Was a hospital ventilator system exempt as a prosthetic device sold by prescription?

Plain-English summary

The manufacturer sold a sophisticated hospital ventilator system for neonate, pediatric, and adult patients. A unit generally cost $65,000 to $70,000 and supported lung-protective ventilation and patient transport within a hospital.

South Carolina's regulation defined a prosthetic device as an artificial device replacing a missing body part. The Department distinguished replacing a body function from replacing a missing body part and concluded that this ventilator was medical equipment used by a hospital to provide professional care, not a prosthetic device.

Its sale therefore was not exempt as a “prosthetic device sold by prescription.” The ruling also explained that sales to hospitals and doctors were retail sales because those providers used or consumed medical supplies in rendering services.

The Department noted that a different exemption might apply to a qualifying sale to the federal government or to a charitable hospital meeting the specific statutory requirements.

What this means for you

Medical-equipment sellers

A prescription alone did not make equipment a prosthetic device. Under the ruling, the item also had to replace a missing body part and actually be sold by prescription.

Hospitals and care providers

The hospital was treated as the user or consumer of equipment used in providing medical services, so the supplier's sale was generally taxable.

Tax professionals

Test each exemption independently. Failure of the prosthetic-device exemption did not rule out a separately applicable purchaser-based exemption.

Common questions

Q: Was the ventilator a prosthetic device?
A: No. It assisted a body function but did not replace a missing body part.

Q: Was its sale exempt merely because it was medical equipment?
A: No. The Department treated the hospital as the taxable user or consumer.

Q: Could another exemption apply?
A: Possibly. The ruling identified qualifying federal-government and certain charitable-hospital sales as separate possibilities.

Q: May another seller rely on this PLR?
A: No. It was issued only to the requesting taxpayer on the stated facts.

Citations and references

• S.C. Code § 12-36-2120(28) — medicine and prosthetic devices sold by prescription
• S.C. Code § 12-36-110 — medical providers as users or consumers
• S.C. Code §§ 12-36-910 and 12-36-1310 — sales and use taxes
• SC Regulations 117-308.8 and 117-332 — hospital purchases and prosthetic-device definition
• Associated Medical Specialist, P.A. v. South Carolina Tax Commission — transaction-focused exemption analysis discussed by the Department

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: PLR03-3.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #03-3

SUBJECT:

XYZ Ventilator System
(Sales and Use Tax)

REFERENCES: S. C. Code Ann. Section 12-36-910 (2000, Supp. 2001)
S. C. Code Ann. Section 12-36-1310 (2000, Supp. 2001)
S. C. Code Ann. Section 12-36-2120 (2000, Supp. 2001)
S. C. Code Ann. Section 12-36-110 (2000)
SC Regulation 117-308.8
SC Regulation 117-332
AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2001)
SC Revenue Procedure #03-1

SCOPE:

A Private Letter Ruling is a written statement issued to a specific taxpayer by
the Department to apply principles of law to a specific set the force and effect
of law, and is not binding on the person who requested it or the public. It is,
however, the Department’s opinion limited to the specific facts set forth, and
is binding on agency personnel only with respect to the person to whom it was
issued and only until superseded or modified by a change in statute,
regulation, court decision, or advisory opinion, providing the representations
made in the request reflect an accurate statement of the material facts and the
transaction was carried out as proposed.

Question:
Is the sale by ABC USA, Inc. of the XYZ ventilator system, as described in the Facts, exempt
from the sales and use tax as a “prosthetic device sold by prescription?”
Conclusion:
The sale by ABC USA, Inc. of the XYZ ventilator system, as described in the Facts, is not
exempt from the sales and use tax as a “prosthetic device sold by prescription.”
Note: The sale of the XYZ ventilator system may qualify for exemptions found in Code Section
12-36-2120(2) (sales to the federal government) and Code Section 12-36-2120(47) (sales to
certain charitable hospitals exempt from property taxation that predominantly serve children and
provide the care without charge to the patient). See these code sections for more details.

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Facts:
ABC USA, Inc. (“ABC”) is a manufacturer and service provider of highly sophisticated, state of
the art medical equipment. ABC is one of the largest and most diversified suppliers of medical
systems and solutions to the health care industry.
ABC manufactures the XYZ ventilator system which is used to treat a complete range of patient
categories from neonate and pediatric to adult. The cost of a unit is generally between $65,000
and $70,000.
All XYZ ventilators are designed with one principle in mind: to deliver lung-protective
ventilation, and to help wean the patient at the earliest opportunity. It provides enhanced modes
and new tools for lung-protective treatment strategies. XYZ’s design provides the patient with
quality bedside ventilatory treatment throughout the entire chain of critical care within the
hospital, including transport. The user interface adapts quickly to attach to different surfaces,
such as a bed, shelf or wall. XYZ’s compact battery unit further simplifies transportation of a
patient.
The need to streamline operating costs and ensure easy training, operation and maintenance were
key parameters in the design of XYZ. Its modular ventilator concept allows hospital asset
managers to provide the specific system package required by a particular department. All three
models can be upgraded by adding hardware and software modules to meet the hospital’s future
needs.
Discussion:
Code Section 12-36-910(A) imposes the sales tax and states:
A sales tax, equal to five percent of the gross proceeds of sales, is imposed upon every
person engaged or continuing within this State in the business of selling tangible personal
property at retail. (Emphasis added.)
Code Section 12-36-1310(A) imposes the use tax and reads:
A use tax is imposed on the storage, use, or other consumption in this State of tangible
personal property purchased at retail for storage, use, or other consumption in this State, at
the rate of five percent of the sales price of the property, regardless of whether the retailer is
or is not engaged in business in this State. (Emphasis added.)
Code Section 12-36-110 defines "retail sale," in part as:
(1)(i) sales of drugs, prosthetic devices, and other supplies to hospitals, infirmaries,
sanitariums, nursing homes, and similar institutions, medical doctors, dentists,
optometrists, and veterinarians, if furnished to their patients as a part of the service
rendered. These institutions, companies, and professionals are deemed to be the users or
consumers of the property;

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SC Regulation 117-308.8 states:
Hospitals, infirmaries, sanitariums, nursing homes and like institutions are engaged
primarily in the business of rendering services. They are not liable for the sales tax with
respect to their gross proceeds or receipts from meals, bandages, dressings, drugs, x-ray
photographs and other tangible personal property where such property is used in the
rendering of the primary medical service to patients. This is true irrespective of whether
or not such tangible items are billed separately to their patients. Hospitals, infirmaries,
sanitariums, nursing homes and like institutions are deemed to be the users or consumers
of such tangible personal property and the instate sellers of these items are required to
report and remit the tax due on the sale of such property to the hospitals, infirmaries,
sanitariums, nursing homes, and like institutions or in the case of out-of-state purchases,
use tax shall be reported and remitted by the purchaser.

Where drugs, prosthetic devices and other supplies are furnished to their patients as a
part of the medical service rendered, such hospitals, infirmaries, sanitariums, nursing
homes and like institutions are deemed to be users or consumers of such drugs,
prosthetic devices and other supplies.
Gases such as oxygen, etc., sold to hospitals, medical doctors, dentists, and others for
professional use are subject to the sales or use tax, whichever may apply.
Code Section 12-36-2120(28) exempts from the sales and use tax:
(a) medicine and prosthetic devices sold by prescription, prescription medicines used to
prevent respiratory syncytial virus, prescription medicines and therapeutic
radiopharmaceuticals used in the treatment of cancer, lymphoma, leukemia, or related
diseases, including prescription medicines used to relieve the effects of any such
treatment, and free samples of prescription medicine distributed by its manufacturer and
any use of these free samples;

(e) dental prosthetic devices;
SC Regulation 117-332 (previously SC Regulation 117-174.257), "Medicines, Prosthetic
Devices and Hearing Aids," states in part:

To assist in the administration of this exemption, the Department has adopted definitions
for the terms "medicine" and "prosthetic devices" as follows:
"Medicine" - a substance or preparation used in treating disease.

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"Prosthetic Device" - an artificial device to replace a missing part of the body.
The sale of prescription lenses that replace a missing part of the eye are exempted from
the tax, as for example eyeglasses prescribed for a person whose natural lenses have
been surgically removed.
Eyeglasses, contact lens, hearing aids and orthopedic appliances, such as braces,
wheelchairs and orthopedic custom-made shoes, do not come within the exemption at
Code Section 12-36-2120(28). However, sales of hearing aids are exempt pursuant to
Code Section 12-36-2120(38).

In an unpublished decision by the South Carolina Court of Appeals, Associated Medical
Specialist, P.A. v. South Carolina Tax Commission and South Carolina Department Of Revenue,
SC Ct. of App., Unpublished Opinion No. 97-UP-447, the Court held that a professional
association specializing in oncology and hematology was the user and consumer of
chemotherapy drugs it administered to patients as part of its professional services. The Court,
while acknowledging that these were prescription drugs, held that these drugs were not sold by
prescription. Therefore, the sale of these drugs to the professional association did not qualify for
the exemption for “medicine ... sold by prescription.” See Code Section 12-36-2120(28). Note,
the exemption for prescription medicines used in the treatment of cancer, lymphoma, leukemia,
or related diseases or used to relieve the effects of any such treatment was subsequently enacted
by the General Assembly in 1998 and became effective on June 28, 1999. (Act 362, Section 2, of
1998)
The terms “sale at retail” and “retail sale” found in Code Section 12-36-110(i) include sales of
“drugs, prosthetic devices, and other supplies to hospitals, infirmaries, sanitariums, nursing
homes, and similar institutions, medical doctors, dentists, optometrists, and veterinarians, if
furnished to their patients as a part of the service rendered.” That section further states that
“[t]hese institutions, companies, and professionals are deemed to be the users or consumers of
the property.”
The exemption does not exempt medicine. It only exempts “medicine … sold by prescription;”
“prescription medicines used to prevent respiratory syncytial virus,” “prescription medicines and
therapeutic radiopharmaceuticals used in the treatment of cancer, lymphoma, leukemia, or
related diseases, including prescription medicines used to relieve the effects of any such
treatment;” and certain free samples or donated medicines.
Therefore, in order for the retail sale of medicine (other than those used to prevent respiratory
syncytial virus or used in the treatment of cancer, lymphoma, leukemia, or related diseases,
including prescription medicines used to relieve the effects of any such treatment) to be exempt,
the retail sale must be one in which a prescription is used to purchase the medicine. In addition,
the statute specifically exempts “prescription medicines used to prevent respiratory syncytial
virus,” and “prescription medicines and therapeutic radiopharmaceuticals used in the treatment
of cancer, lymphoma, leukemia, or related diseases, including prescription medicines used to

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relieve the effects of any such treatment.” These provisions would have been unnecessary if the
exemption for “medicine … sold by prescription” exempted all prescription medicines purchased
by doctors or hospitals for the benefit of a patient of the doctor or hospital. However, the
exemption only applies to medicines when sold by prescription.
In addition, the Court noted that “[i]t is not unusual for a sales and use tax exemption to focus on
a transaction to determine whether an item is exempt from taxation. A substantial number of
sales tax and use exemptions focus on items sold by or to particular customers, or items used by
a particular customer.” As such, the Court noted that the language of the statute does not exempt
prescription medicines sold to a professional medical association since they were not “sold by
prescription.”
Finally, SC Technical Advice Memorandum #88-23 states "it is unreasonable to interpret the
intent of the legislature so as to exempt...medicines and drugs merely because such items are sold
pursuant to a prescription. Therefore, … medicines [to be exempt] must require a prescription."
The principles established in Associated Medical, also apply to prosthetic devices. The
exemption does not exempt prosthetic devices. It only exempts “prosthetic devices sold by
prescription.” Therefore, in order for the prosthetic devices to be exempt, the retail sale must be
one in which a prescription is used to purchase the prosthetic device. In addition, the statute
specifically exempts “dental prosthetic devices.” This provision would have been unnecessary if
the exemption for “prosthetic devices sold by prescription” exempted dental prosthetic devices
purchased by dentists from dental labs for the benefit of a particular patient of the dentist.
However, the exemption only applies to prosthetic devices when sold by prescription.
Therefore, sales of prosthetic devices, other than dental prosthetic devices, to a hospital, nursing
home, or a similar institution or doctor are not exempt since such sales do not require a
prescription and are not sold by prescription.
Based on the above, it is the opinion of the Department that in order for the exemption for
“prosthetic devices sold by prescription” to be applicable the sale must require a prescription and
the device must actually be sold by prescription and the device must replace a missing part of the
body. A device that merely replaces a missing function is not exempt. In addition, sales of
prosthetic devices to a hospital, nursing home, or a similar institution or doctor are not exempt
since such sales do not require a prescription.
Based on the above, the sale by ABC USA, Inc. of the XYZ ventilator system, as described in
the Facts, is not exempt from the sales and use tax as a “prosthetic device sold by prescription.”
In fact, a review of the information supplied indicates that the XYZ ventilator system is not a
prosthetic device, but medical equipment used by a hospital in providing its professional medical
care.
Note: Code Section 12-36-2120(2) exempts sales of “tangible personal property … to the federal
government. Commission Decision #93-2 held that sales paid for via Medicare or Medicaid are
not sales to the federal government.

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Code Section 12-36-2120(47) exempts sales of tangible personal property to charitable hospitals
that are exempt from property taxation under Section 12-37-220; predominantly serve children;
and where the care is provided without charge to the patient.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank
Burnet R. Maybank, Director
June 23
, 2003
Columbia, South Carolina

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