Does a dissolvable corneal collagen shield used after eye surgery qualify for New York's sales-tax exemption for medical supplies?

Plain-English summary

Alcon Surgical, Inc. makes pharmaceuticals, surgical supplies and equipment, and prosthetic devices. One product is a corneal collagen shield — a thin, pliable collagen film inserted into the eye after surgery to assist healing, which dissolves and is absorbed by the body within roughly a day. Citing clinical literature on the shield's therapeutic and protective properties, Alcon asked whether it qualifies for the medical-supply exemption in Tax Law § 1115(a)(3).

The Department's answer:

• The shield is an exempt medical supply. Section 1115(a)(3) exempts drugs and medicines and medical equipment and supplies required to treat illness or correct physical incapacity. The collagen shield is not a drug or medicine, but it is a medical supply — a therapeutic device similar to ophthalmic suture materials, which the Department held exempt in Alcon Laboratories, Inc., TSB-A-91(54)S.
• The retail-for-compensation carve-out. The exemption does not cover medical equipment/supplies (other than drugs and medicines) purchased at retail for use in performing medical or similar services for compensation. So the shield's sale is exempt except to a person buying it at retail to use in performing medical services for pay.
• Sales to hospitals/exempt organizations remain exempt. A sale of the shield to a hospital or other organization qualifying under § 1116(a) is exempt even if that entity uses the shield in performing medical services for compensation.

What this means for you

Medical-device and supply manufacturers and distributors

A therapeutic device like a collagen shield qualifies as an exempt medical supply under § 1115(a)(3), on par with sutures — even though it isn't a "drug or medicine." The key is that it's a supply required to treat illness or correct physical incapacity.

The "for compensation" limit matters for providers

If a provider buys the supply at retail to use in performing medical services for compensation, the exemption for non-drug medical equipment/supplies doesn't apply to that purchase. Watch who is buying and for what use.

Hospitals and exempt organizations get the broader exemption

A sale to a hospital or other § 1116(a) exempt organization is exempt regardless — even when the hospital uses the item to provide services for pay. The exempt-organization status carries the exemption past the retail-for-compensation limit.

Accountants and tax professionals

The opinion classifies the shield as a § 1115(a)(3) medical supply (not a drug/medicine), following Alcon Laboratories on ophthalmic sutures, subject to the statute's retail-for-compensation exclusion for non-drug supplies — which is itself overridden when the purchaser is a § 1116(a) exempt organization.

Common questions

Q: Is a corneal collagen shield subject to New York sales tax?
A: Generally no. It qualifies as an exempt medical supply under § 1115(a)(3), similar to ophthalmic suture materials.

Q: Is it treated as a drug or medicine?
A: No. The Department classified it as a medical supply — a therapeutic device — not as a drug or medicine.

Q: When is a sale of the shield taxable?
A: When it's purchased at retail by someone using it to perform medical or similar services for compensation, since the exemption for non-drug medical supplies doesn't reach that use.

Q: What about sales to hospitals?
A: A sale to a hospital or other § 1116(a) exempt organization is exempt even if the hospital uses the shield in performing medical services for compensation.

Q: Why compare it to sutures?
A: In Alcon Laboratories the Department held ophthalmic suture materials to be exempt medical supplies; the collagen shield is a similar therapeutic device.

Citations and references

Statutes and authorities:

• Tax Law § 1115(a)(3) (exemption for drugs, medicines, and medical equipment and supplies; retail-for-compensation exclusion for non-drug supplies)
• Tax Law § 1105(a) (tax on receipts from retail sales of tangible personal property)
• Tax Law § 1116(a) (exempt organizations, including hospitals)
• Alcon Laboratories, Inc., Adv. Op. Comm. T&F, Aug. 2, 1991, TSB-A-91(54)S

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_43s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (43) S
Sales Tax
May 27, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920309B

On March 9, 1992, a Petition for Advisory Opinion was received from Alcon Surgical, Inc.,
6201 South Freeway, Fort Worth, Texas 76134.
The issue raised by Petitioner, Alcon Surgical, Inc., is whether a corneal collagen shield
qualifies for the exemption from sales tax provided for by Section 1115(a)(3) of the Tax Law.
Petitioner manufactures and sells various pharmaceuticals, surgical supplies, surgical
equipment, and prosthetic devices. Among the products offered is a corneal collagen shield. It is
inserted into the eye following surgery to assist in healing. In approximately 24 hours, the shield is
dissolved and is absorbed by the body.
An article in the Journal of Cataract Refractory Surgery V. 14, September 1988 by Robert
H. Marmer, M.D. entitled Therapeutic and Protective Properties of the Corneal Collagen Shield
contained the following discussion of the corneal collagen shield.
The results of these experimental and clinical studies have shown the following:
1.

The speed of epithelial healing is faster and more complete with the use of
the collagen shield.

2.

There is less stromal edema at the wound sites in collagen treated corneas.

3.

The shield seems to protect keratocytes adjacent to the wound and keratocyte
reaction is diminished,

4.

Inflammatory reaction and PEN infiltrating on is diminished with use of the
shield.

5.

The surface epithelial bonding appears to be more normal with use of the
shield.

Bausch & Lomb describes the physical properties of the Bio-Cot collagen
corneal shield as being cast from 100% pure homogenized porcine scleral collagen,
which resembles the collagen molecules of the human eye and appears to be
clinically compatible with collagen in the human eye. The shield appears to be
nonirritating, nontoxic and noninflammatory, with a neutral pH. It is clear, pliable,
thin film 0.0127 mm to 0.0710 mm thick in a spherical shape 14.5 mm in diameter
and has a 9.0 mm base curve. It is easily applied to the eye and absorbs ocular fluids,
which helps it conform to the cornea. After application, the noncross-linked collagen
TP-9 (9/88)

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TSB-A-92 (43) S
Sales Tax
May 27, 1992

will begin to dissolve in the eye between two and 12 hours. It should be stored at
room temperature; contact with heat above 40 degrees or temperatures at or below
freezing should be provided. It should not be resterilized ....
The collagen shield could be used with postoperative or traumatic corneal injuries,
nontraumatic corneal conditions, bullous keratopathy, and penetrating and
nonpenetrating keratoplasty and refractive surgical procedures. It is also helpful to
simplify topical corneal care, to protect from eye lid movement, and as a possible
enhancement of the effect of corneal surgical procedures, for example, radial
keratotomy. In the future it may become a vehicle for administration of medication.
Although it is necessary to exert caution in the use of new protective and therapeutic
devices and materials, it appears that few concerns other than the allergy to collagen
or porcine products would be likely to cause a problem with the collagen shield. The
other entities in the precautionary list may even benefit from the use of the shield. For
example, in my clinical experience, the symptoms of keratoconjunctivitis sicca
unresponsive to traditional therapy appear to be alleviated substantially with the use
of the collagen shield. Certainly an amblyopic or monocular patient with a corneal
problem would fare much better with a clear protective and therapeutic device placed
in the eye than with medication that could adversely affect his or her vision or with
a patch placed over the eye that could be incapacitating.
I believe that medication may be incorporated into the physical make-up of
the collagen shield so that it will not only be effective in accelerating healing, but it
will also protect against and treat infection and other disorders.
The future of this device is promising and could revolutionize corneal care.
Vast potential prospects for clinical application of this device exist.
Section 1105(a) of the Tax Law imposes sales tax upon "[T]he receipts from every sale of
tangible personal property, except as otherwise provided in this article."
Section 1115(a)(3) of the Tax Law exempts from the tax on retail sales by Section 1105(a)
of the Tax Law:
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 or
compensation.

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TSB-A-92 (43) S
Sales Tax
May 27, 1992

In Alcon Laboratories, Inc., Adv Op Comm T&F, August 2, 1991, TSB-A-91(54)S the
Commissioner advised that ophthalmic suture materials qualify for purposes of the exemption
contained in Section 1115(a)(3) of the Tax Law as medical supplies.
A corneal collagen shield is not a drug or medicine but is a medical supply for purposes of
the exemption contained in Section 1115(a)(3) of the Tax Law since it is a therapeutic device similar
to opthalmic suture materials. Alcon Laboratories, Inc., supra, and Journal of Cataract Refractory
Surgery, supra. Therefore, the sale of such shield to other than those purchasing the supply at retail
for use in performing medical services for compensation is exempt from sales tax. Furthermore,
the sale of such shield to a hospital or other organization qualifying for exemption under Section
1116(a) of the Tax Law would be exempt from the imposition of sales tax even if such entity was
using the shield in performing medical services for compensation.

DATED: May 27, 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.