Is a manufacturer's sale of ultrasound diagnostic imaging equipment exempt from New York sales tax as production machinery or as medical equipment?

Plain-English summary

Advanced Technology Laboratories, Inc. manufactures and sells ultrasound diagnostic imaging systems. Its customers are imaging centers: patients are referred by physicians, the center scans them, and the machine produces video cassettes of ultrasound images that go to the patient or physician for diagnostic use. The company asked whether the sale of this equipment is exempt as production equipment under Tax Law § 1115(a)(12).

The Department said no to the production exemption, but yes to the medical-equipment exemption:

• Not exempt as production machinery. Section 1115(a)(12) exempts machinery used directly and predominantly in the production of tangible personal property for sale. Unlike the income-tax and franchise-tax investment credits (which lack the "for sale" requirement), the sales-tax exemption has that extra condition. The imaging centers use the machines to provide a diagnostic service, not to make goods for sale — the video cassettes aren't sold. Following Segal Equipment Associates (TSB-A-90(9)S), where a CAT-SCAN machine producing diagnostic images was denied the § 1115(a)(12) exemption, and echoing the snowmaking-equipment cases (Shanty Hollow: investment credit allowed, sales-tax exemption denied), the ultrasound machines don't qualify.
• Exempt as medical equipment. The machines are "medical equipment" under § 1115(a)(3) and Regulation § 528.4(e)(1) — devices intended for use in the diagnosis, treatment, or prevention of illness in human beings. So the company's sales of them are exempt from sales and use tax — unless they are "purchased at retail for use in performing medical and similar services for compensation," in which case the exemption does not apply.
• Sales to exempt organizations. Sales of the machines to organizations exempt under § 1116(a) are also exempt.

What this means for you

The manufacturing exemption needs goods made "for sale"

Two exemptions can look interchangeable but aren't. The income/franchise-tax investment credits reward machinery used in production. The sales-tax production exemption in § 1115(a)(12) adds a hard requirement: the property produced must be for sale. Equipment that generates diagnostic images given to a patient — not sold — fails that test, even though the machine is clearly "producing" something.

But diagnostic devices can still be exempt as medical equipment

Missing the manufacturing exemption isn't the end of the analysis. Diagnostic imaging machines are medical equipment under § 1115(a)(3), which independently exempts their sale. So the practical answer for many imaging devices is: exempt — just under a different provision.

The "for compensation" carve-out is the trap

The medical-equipment exemption is lost when the equipment is "purchased at retail for use in performing medical and similar services for compensation." An imaging center that buys the machine to run paid scans may fall into that carve-out. This is the same retail-for-compensation limit that appears in other medical-supply opinions (for example, TSB-A-92(43)S on corneal collagen shields). Watch who the buyer is and how they use the device.

Accountants and tax professionals

Run the two exemptions in order: (1) § 1115(a)(12) fails without production of goods for sale; (2) § 1115(a)(3) then rescues the sale as medical equipment, subject to the retail-for-compensation carve-out and the § 1116(a) exempt-organization overlay.

Common questions

Q: Is ultrasound imaging equipment exempt as production machinery?
A: No. The imaging centers use it to provide a diagnostic service, not to produce tangible personal property for sale, so § 1115(a)(12) doesn't apply.

Q: Then why is the sale still exempt?
A: Because the machine qualifies as medical equipment under § 1115(a)(3) and Regulation § 528.4(e)(1), which exempts its sale.

Q: When would that medical-equipment exemption not apply?
A: When the equipment is purchased at retail for use in performing medical or similar services for compensation — that use is carved out of the exemption.

Q: What about sales to a hospital or other exempt organization?
A: Sales to organizations exempt under § 1116(a) are exempt from sales tax.

Citations and references

Statutes, regulations, and authorities:

• Tax Law § 1115(a)(12) (exemption for machinery/equipment used directly and predominantly in producing tangible personal property for sale)
• Tax Law § 1115(a)(3) (exemption for medical equipment and supplies; retail-for-compensation carve-out)
• Sales and Use Tax Regulations § 528.4(e)(1) (definition of medical equipment)
• Tax Law § 1116(a) (sales to exempt organizations)
• Segal Equipment Associates, Adv. Op. Comm. T&F, March 12, 1990, TSB-A-90(9)S (CAT-SCAN diagnostic machine denied § 1115(a)(12) exemption)
• Matter of Shanty Hollow Corp., Dec. St. Tax Comm., March 9, 1984, TSB-H-84(60)S, aff'd Shanty Hollow v. New York State Tax Commission, 111 A.D.2d 968 (snowmaking equipment; sales-tax exemption denied)
• Matter of Plattskill Mountain Ski Center, Inc., Dec. St. Tax Comm., March 9, 1984, TSB-H-85(28)C (investment credit allowed for snowmaking equipment)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_19s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (19) S
Sales Tax
March 6, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920103B

On January 3, 1992, a Petition for Advisory Opinion was received from Advanced
Technology Laboratories, Inc., 701 Fifth Avenue, Suite 6800, Seattle, WA 98104-7019.
The issue raised by Petitioner, Advanced Technology Laboratories, Inc., is whether the sale
of equipment used to produce video cassettes which contain ultrasound images is exempt from sales
and use taxes as production equipment under Section 1115(a)(12) of the Tax Law.
Petitioner manufactures and sells diagnostic imaging systems using ultrasound. technology.
The systems address all major segments of the market for ultrasound imaging equipment, including
radiology, cardiology, obstetrics and gynecology, and peripheral vascular diagnosis.
Petitioner has customers that are imaging centers. Patients are referred to centers by their
physicians. These centers use a variety of approaches to imaging depending on the specific need and
condition of a patient. Images are captured on various media and given to the patient or sent directly
to physician. When used in this type of setting, such equipment produces video cassettes which
contain ultrasound images. The ultrasound images are used solely for diagnostic purposes.
Section 1115(a)(12) of the Tax Law exempts "machinery and equipment for use or
consumption directly and predominantly in the production of tangible personal property. . . for sale,
by manufacturing. . ." from the imposition of sales tax.
The investment tax credit for Personal Income Tax purposes was allowed under Section
606(a) of the Tax Law to a taxpayer operating in a manner similar to Petitioners' customers. (Albany
Equipment Management Associates, Adv Op Comm T & F, TSB-A-88-(10)I. However, while the
investment tax credits under the Personal Income Tax and Franchise Tax on Business corporations
are similar for machinery and equipment to the sales tax exemption for machinery and equipment,
the sales tax exemption set forth in Section 1115(a)(12) of the Tax Law contains an additional
requirement not found in the investment tax credit sections. The tangible personal property produced
must be "for sale."
This distinction has been applied to snow making equipment. The Tax Commission allowed
the investment tax credit (Matter of Plattskill Mountain Ski Center, Inc., Dec St Tax Comm, March
9, 1984, TSB-H-85(28)C), but did not allow the sales tax exemption (Matter of Shanty Hollow Corp,
Dec St Tax Comm, March 9, 1984, TSB-H-84(60)S). The Decision of the State Tax Commission
was affirmed by the Appellate Division in Shanty Hollow v. New York State Tax Commission, 111
A.D. 2d 968.

-2­
TSB-A-92 (19) S
Sales Tax
March 6, 1992

In Segal Equipment Associates, Adv. Op Comm T&F, March 12, 1990, TSB-A-90(9)S,
the Commissioner advised that a "CAT-SCAN" machine which produced tangible images for
diagnostic purposes did not qualify for exemption from sales tax under Section 1115(a)(12) of the
Tax Law.
Section 1115(a)(3) of the Tax Law, however, provides exemption from tax on retail sales of
the following:
(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. (emphasis added)
Section 528.4(e)(1) of the Sales and Use Tax Regulations defines the term "medical
equipment" to mean:
(e) Medical equipment. (1) Medical equipment means machinery, apparatus and
other devices (other than prosthetic aids, hearing aids, eyeglasses and artificial
devices which qualify for exemption under section 1115(a)(4) of the Tax Law),
which are intended for use in the cure, mitigation, treatment or prevention of illnesses
or diseases or the correction or alleviation of physical incapacity in human beings.
(emphasis added)
Accordingly, since Petitioner's customers are using the imaging machines to provide a
diagnostic service and not for the production of tangible personal property for sale, pursuant to Segal
Equipment Associates, supra, the imaging machines do not qualify for exemption from sales tax
under Section 1115(a)(12) of the Tax Law. The imaging machines do, however, constitute medical
equipment pursuant to Section 1115(a)(3) of the Tax law and Section 528.4(e)(1) of the Sales and
Use Tax Regulations and thus the receipts from the sale of such machines by Petitioner are exempt
from sales and use taxes unless purchased at retail for use in performing medical and similar services
for compensation.

-3­
TSB-A-92 (19) S
Sales Tax
March 6, 1992

It is noted that sales of imaging machines to exempt organizations as defined in Section
1116(a) of the Tax Law are exempt from the impositions of sales tax.

DATED: March 6, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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