Can a dental practice's own in-house dental lab (making dentures, crowns, and bridges) buy its raw materials tax-free with a resale certificate, and does it matter whether the lab operates as a division of the practice or as a separate LLC that sells the finished prosthetics back to the practice?

Plain-English summary

A dental professional corporation ("PC") wanted advice on two alternative ways to structure a dental lab that manufactures dentures, partial dentures, bridges, artificial teeth, and crowns. Under Business Structure #1, the lab is just an internal division of the PC — the PC itself buys precious metals, porcelain, and acrylics, using some for ordinary tooth repair and some for the lab to manufacture prosthetics, and planned to issue resale certificates on the material destined for prosthetics. Under Business Structure #2, the PC would spin the lab's assets off into a wholly owned, single-member LLC, which would buy the same kinds of raw materials (issuing its own resale certificates), manufacture the prosthetics, and then sell the finished products to the PC.

For Structure #1, the Department said no resale certificate is available. Citing a controlling appellate decision (Dental Society of State of N.Y. v. N.Y.S. Tax Comm.), the Department confirmed that raw materials used by a dentist in performing dental services — even materials that get built into an otherwise-exempt prosthetic like a crown or denture — stay taxable when purchased by the practitioner performing the (nontaxable) service, precisely because "raw materials can be rationally distinguished from equipment," and only the finished prosthetic itself, not the component ingredients bought by the treating dentist, gets the prosthetic-aid exemption. So under this structure, all of the PC's own material purchases are taxable retail purchases, regardless of whether the materials end up repairing a tooth or becoming part of a denture.

Structure #2 comes out completely differently, because it changes who's actually manufacturing and selling. Transferring the lab's assets into the new LLC in exchange for LLC ownership isn't itself a taxable retail sale. Once operating, the LLC is a genuine, separate seller: it buys the raw materials specifically to manufacture prosthetics it will then sell to the PC, so its purchases qualify for the ordinary resale exclusion (following the Department's earlier Alvy Dental Supply ruling involving materials sold to third-party dental labs). And because the LLC's sale of the finished dentures, bridges, and crowns to the PC is a sale of prosthetic aids, that sale is separately exempt under the prosthetic-aid exemption. The one wrinkle: if the LLC ever sells raw, unincorporated materials (rather than finished prosthetics) to the PC for the PC to use in its own dental services, that sale is an ordinary taxable retail sale, the same as if the PC had bought the raw materials directly.

What this means for you

Dental practices considering an in-house lab

Simply calling your in-house lab a separate "division" doesn't unlock resale-certificate treatment on your raw material purchases — as long as you (the treating dental practice) are the one buying materials to perform your own dental services, those purchases stay taxable whether or not the material ends up in a prosthetic. Genuinely restructuring the lab as a separate selling entity that manufactures and then actually sells finished prosthetics back to you is what changes the tax result.

Dental laboratories organized as separate entities (LLCs, corporations)

Raw materials that become a physical component of a prosthetic aid you manufacture for resale qualify for the resale exclusion when you buy them, following the Department's Alvy Dental Supply precedent — and your sale of the finished prosthetic itself is separately exempt as a prosthetic aid.

Accountants and tax professionals structuring healthcare practice reorganizations

The controlling authority against a resale certificate for a practicing dentist's own raw materials is the appellate Dental Society of State of N.Y. decision, which specifically upheld 20 NYCRR § 528.4(h)'s "raw materials vs. equipment" distinction against a claim that materials used to make exempt prosthetics should inherit that exemption. The favorable Structure #2 result depends on the LLC being a genuine separate taxpayer that actually sells (not merely fabricates on behalf of) the finished product — the initial asset transfer into the new LLC in exchange for membership interest is itself non-taxable under the Deloitte & Touche precedent on contributions to a new entity.

Common questions

Q: Can a dentist buy dental lab materials tax-free with a resale certificate if some of the material ends up in an exempt prosthetic like a crown?
A: No, not if the dentist is the one performing the dental service using those materials — raw materials purchased by a practicing dentist for use in dental services stay taxable regardless of whether they become part of a crown, denture, or other prosthetic.

Q: Does forming a separate LLC to run the dental lab change the sales tax result?
A: Yes. If the LLC genuinely manufactures prosthetics and sells the finished products to the practice, the LLC's own raw material purchases qualify for the resale exclusion, and its sale of the finished prosthetics to the practice is separately exempt as a sale of prosthetic aids.

Q: Is moving the lab's assets into a new LLC itself a taxable sale?
A: No. Transferring assets to a newly formed LLC in exchange for a membership interest in that LLC is not a retail sale subject to tax.

Q: What if the separate LLC sells the practice raw materials instead of finished prosthetics?
A: That sale is an ordinary taxable retail sale — the exemption only applies to the LLC's sale of the actual finished prosthetic aids, not to raw, unincorporated materials sold for the practice's own use in dental services.

Citations and references

Statutes and regulations:

• Tax Law § 1101(b)(4)(i) (definition of "retail sale"; resale exclusion)
• Tax Law § 1105 (imposition of sales tax)
• Tax Law § 1115(a)(3) (drugs, medicines, and medical supplies exemption; retail-for-compensation carve-out)
• Tax Law § 1115(a)(4) (prosthetic aids exemption)
• 20 NYCRR § 526.6 (resale exclusion)
• 20 NYCRR § 528.4(h) (taxable medical equipment/supplies; dental supplies example)
• 20 NYCRR § 528.5 (prosthetic aid exemption and qualification standard)

Prior rulings/cases referenced:

• Matter of Dental Society of State of N.Y. v. N.Y.S. Tax Comm., 110 A.D.2d 988, affd. 66 N.Y.2d 939
• Matter of Slattery Assoc. v. Tully, 79 A.D.2d 761, affd 54 N.Y.2d 711
• Deloitte & Touche, LLP, Adv Op Comm T&F, Jan. 30, 1998, TSB-A-98(2)S
• Alvy Dental Supply Co., Adv Op Comm T&F, July 17, 1995, TSB-A-95(27)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a00_32s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(32)S
Sales Tax
September 7, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S000424A

On April 24, 2000, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Underberg & Kessler LLP, 1800 Chase Square, Rochester, New York, 14604.
The issues raised by Petitioner, Underberg & Kessler LLP, are whether certain purchases and
sales as described below are exempt from sales and compensating use tax as purchases made for
resale or as sales of prosthetic aids.
Petitioner submitted the following facts as a basis for this Advisory Opinion.
A professional corporation (“PC”) performs dental services for compensation. The PC is
considering two alternate business structures for operating a dental lab to manufacture dentures,
partial dentures, bridges, artificial teeth and crowns. The dental lab will operate either as a division
of the PC or as a single-member LLC, wholly owned by the PC. The two business structures are
described as follows:
Business Structure #1
The dental lab would be a division of the PC. The PC will purchase precious metals,
porcelain and acrylics both for the repairing of teeth and for the dental lab to use in the manufacture
of prosthetic aids. The PC would issue resale certificates to vendors, but only for the material to be
incorporated into the prosthetic aids.
Business Structure #2
The PC would transfer the assets necessary to operate the dental lab to a newly formed single­
member LLC in exchange for all of the membership interest in the LLC. The LLC will purchase
precious metals, porcelain and acrylics to manufacture prosthetic aids and issue resale certificates
to the vendors. The LLC would not provide dental services for compensation or purchase materials
as an agent of the PC. After manufacture, the LLC will sell the prosthetic aids to the PC.
Applicable Law and Regulations
Section 1101(b)(4)(i) of the Tax Law defines retail sale as “A sale of tangible personal
property to any person for any purpose, other than (A) for resale as such or as a physical component
part of tangible personal property, or (B) for use by that person in performing the services subject

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to tax under paragraphs (1), (2), (3), (5), (7) and (8) of subdivision (c) of section eleven hundred five
where the property so sold becomes a physical component part of the property upon which the
services are performed or where the property so sold is later actually transferred to the purchaser of
the service in conjunction with the performance of the service subject to tax....
Section 1105 of the Tax Law provides, in part:
On and after June first, nineteen hundred seventy-one, there is hereby
imposed and there shall be paid a tax of four percent upon:
(a) The receipts from every retail sale of tangible personal property, except
as otherwise provided in this article.
Section 1115(a) of the Tax Law provides, in part:
Receipts from the following shall be exempt from the tax on retail sales
imposed under subdivision (a) of section eleven hundred five and the compensating
use tax imposed under section eleven hundred ten:
*

*

*

(3) Drugs and medicines intended for use, internally or externally, in the cure,
mitigation, treatment or prevention of illnesses or diseases in human beings, medical
equipment (including component parts thereof) and supplies required for such use or
to correct or alleviate physical incapacity, and products consumed by humans for the
preservation of health but not including cosmetics or toilet articles notwithstanding
the presence of medicinal ingredients therein or medical equipment (including
component parts thereof) and supplies, other than such drugs and medicines,
purchased at retail for use in performing medical and similar services for
compensation.
(4) Prosthetic aids, hearing aids, eyeglasses and artificial devices and
component parts thereof purchased to correct or alleviate physical incapacity in
human beings.
Section 526.6 of the Sales and Use Tax Regulations provides, in part:
(a) The term retail sale or sale at retail means the sale of tangible personal
property to any person for any purpose, except as specifically excluded.
*

*

*

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(c) Resale exclusion. (1) Where a person, in the course of his business
operations, purchases tangible personal property or services which he intends to sell,
either in the form in which purchased, or as a component part of other property or
services, the property or services which he has purchased will be considered as
purchased for resale, and therefore not subject to tax until he has transferred the
property to his customer.
(2) A sale for resale will be recognized only if the vendor receives a properly
completed resale certificate. See sections 532.4 and 532.6 of this Title.
Section 528.4 of the Sales and Use Tax Regulations provides, in part:
(a) Exemption. (1) Drugs and medicines intended for the use, internally or
externally in the cure, mitigation, treatment or prevention of illnesses or diseases in
human beings, medical equipment (including component parts thereof) and supplies
required for such use or to correct or alleviate physical incapacity, and products
consumed by humans for the preservation of health are exempt.
*

*

*

(h) Taxable medical equipment and supplies. (1) Medical equipment and
supplies purchased for use in performing medical or similar services for
compensation are not exempt from tax.
*
Example 4:

*

*

Dental supplies such as porcelain, mercalloy, gold, silver,
acrylic denture base, amalgam, composite resin, silicate, and
dental floss are not exempt when purchased by a dentist who
will use them in performing a dental service for
compensation.

(2) Medical services for human beings include but are not limited to the
practices of medicine, dentistry, physical therapy, chiropractic, nursing, podiatry,
optometry and radiology, whether performed by a private practitioner, clinical
laboratory, hospital, nursing home, ambulance service, clinic, or health maintenance
facilities.
Section 528.5 of the Sales and Use Tax Regulations provides, in part:

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(a) Exemption. Prosthetic aids, hearing aids, eyeglasses and artificial devices
and components thereof, purchased to correct or alleviate physical incapacity in
human beings are exempt from the tax.
(b) Qualifications. (1) In order to qualify as a prosthetic aid, a hearing aid,
eyeglasses or an artificial device, the property must either completely or partially
replace a missing body part or the function of a permanently inoperative or
permanently malfunctioning body part and must be primarily and customarily used
for such purposes and not be generally useful in the absence of illness, injury or
physical incapacity.
Example 1: Artificial hands, arms, legs, false teeth, etc. are exempt.
*

*

*

Example 4: A crown which is permanently attached to a tooth by a dentist is
exempt.
Opinion
Business Structure #1
In Business Structure #1, the dental lab is a division of the PC. The PC will purchase the
named materials for both the repairing of teeth in the course of providing the medical services of
dentistry and for the manufacture of prosthetic aids such as dentures, bridges, artificial teeth and
crowns by the dental lab. The PC will furnish the prosthetic aids that it manufactures to its patients
in conjunction with the medical services.
In Dental Society of State of N.Y. v. N.Y.S. Tax Comm., 110 A.D. 2d 988, affd. 66 N.Y.2d
939 the Appellate Division reversed a lower court’s ruling which held that gold, silver and other
alloys and substances used in repairing teeth “qualified for an exemption as prosthetic aids and held
that the implementing regulation, 20 NYCRR 528.4(h), relied on by defendant was invalid.” The
Appellate Division stated, in part:
Special Term essentially concluded that since the subject materials are
utilized to make both false teeth and crowns, which are expressly exempt, so
necessarily must be the component parts. This conclusion is in direct conflict with
the Department’s regulation interpreting the statutory exemption for drugs and
medicines, set forth in Tax Law § 1115(a)(3),... Nor can we agree with plaintiff’s
contention that the distinction between crowns and false teeth, which are exempt, and
filling substances, which are not, is irrational. Raw materials can be rationally

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distinguished from equipment (Matter of Slattery Assoc. v Tully, 79 AD2d 761, 762,
affd 54 NY2d 711). In construing the meaning of “prosthetic aid”, we search for “an
accommodation between a common understanding of the term and the legislative
purpose” (Engle v Talarico, supra, p 241). The ordinary, commonsense meaning of
prosthesis is an artificial device used to replace a missing part of the body (see,
Webster’s Third New International Dictionary 1822 [P. Gove ed. 1961]).
The PC performs medical services for compensation within the meaning and intent of Section
1115(a)(3) of the Tax Law and Section 528.4(h)(2) of the Sales and Use Tax Regulations. The
precious metals, porcelain and acrylics purchased by the PC are for use in performing nontaxable
medical services, and therefore, are purchased at retail, whether they are used for the repair of teeth
or to make a prosthetic aid. Accordingly, the PC may not use a resale certificate when it purchases
such materials for use in performing nontaxable medical services.
Based on The Dental Society of the State of New York, supra, and in accordance with
Section 1115(a)(3) of the Tax Law and Section 528.4(h) of the Sales and Use Tax Regulations, the
purchase by the PC of the materials as described in Business Structure #1 for use in performing
medical services for compensation are subject to sales and compensating use tax.
Business Structure #2
In Business Structure #2, the PC will form an LLC by transferring the assets comprising the
dental lab to the single-member LLC. In exchange for the transfer of such assets the PC will receive
100% of the ownership interest in the LLC. Under Business Structure #2, the LLC will purchase
materials necessary to manufacture prosthetic aids and then will sell such prosthetic aids to the PC.
When the LLC purchases such materials it plans on issuing resale certificates to the vendors who sell
the materials to the LLC. The LLC is treated as a partnership separate from the PC. When the PC
transfers assets to the LLC upon its organization in exchange for an interest therein, such transfer
is not a retail sale subject to tax. (See Deloitte & Touche, LLP, Adv Op Comm T&F, January 30,
1998, TSB-A-98(2)S).
In Alvy Dental Supply Co., Adv Op Comm T&F, July 17, 1995, TSB-A-95(27)S, the
Petitioner was a corporation that sold tangible personal property to dental laboratories for use to
manufacture dentures and crowns for resale to dentists. The tangible personal property sold included
teeth, porcelain, certain acrylics and certain metals which become physical component parts of
dentures and crowns, and items such as waxes, abrasives and plaster which do not. The opinion
stated that “Sales by Petitioner to dental laboratories of teeth, porcelain, certain acrylics and certain
metals which become a physical component part of a denture for sale by the laboratory may be
purchased for resale provided the purchaser thereof gives the seller a properly completed Resale
Certificate (Form ST-120) in accordance with the provisions of Section 1101(b)(4)(i) of the Sales
Tax Law and sections 526.6(c)(1) and (2) of the Sales and Use Tax Regulations.”

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In accordance with Section 1101(b)(4)(i) of the Tax Law, there is no sales and compensating
use tax imposed upon the purchase by the LLC of the precious metals, porcelain and acrylics
incorporated into the prosthetic aids that the LLC sells to the PC as described in the facts of the
Petition. Such materials are purchased by the LLC for resale. See Alvy Dental Supply Co., supra.
Also, the sale of prosthetic aids by the LLC to the PC is exempt under Section 1115(a)(4) of the Tax
Law. However, if the LLC sells raw materials such as the precious metals, porcelain and acrylics
to the PC for use in performing nontaxable medical services, such sale constitutes a retail sale subject
to sales and use tax, whether such materials are used to repair teeth or to make a prosthetic aid.

DATED: September 7, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.