Is a bio-absorbable steroid-releasing sinus implant, sold bundled with or separate from its delivery system, taxed at Illinois' 1% low rate as a medical appliance?

Plain-English summary

A company that sells medical products asked the Illinois Department of Revenue how sales tax applies to two related items: (1) a bio-absorbable, steroid-releasing implant used by physicians during sinus surgery, sold bundled as a single-priced package with a delivery system (a one-time-use surgical tool, prescription-only, used to insert the implant), and (2) a different delivery system sold on its own, which offers physicians an alternate way to place the same implant.

Illinois generally taxes retail sales of tangible personal property at a general merchandise rate of 6.25% plus applicable local taxes. But under 86 Ill. Adm. Code 130.311, products that qualify as "drugs, medicines, or medical appliances" are taxed at a much lower rate of 1% plus applicable local taxes. A "medical appliance" is defined as an item that directly substitutes for a malfunctioning part of the human body -- the ruling gives examples like artificial limbs, dental prostheses, orthopedic braces, wheelchairs, pacemakers, dialysis machines, hearing aids, eyeglasses, and contact lenses. A "medicine or drug" is any preparation for human use that makes a written medicinal claim on its label (e.g., that it cures, treats, or mitigates disease, illness, injury, or pain).

Because this is a General Information Letter (GIL) rather than a Private Letter Ruling (PLR), the Department did not (and could not) issue a binding determination on the taxpayer's specific facts. For the bundled implant-and-delivery-system product (Product Offering #1), the Department said it could not determine whether it qualifies for the 1% rate as either a medical appliance or a drug without more information about how the product is used and what claims appear on its label -- it pointed the taxpayer to an earlier PLR, ST-16-0002 (March 15, 2016), as a potentially helpful (though non-binding, taxpayer-specific) reference. For the stand-alone delivery system (Product Offering #2), however, the Department concluded that -- based on the facts given -- it does not appear to directly substitute for a malfunctioning body part or qualify as a drug, so it would not qualify for the 1% rate and would instead be taxed at the general 6.25% rate.

What this means for you

Medical device and appliance sellers

If you sell products that could be characterized as medical appliances or drugs, don't assume the lower 1% rate applies just because a product is used in a medical or surgical context. The test is whether the item itself directly substitutes for a malfunctioning body part (for appliances) or makes a medicinal claim on its label (for drugs/medicines). A surgical tool or delivery mechanism that merely helps place or administer another product -- but performs no bodily substitution function itself -- will likely be taxed at the general 6.25% merchandise rate, even if it is prescription-only and single-use.

Sellers of bundled products

When a device is sold as a single-priced bundle (here, an implant plus its delivery system, invoiced as one non-itemized charge), the Department did not resolve how to characterize the bundle for tax purposes in this GIL -- it said more information was needed. If you sell bundled medical products, consider whether requesting a Private Letter Ruling (which is binding on the Department for your specific facts, unlike a GIL) would give you more certainty than relying on this general guidance.

Accountants and tax professionals

Remember that a GIL, issued under 2 Ill. Adm. Code 1200.120, is explicitly not a statement of Department policy and is not binding -- even on the taxpayer who requested it. If a client needs a determination they can rely on, they should pursue a PLR under 2 Ill. Adm. Code 1200.110 instead. This letter also flags ST-16-0002 (March 15, 2016) as a potentially relevant prior PLR on similar rate questions, though it is binding only on the company that requested it.

Common questions

Q: What is the tax rate difference between "medical appliances" and general merchandise in Illinois?
A: Qualifying drugs, medicines, and medical appliances are taxed at a lower State rate of 1% plus applicable local taxes. Everything else is taxed at the general merchandise rate of 6.25% plus applicable local taxes.

Q: Did the Department decide whether the sinus implant qualifies for the 1% rate?
A: No. The Department said it could not make that determination without more information about how the product is used and the claims made on its label, and it directed the taxpayer to apply 86 Ill. Adm. Code 130.311 to its own facts.

Q: Why did the stand-alone delivery system not qualify for the low rate?
A: Based on the facts provided, the delivery system's only function is placing the implant in the sinus tissue -- it does not itself substitute for a malfunctioning body part and it makes no medicinal claim, so it does not meet the definition of a medical appliance or a drug.

Q: Is this letter binding on the Department or on other taxpayers?
A: No. This is a General Information Letter (GIL), not a Private Letter Ruling (PLR). A GIL only directs a taxpayer to relevant regulations and sources of information; it is not a statement of Department policy and is not binding on the Department, even for the requesting taxpayer.

Q: What should a business do if it needs a binding answer on a bundled medical product?
A: Request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110. Unlike a GIL, a PLR is binding on the Department as to the requesting taxpayer, provided the facts recited in the PLR are correct and complete.

Citations and references

• 35 ILCS 120/2 (Retailers' Occupation Tax Act imposition)
• 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax regulation)
• 35 ILCS 105/3 (Use Tax Act imposition)
• 86 Ill. Adm. Code 150.101 (Use Tax regulation)
• 86 Ill. Adm. Code 130.311 (Drugs, Medicines, Medical Appliances, and Grooming and Hygiene Products)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedures)

Subject

Medical Appliances

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2020/st20-0033-gil.pdf

Original ruling text

ST 20-0033-GIL MEDICAL APPLIANCES
A medical appliance is an item that directly substitutes for a malfunctioning part of the human
body. Products that qualify as medical appliances are taxed at a lower State rate of 1% plus
any applicable local taxes. See 86 Ill. Adm. Code 130.311. (This is a GIL).

November 10, 2020

Dear Xxxx:
This letter is in response to your letter dated February 26, 2020, in which you requested
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website
at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
ABC (FEIN #####) is requesting a ruling from your State on the taxability of two type of
products we sell.
Product Offering #1) Implant and Delivery system sold as ONE BUNDLE to
physicians to be used in patients during sinus surgery
Our main product, a bio-absorbable steroid-releasing implant that offers localized drug
delivery directly to the sinus tissue, is inserted by a physician to maintain the surgical
opening, expands to prop open the sinus and gradually delivers corticosteroid with antiinflammatory properties directly to the sinus lining as the implant dissolves. The implant
is sold, by prescription only, as a bundle with a delivery system, a type of medical tool or
surgical/procedure kit that is labeled to be dispensed only by the prescription or order of
a licensed practitioner and are intended for one-time use on a single patient only. One
cannot purchase or use the implant without a delivery system, as they are simply two
integral parts of ONE bundled product. We sell to hospitals, ambulatory surgery
centers and physician’s offices for scrub cases and/or inventory stocking; and the
selling price for this bundle is a single set price. The charge for the implant and the
delivery system is not separately stated on the billing invoice.
Product Offering #2) Delivery system

ST 20-0033-GIL
Page 2

We also sell a different design of delivery system as a stand-alone product. This
delivery system offers the physicians an alternate method of delivery of our implant;
compared to the delivery system included in the bundled package. This delivery system
itself has no other function than placing our implant in the sinus tissue.
Please refer to our website for additional product information is https://propelopens.com.
Let us know if you have any questions or need further clarifications.
Please send us your ruling on the two product offerings as soon as you can. We thank
you in advance for your prompt attention.
DEPARTMENT’S RESPONSE:
The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property to purchasers for use or consumption. 35 ILCS
120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is imposed on the privilege of using, in this
State, any kind of tangible personal property that is purchased anywhere at retail from a retailer. 35
ILCS 105/3; 86 Ill. Adm. Code 150.101.
Please see the Department’s regulation at 86 Ill. Adm. Code Section 130.311, which is its
regulation governing Drugs, Medicines, Medical Appliances, and Grooming and Hygiene Products.
Those products that qualify as drugs, medicines and medical appliances are taxed at a lower State
rate of 1% plus any applicable local taxes. Those items that do not qualify for the low rate of tax are
taxed at the general merchandise rate of 6.25% plus applicable local taxes.
A medicine or drug is any pill, powder, potion, salve, or other preparation for human use that
purports on the label to have medicinal qualities. A written claim on the label that a product is
intended to cure or treat disease, illness, injury or pain, or to mitigate the symptoms of such disease,
illness, injury or pain constitutes a medicinal claim. See Section 130.311 for examples of medicinal
claims. Examples of qualifying products include prescription drugs or medicines and nonprescription
drugs or medicines such as aspirin or other pain relievers that purport on the label to have medicinal
qualities. The term "nonprescription medicines and drugs" does not include grooming and hygiene
products. Grooming and hygiene products include, but are not limited to, soaps and cleaning
solutions, shampoo, toothpaste, mouthwash, antiperspirants, and suntan lotions and screens, unless
those products are available by prescription only. If an item is a nonprescription grooming and
hygiene product, it will be taxed at the State 6.25% general merchandise rate regardless of any
medicinal claims made on the product’s label.
A medical appliance is an item that is used to directly substitute for a malfunctioning part of the
human body. Included in the exemption as medical appliances are such items as artificial limbs,
dental prostheses and orthodontic braces, crutches and orthopedic braces, wheelchairs, heart
pacemakers, and dialysis machines (including the dialyzer). Corrective medical appliances such as
hearing aids, eyeglasses and contact lenses qualify for exemption. Moreover, generally, home
glucose monitors, test strips and related supplies used to treat human diabetes also qualify for the 1%
State rate of tax. See subsection (d) of 86 Ill. Adm. Code 130.311.
Due to the limited information contained in your letter, we cannot determine whether Product
Offering 1 qualifies for the lower State rate of 1% as either a medical appliance or a drug. We cannot

ST 20-0033-GIL
Page 3

make such a determination without more information regarding how the product is used and without
examining the claims made on the label. Please apply the above referenced regulation to the product
in order to determine the appropriate tax rate. You may wish to review ST-16-0002 (March 15, 2016)
when determining the proper tax rate. Although the ruling applies only to the product and company
submitting the PLR, it may be helpful when making your decision regarding the proper rate to charge.
Based on the items listed in your letter, it does not appear that Product Offering 2 directly
substitute for a malfunctioning part of the human body or is a drug and, thus, would not qualify for the
1% rate.
I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.

Very truly yours,

Debra M. Boggess
Associate Counsel

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