient and is discarded once that patient’s treatment ends. Lastly, you state that a prescribed
stimulator is eligible for payment under Medicare. Assuming these statements to be fact, the stimulator does meet
the requirements of Subsection (9)(a).
Should the facts be otherwise, a different conclusion could be reached.
It
should be noted, however, that Subsection (9)(b) excludes from the definition
of “home medical equipment” any “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.” Subsection (9)(c) defines
“health care facility” as used in Subsection (9)(b) to include: “(I) a clinic;
(ii) a doctor’s office; and (iii) a health care facility as defined in Subsection
26-21-2.”
In
a prior advisory opinion, the Commission found that a bone growth stimulator
was excluded from the definition of “home medical equipment.” In that instance, the physician retained
ownership of the stimulator until treatment was complete, and the stimulator
was returned to the company for disposal.
Under those circumstances, the Commission determined that the device was
sold to the physician for use in his or her medical practice, and thus was
excluded from the definition of “home medical equipment” by Subsection(9)(b).
In
this case, you state that the patient owns the stimulator. Accordingly, the stimulator is not purchased
by a doctor for use in his or her medical practice. Given the facts as presented in your letter and interpreted
above, the stimulator you inquire about would be exempt from Utah sales tax
under the home medical equipment exemption.
As
we have decided that the stimulator qualifies for a sales tax exemption as home
medical equipment, we do not address whether or not the stimulator qualifies
for the sales tax exemption for medicine.
Please contact us if you have any other questions.
For
the Commission,
Joe
B. Pacheco, CPA
^^ Commissioner