Were Company X's MRI and lithotripsy agreements equipment leases, and could it acquire the equipment for resale?

Plain-English summary

Company X provided MRI and lithotripsy equipment and operating personnel to Connecticut hospitals. Sales, leases, and services to qualifying nonprofit charitable hospitals were exempt, so Company X was correct not to charge those hospitals sales tax.

But DRS found that the sample agreements were services, not equipment leases. The hospitals did not receive exclusive possession, use, and enjoyment of the equipment. Company X retained substantial control, including access to the mobile units and responsibility for maintenance, operation, operating personnel, and insurance.

Because Company X was providing services, it could not buy or lease the equipment for resale. Company X instead owed tax on those purchases or leases when the equipment was used in Connecticut.

What this means for you

The customer-facing hospital exemption did not make Company X's equipment a resale purchase. Contract substance and retained operational control determined whether the arrangement was a lease or a service.

Common questions

Could Company X avoid charging qualifying nonprofit hospitals? Yes under the cited hospital exemption.

Were the agreements leases? No. Company X retained too much control and responsibility.

Could Company X acquire the equipment for resale? No.

Who owed tax on the equipment used in Connecticut? Company X owed tax on its purchases or leases.

Citations and references

• Conn. Gen. Stat. § 12-412(5), as cited in the ruling.
• Conn. Agencies Regs. § 12-426-15(b), as cited in the ruling.

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 89-250

Original ruling text

Ruling 89-250, Leasing

You have inquired as to the sales tax treatment of your agreements with certain hospitals in Connecticut relating to MRI [Magnetic Resonance Imaging] and lithotripsy equipment and operating personnel.

As you are obviously aware, the sale (or leasing) of tangible personal property and/or the rendering of services to nonprofit charitable hospitals is exempt from sales tax under section 12-412(5) of the Connecticut General Statutes and section 12-426-15(b) of the Regulations of Connecticut State Agencies, and to the extent that Company X does not charge such tax to qualifying hospitals, it is correct.

However, after close examination of the two sample "Service and Lease Agreements" attached to your letter, it is our opinion that these agreements do not vest the Provider with sufficient control over or responsibility for the equipment involved to consititute "leases of equipment" in the ordinary legal sense. It would appear that exclusive possession, use and enjoyment of the equipment is not granted to the Provider, but rather that Company X retains a large measure of control over both the MRI system and the Lithotripter unit while they are on the premises of the Provider, including complete control over access and admittance to the mobile units, responsibility for their main- tenance and operation including operating personnel, insurance, etc.

Based on the above, we conclude that Company X is providing a service, not leasing equipment to its customers, and is therefore not entitled to purchase or lease the equipment on resale from its supplier. Instead, Company X is liable for tax on all such purchases or leases when use of the equipment occurs in Connecticut.

LEGAL DIVISION

December 5, 1989