Are prescription-only bone-graft and bone-regeneration implants sold to Georgia hospitals exempt as prosthetic devices?

Plain-English summary

The first bone-void-filling and fracture-repair product was an exempt prosthetic device. It could be sold only by prescription, was surgically implanted, and title and possession permanently transferred through the hospital or surgery center to the prescribed patient.

The second synthetic bone-regeneration product also met the prosthetic-device definition, but FDA marketing approval was still pending. Its sales would become exempt only if FDA approved it as a Class III device restricted to prescription use.

Common questions

Q: Could the hospital buy the first product without Form ST-5?

A: Yes. The rule cited allowed the hospital or surgery center to buy a prescription-only prosthetic device tax-free for permanent transfer to the prescribed patient.

Q: Was the second product already unconditionally exempt?

A: No. The ruling made exemption conditional on prescription-only FDA approval.

Citations and references

• O.C.G.A. § 48-8-3(54) -- prescribed prosthetic-device exemption
• O.C.G.A. § 48-8-2(29) -- prosthetic-device definition
• Ga. Comp. R. & Regs. r. 560-12-2-.30(5)(a) -- hospital purchase without Form ST-5
• 21 C.F.R. § 801.109 -- prescription-device restriction

Source

• Landing page: Georgia Sales & Use Tax Letter Rulings
• Original PDF: LR SUT-2013-04

Original ruling text

State of Georgia
Douglas J. MacGinnitie
Commissioner

Department of Revenue

Administrative Division – Office of Tax Policy
1800 Century Blvd., Suite 15107
Atlanta, Georgia 30345-3205
(404) 417- 6649

Frank M. O’Connell
Director

January 29, 2013

Georgia Letter Ruling No. 2013-01-29-01 Medical & Drugs

This letter is in response to your requests for guidance on the application of Georgia sales and
use tax to sales of certain items to hospitals and surgery centers.
Facts
Taxpayer is a licensed distributer of a prosthetic device used for bone void filling and fracture
repair. The product material is a composition of carbonated apatite and bovine type I collagen.
Carbonated apatite is a form of calcium phosphate that closely resembles the mineral phase of
natural human bone. The granules are interspersed within the collagen, providing an enhanced
osteoconductive scaffold to support bone remodeling. The scaffold is highly porous with ample
surface area for absorption of bone marrow aspirate and stem cell attachment. The prouduct is
available in pads, strips, blocks, plugs and paste. Upon saturation, bone marrow aspirate may be
manipulated as desired. This flexible structure allows the grafts to be shaped based on patient
anatomy and surgical environment. Pads, strips, blocks and plugs may be compressed, folded,
trimmed or layered, while hydrated paste may be molded. Taxpayer sells this product to
hospitals and surgery centers in Georgia to be surgically implanted in patients.
Taxpayer provided documents from the United States Food and Drug Administration (“FDA”)
indicating that the product is a Class II device, which means it can only be sold to patients
pursuant to a medical prescription of a licensed medical professional. 1
Taxpayer is also a licensed distributor of a combination drug device product that is pending
marketing approval by the FDA as a Class III medical device. This product was developed as a
fully synthetic replacement to autograft in hindfoot and ankle surgery. It consists of two
components: recombinant human platelet-derived growth factor and beta-tricalcium phosphate.
The product is supplied as a kit for a single use only. At the point of use, the two primary
components are combined in entirety, mixed and subsequently applied to the surgical site. The
beta-tricalcium phosphate component of the product is a highly porous, resorbable and
osteoconductive scaffold which provides a framework for bone regeneration, aids in preventing
1

21 C.F.R. § 801.109.

An Equal Opportunity Employer

January 29, 2013
Page 2 of 3

soft tissue infiltration, and promotes stabilization of the blood clot. The recombinant human
platelet-derived growth factor, also known as becalplermin, acts by stimulating the recruitment
and proliferation of a variety of cell types. The product is placed on defects, such as gaps
between bones where a surgeon is trying to achieve fusion. It provides scaffolding for natural
occurring tissue (bone) regeneration and is gradually resorbed by the body and turned into bone.
The presence of the protein stimulates this naturally occurring biological process.
Issues
Are Taxpayer’s sales of these products to hospitals and surgery centers in Georgia subject to
sales and use tax?
Analysis
All retail purchases and sales of tangible personal property are taxable unless provided for
otherwise. 2 Tax is levied and imposed upon the retail purchase, retail sale, rental, storage, use, or
consumption of tangible personal property and on certain services that occur in this state. 3
"Retail sale" or a "sale at retail" means a sale to a consumer or to any person for any purpose
other than for resale of tangible personal property or certain services. 4
The tax applies to all retail sales of drugs, medicine, medical supplies and equipment unless
specifically exempt. 5 Code Section 48-8-3(54) provides an exemption from sales and use tax for
“[t]he sale or use of any durable medical equipment that is sold or used pursuant to a prescription
or prosthetic device that is sold or used pursuant to a prescription”. In addition, Code Section 488-3(47) provides an exemption for “[t]he sale or use of drugs which are lawfully dispensable
only by prescription for the treatment of natural persons . . .”
To qualify as an exempt prosthetic device, the particular item must initially meet the definition.
Specifically, “prosthetic device” means a replacement, corrective, or supportive device…worn
on or in the body to artificially replace a missing portion of the body; or prevent or correct
physical deformity or malfunction; or support a weak or deformed portion of the body. 6 If an
item meeting this definition can, under federal or state law, be sold or used only pursuant to a
prescription, and title and possession of the item will be permanently transferred from a hospital
or surgery center to a natural person to whom a prescription for the item is issued, the hospital or
surgery center may purchase the item tax exempt without furnishing form ST-5 (Sales and Use
Tax Certificate of Exemption). 7 The hospital or surgery center may then transfer the device tax
exempt pursuant to O.C.G.A. § 48-8-3(54) to a natural person to whom a prescription for the
device is issued.
2

O.C.G.A. §§ 48-8-1 and 48-8-30(b).
O.C.G.A. § 48-8-30.
4
O.C.G.A. § 48-8-2(31).
5
Ga. Comp. R. & Regs. r. 560-12-2-.30, effective November 19, 2012.
6
O.C.G.A. § 48-8-2(29).
7
Ga. Comp. R. & Regs. r. 560-12-2-.30(5)(a).
3

January 29, 2013
Page 3 of 3

Rulings
The first product meets the definition of “prosthetic device”. Under federal law, it can only be
sold or used pursuant to a medical prescription. Title and possession of the product are
permanently transferred to a natural person to whom it is prescribed. Therefore, Taxpayer’s sales
of this product to hospitals and surgical centers are exempt from Georgia sales and use tax.
The second product also meets the definition of “prosthetic device”. It is the Department’s
understanding that Taxpayer is currently seeking FDA approval of this product as a Class III
medical device. If the FDA approves the product as a Class III medical device and restricts it to
“prescription use” only, Taxpayer’s sales of the product to hospitals and surgical centers will
also be exempt from Georgia sales and use tax.
The opinions expressed in this ruling are based upon the information contained in your request
and limited to the specific transactions and taxpayer in question. Should the circumstances
regarding the transactions change, or differ materially from those represented, then this ruling
may become invalid. In addition, please be advised that subsequent statutory or administrative
rule changes or judicial interpretations of the Statutes or Rules upon which this advice is based
may subject similar future transactions to a different tax treatment than that expressed in this
response.