When a single medical device kit bundles a tax-exempt prosthetic component with non-exempt equipment (needles, guide wires, sheaths), is the whole kit taxable or exempt?

Plain-English summary

A medical device maker followed up on a 1995 Comptroller letter that had ruled its "VasoSeal" hemostasis device taxable in full. VasoSeal is used in cardiovascular procedures like coronary angiography and angioplasty: it seals arterial punctures by introducing resorbable collagen along the tissue track to the vessel wall, where it forms a coagulum that stops bleeding, similar to collagen surgeons use directly. The device is a kit containing several sterile, single-patient-use components: a needle depth indicator card, needle clamp, guide wire, guide wire introducer, sheath, dilator, and the collagen cartridge itself. The company argued, citing prior Comptroller guidance on prosthetic devices, that a qualifying prosthetic device doesn't need to be permanently implanted to be exempt.

The Comptroller agreed in part: the collagen cartridge itself qualifies for the prosthetic-device exemption, since it functions similarly to implantable collagen already treated as exempt. But the rest of the kit — the needle, clamp, guide wire, introducer, sheath, and dilator — are delivery/access equipment, not a prosthetic device, and do not qualify on their own.

That created a bundling question: when a single kit is sold for one charge and mixes an exempt item with taxable items, the predominant cost controls the whole kit's taxability. If the taxable components cost more than the exempt collagen cartridge, the entire kit is taxable; if the exempt cartridge costs more than the taxable components combined, the entire kit is exempt.

What this means for you

Medical device manufacturers and distributors

If you sell a device kit bundling an exempt component (like a prosthetic or implant material) with non-exempt hardware, don't assume packaging them together for one price automatically makes the whole kit exempt — or automatically makes it taxable. Track the relative cost of the exempt vs. taxable components; that predominant-cost comparison, not the presence of any exempt item, decides the kit's overall tax treatment.

Accountants and tax professionals

This is a useful general "kit rule" beyond just medical devices: Texas applies a predominant-cost test to single-charge bundles of taxable and exempt tangible personal property. Keep cost documentation for each component if a bundled product mixes exempt and taxable items, since that's what a taxability determination will turn on.

Common questions

Q: Does including one exempt component make an entire kit tax-exempt?
A: Not automatically. Per this ruling, the kit's overall taxability depends on whether the exempt or taxable components cost more — the predominant cost of the kit's contents controls, not merely the presence of an exempt item.

Q: Why did only the collagen cartridge qualify as exempt and not the rest of the kit?
A: The collagen cartridge functions as a prosthetic device (sealing/replacing tissue function at the puncture site), similar to implantable collagen already recognized as exempt. The needle, guide wire, sheath, and dilator are delivery equipment used to place it, not a prosthetic device themselves.

Q: Does a prosthetic device have to be permanently implanted to qualify for exemption?
A: No — the Comptroller confirmed permanence isn't required, consistent with prior guidance the taxpayer cited.

Q: Can another device maker rely on this letter for a similar kit?
A: No. This letter addresses this specific product's facts; a different kit's component costs or functions would need its own analysis, and STAR letters only support detrimental reliance for the taxpayer who received them.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200107413L

Original ruling text

July 27, 2001

via fax **

Dear **:

Thank you for your letter concerning the taxability of a new product called
Yagoseal.

You received a response from this office dated August 29,1995 stating that the
product was taxable. The product stops bleeding from arterial punctures. It
is used in diagnostic and therapeutic procedures such as coronary angiography
and angioplasty.

VasoSeal achieves hemostasis by introducing collagen along the tissue track up
to the vessel wall without allowing collagen to enter the vessel. The collagen
forms a seal at the puncture site. Like the collagen used by cardiovascular,
general and thoracic surgeons, VasoSeal is made of resorbable natural fibers.
They work by attracting and activating blood platelets and forming a coagulum
at the arterial surface.

The VasoSeal device contains the following component parts: needle depth
indicator card, needle clamp, guide wire, guide wire introducer, VasoSeal
sheath, dilator, and collagen cartridge. The component devices are sterile and
for a single patient use.

You have submitted a letter referring to prosthetic devices stating that a
qualifying prosthetic device does not need to be permanently implanted in order
to be exempt.

Response: The collagen cartridge qualifies for exemption. However, the entire
device contains additional equipment or supplies that do not qualify for
exemption. Please note the response in the letter that you sent regarding
situations when taxable and exempt products are sold together in a kit for a
single charge. It stated that the predominant cost of the entire kit will
determine the taxability of the kit. If the cost of the taxable items is
greater than the cost of the exempt items, the kit is taxable. If the cost of
the exempt items is greater, the kit will be exempt.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change. You may call me toll free at
1-800-531-5441, ext. 5-0613. The direct line is 512/475-0613. You may also
write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division