August 15, 2022
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RE: Private Letter Ruling No. 20211119145107
Dear **************:
We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated Nov. 17, 2021 and additional information dated July 26, 2022. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.
You requested guidance on the taxability of PRODUCT A sold by ************** (Taxpayer).
Facts Presented
Taxpayer is a multinational medical device and health care company that manufactures PRODUCT A. PRODUCT A device is used by medical providers in diagnostic evaluation and monitoring of patients who experience unexplained symptoms such as dizziness, palpitations, chest pain, syncope, and shortness of breath. It is also used to monitor patients who have previously been diagnosed with atrial fibrillation or who are susceptible to developing atrial fibrillation.
PRODUCT A is implanted under the skin and can remain in the patient for approximately three years. After that time, it must be removed to replace the battery according to PRODUCT A User’s Manual and Help Manual. [ENDNOTE 2] Many patients receive a replacement PRODUCT A when their device’s battery runs out, while some patients have their device removed before this occurs. PRODUCT A works with a mobile application monitoring system that records the heart’s electrical activity and sends the information to the medical provider for remote monitoring.
Questions, Rulings, and Analysis
Our restatements of your questions are shown below, followed by our responses and analysis.
Question One: Is PRODUCT A an exempt therapeutic appliance or device?
Ruling One: PRODUCT A is a therapeutic device and exempt from sales and use tax if sold to a patient with a prescription. A therapeutic device sold to a medical provider for use in the provision of a nontaxable medical service is taxable unless an exemption applies. See Rule 3.284(d)(11)(C).
Question Two: Is PRODUCT A an exempt prosthetic device?
Ruling Two: PRODUCT A is not an exempt prosthetic device.
Analysis for Questions One and Two: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). Section 151.010 (Taxable Item) defines a taxable item to include tangible personal property and taxable services. Section 151.009 (“Tangible Personal Property”) defines tangible personal property as personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any manner. Taxpayer’s PRODUCT A is tangible personal property.
Certain health care supplies are exempted from sales and use tax, including orthopedic, dental, and prosthetic devices, as well as therapeutic devices when purchased and used by an individual with a prescription from a licensed practitioner of the healing arts. See Sections 151.313(a)(5)-(6) (Health Care Supplies).
An orthopedic appliance is an appliance or device designed specifically for use in the correction or prevention of human deformities, defects, or chronic diseases of the skeleton, joints, or spine. Rule 3.284(a)(12) (Drugs, Medicines, Medical Equipment, and Devices).
A prosthetic device is an item that is artificial and replaces a missing part of the body, performs the function of a vital organ or appendage of the human body, or is permanently implanted in the body. Examples of prosthetic devices are heart-lung pumps, nasal gastric and gastrointestinal devices, ureteral stents, urethral stents, artificial kidney machines, and related components and supplies. Rule 3.284(a)(13).
A therapeutic appliance or device is defined as an appliance or device that is designed to alleviate pain or for use during the treatment or cure of human sickness, disease, suffering or deformity. Rule 3.284(a)(14).
Taxpayer’s PRODUCT A does not meet the definition of an orthopedic appliance as it is not used to treat any deformity or disease of the skeleton, joints, or spine. Taxpayer’s PRODUCT A is also not a prosthetic device. Taxpayer's PRODUCT A does not replace a missing part of the body or perform the function of a vital organ. PRODUCT A is not “permanently” implanted in the body as it can be removed as soon as the medical provider has obtained a diagnosis from the device, and as it only has a battery life of three years.
Taxpayer’s user manual provided to medical professionals suggests the inoperable device should be removed when the battery dies. Even if the medical provider decides the patient should continue to be monitored and inserts a replacement PRODUCT A, none of these devices are permanently implanted. Temporary devices which do not replace a body part or do not perform a bodily function do not qualify for exemption as prosthetic devices.
Taxpayer cites STAR Accession No. 200305892L (May 15, 2003) as an example of a device (a MedPort used in an intravenous (IV) system) that was held to be a prosthetic device. However, that letter is no longer applicable to prosthetic devices as the legislature has classified devices such as the MedPort as exempt IV systems under Section 151.313(e).
Taxpayer also asserts their PRODUCT A is similar to an intrauterine device (IUD) as discussed in STAR Accession No. 200401322L (Jan. 12, 2004), however that letter does not contain a full analysis of the taxability of an IUD device. Long standing Comptroller policy has determined an IUD to be taxable unless it had specific characteristics that qualified it as a prosthetic device. See STAR Accession No. 7608L0027D11 (Aug. 12, 1976). The IUD device discussed in STAR Accession No. 200211581L (Nov. 19, 2002) qualified as a prosthetic device as it became enmeshed into a patient's body and was not intended to be removed, thus becoming “permanently implanted.” Taxpayer’s PRODUCT A is intended to be removed no later than three years after implantation, at the end of the life of the battery powering the device.
Taxpayer's PRODUCT A meets the definition of a therapeutic appliance or device, as it is used as a diagnostic medical tool designed for use in patients with heart conditions. PRODUCT A is exempt only when sold to a patient with a prescription. See Rule 3.284(d)(11)
Question Three: If PRODUCT A does not qualify for an exemption under Section 151.313, may the Taxpayer accept a resale certificate from a medical provider that purchases PRODUCT A on behalf of its patient?
Ruling Three: The Taxpayer cannot accept resale exemption certificate from a medical provider.
Analysis Question Three: Taxpayer may not accept a resale certificate from medical providers under Section 151.006 (“Sale for Resale”) as the medical providers are using the devices to provide of their nontaxable services. See Section 151.006(c). Therapeutic appliances and devices sold to medical providers are subject to sales and use tax. See Rule 3.284(d)(11)(C).
Taxpayer may accept an exemption certificate from a medical provider that qualifies as an exempt organization under Section 151.309 (Governmental Entities) or Section 151.310 (Religious, Educational, and Public Service Organizations).
STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.
Sincerely,
Tax Policy Division – Indirect Taxes
Texas Comptroller of Public Accounts
ENDNOTES
1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.
2. <Taxpayer's web page> last accessed 07/18/2022