Is an implantable cardiac-monitoring device exempt from Texas sales tax as a therapeutic or prosthetic device, and can the manufacturer sell it tax-free to hospitals on a resale certificate?

Plain-English summary

The Texas Comptroller ruled that an implantable cardiac-monitoring device is exempt from sales tax only when sold directly to a patient with a prescription — not when sold to the hospitals and medical providers who actually implant and use it.

The device (called "PRODUCT A" in the ruling) is implanted under a patient's skin to monitor unexplained symptoms like dizziness, palpitations, or chest pain, or to track atrial fibrillation risk. It runs on a roughly three-year battery and must be removed and replaced (or removed permanently) once the battery dies.

Texas exempts three categories of health care supplies when purchased with a prescription: orthopedic appliances, prosthetic devices, and therapeutic devices. The Comptroller ruled the device is a therapeutic device (designed to alleviate pain or aid in treating/diagnosing disease) but not a prosthetic device, because it doesn't replace a missing body part, doesn't perform the function of a vital organ, and isn't "permanently" implanted — it's specifically designed to be removed after roughly three years. The Comptroller distinguished older guidance the manufacturer tried to rely on: a device implanted permanently and never intended for removal (like certain IUDs that become enmeshed in tissue) can qualify as a prosthetic device, but a device with a planned removal date, even years out, does not.

Because the device is only a "therapeutic" device (not orthopedic or prosthetic), Texas's exemption rule applies narrowly: it's tax-free only when sold directly to a patient who has a prescription. When the manufacturer instead sells the same device to a hospital or medical provider — who then implants it as part of providing care — that sale is fully taxable, because a therapeutic device sold to a medical provider (rather than the patient) doesn't qualify for the prescription exemption.

The manufacturer also asked whether it could sell tax-free to medical providers using a resale certificate (the theory being the provider "resells" the device to the patient). The Comptroller said no — the medical provider isn't reselling the device, it's using the device to perform its own nontaxable medical service, so the resale exemption doesn't apply. The manufacturer's only other tax-free path to a hospital is if that hospital itself separately qualifies as an exempt governmental or religious/educational/public-service organization.

What this means for you

Medical device manufacturers

Whether your device is a "therapeutic" or "prosthetic" device under Texas's health-care-supplies exemption matters a lot: prosthetic devices generally have broader exemption reach, while therapeutic devices are exempt ONLY on direct sale to a prescription patient. Selling the same device to a hospital that then implants it is a taxable sale to the hospital, full stop — unless the hospital independently qualifies as a tax-exempt entity.

Hospitals and medical providers purchasing implantable devices

Don't assume every implantable medical device you buy is automatically tax-exempt just because it will ultimately benefit a patient. If the device is "therapeutic" rather than "prosthetic" or "orthopedic," and you're the purchaser (not the patient), the sale is taxable to you unless you separately qualify as an exempt organization.

Accountants and tax professionals for medical device companies

The "permanently implanted" line is the crux of the prosthetic-vs-therapeutic distinction — a device intended for eventual removal (even years later, like a battery-life-limited implant) is not "permanent" for this purpose, regardless of how invasive or medically significant the implant procedure is. Also remember: a therapeutic device seller cannot accept a resale certificate from a medical provider, since the provider is a user/consumer of the device in its own nontaxable service, not a reseller.

Common questions

Q: Is my implantable medical device exempt from Texas sales tax?
A: It depends on the classification. Prosthetic devices (permanently implanted, replacing a body part or vital organ function) and orthopedic appliances have exemption paths; therapeutic devices (designed to treat, diagnose, or alleviate pain, but not permanently implanted or replacing a body part) are exempt ONLY when sold directly to a prescription patient.

Q: If a hospital implants a device in a patient, is the hospital's purchase of that device tax-exempt?
A: Not automatically. If the device is a therapeutic (not prosthetic) device, selling it to the hospital instead of directly to the prescription patient is a taxable sale, unless the hospital independently qualifies for a governmental or religious/educational/public-service exemption.

Q: Can a device manufacturer accept a resale certificate from a hospital to avoid charging sales tax?
A: No, per this ruling — the hospital isn't reselling the device, it's using it to perform its own nontaxable medical service, so the sale-for-resale exemption doesn't apply.

Q: What makes a device "permanently implanted" for prosthetic-device purposes?
A: A device intended to stay in the body indefinitely with no planned removal (like certain IUDs that become enmeshed in tissue) can qualify. A device with a defined removal/replacement timeline — even a multi-year one, like this device's roughly three-year battery life — does not count as "permanent."

Q: Can I rely on this ruling for my own medical device?
A: Only if you're the taxpayer it was issued to. It binds the Comptroller solely as to that taxpayer's specific device and facts and can't be relied on by others, though it illustrates how the Comptroller distinguishes therapeutic from prosthetic devices.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (Sales Tax Imposed)
• Tex. Tax Code § 151.009 (Tangible Personal Property)
• Tex. Tax Code § 151.010 (Taxable Item)
• Tex. Tax Code § 151.006 (Sale for Resale), § 151.006(c) (medical providers not reselling when using devices in their own services)
• Tex. Tax Code § 151.309 (Governmental Entities exemption)
• Tex. Tax Code § 151.310 (Religious, Educational, and Public Service Organizations exemption)
• Tex. Tax Code § 151.313(a)(5)-(6), (e) (Health Care Supplies — orthopedic/prosthetic/therapeutic exemption)
• 34 Tex. Admin. Code § 3.284(a)(12) (orthopedic appliance definition)
• 34 Tex. Admin. Code § 3.284(a)(13) (prosthetic device definition)
• 34 Tex. Admin. Code § 3.284(a)(14) (therapeutic appliance/device definition)
• 34 Tex. Admin. Code § 3.284(d)(11)(C) (therapeutic device sold to medical provider is taxable)
• STAR Accession No. 200305892L (May 15, 2003) — no longer applicable per Section 151.313(e)
• STAR Accession No. 200401322L (Jan. 12, 2004); 7608L0027D11 (Aug. 12, 1976); 200211581L (Nov. 19, 2002)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202208009L

Original ruling text

August 15, 2022

RE: Private Letter Ruling No. 20211119145107

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated Nov. 17, 2021 and additional information dated July 26, 2022. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of PRODUCT A sold by ** (Taxpayer).

Facts Presented

Taxpayer is a multinational medical device and health care company that manufactures PRODUCT A. PRODUCT A device is used by medical providers in diagnostic evaluation and monitoring of patients who experience unexplained symptoms such as dizziness, palpitations, chest pain, syncope, and shortness of breath. It is also used to monitor patients who have previously been diagnosed with atrial fibrillation or who are susceptible to developing atrial fibrillation.

PRODUCT A is implanted under the skin and can remain in the patient for approximately three years. After that time, it must be removed to replace the battery according to PRODUCT A User’s Manual and Help Manual. [ENDNOTE 2] Many patients receive a replacement PRODUCT A when their device’s battery runs out, while some patients have their device removed before this occurs. PRODUCT A works with a mobile application monitoring system that records the heart’s electrical activity and sends the information to the medical provider for remote monitoring.

Questions, Rulings, and Analysis

Our restatements of your questions are shown below, followed by our responses and analysis.

Question One: Is PRODUCT A an exempt therapeutic appliance or device?

Ruling One: PRODUCT A is a therapeutic device and exempt from sales and use tax if sold to a patient with a prescription. A therapeutic device sold to a medical provider for use in the provision of a nontaxable medical service is taxable unless an exemption applies. See Rule 3.284(d)(11)(C).

Question Two: Is PRODUCT A an exempt prosthetic device?

Ruling Two: PRODUCT A is not an exempt prosthetic device.

Analysis for Questions One and Two: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). Section 151.010 (Taxable Item) defines a taxable item to include tangible personal property and taxable services. Section 151.009 (“Tangible Personal Property”) defines tangible personal property as personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any manner. Taxpayer’s PRODUCT A is tangible personal property.

Certain health care supplies are exempted from sales and use tax, including orthopedic, dental, and prosthetic devices, as well as therapeutic devices when purchased and used by an individual with a prescription from a licensed practitioner of the healing arts. See Sections 151.313(a)(5)-(6) (Health Care Supplies).

An orthopedic appliance is an appliance or device designed specifically for use in the correction or prevention of human deformities, defects, or chronic diseases of the skeleton, joints, or spine. Rule 3.284(a)(12) (Drugs, Medicines, Medical Equipment, and Devices).

A prosthetic device is an item that is artificial and replaces a missing part of the body, performs the function of a vital organ or appendage of the human body, or is permanently implanted in the body. Examples of prosthetic devices are heart-lung pumps, nasal gastric and gastrointestinal devices, ureteral stents, urethral stents, artificial kidney machines, and related components and supplies. Rule 3.284(a)(13).

A therapeutic appliance or device is defined as an appliance or device that is designed to alleviate pain or for use during the treatment or cure of human sickness, disease, suffering or deformity. Rule 3.284(a)(14).

Taxpayer’s PRODUCT A does not meet the definition of an orthopedic appliance as it is not used to treat any deformity or disease of the skeleton, joints, or spine. Taxpayer’s PRODUCT A is also not a prosthetic device. Taxpayer's PRODUCT A does not replace a missing part of the body or perform the function of a vital organ. PRODUCT A is not “permanently” implanted in the body as it can be removed as soon as the medical provider has obtained a diagnosis from the device, and as it only has a battery life of three years.

Taxpayer’s user manual provided to medical professionals suggests the inoperable device should be removed when the battery dies. Even if the medical provider decides the patient should continue to be monitored and inserts a replacement PRODUCT A, none of these devices are permanently implanted. Temporary devices which do not replace a body part or do not perform a bodily function do not qualify for exemption as prosthetic devices.

Taxpayer cites STAR Accession No. 200305892L (May 15, 2003) as an example of a device (a MedPort used in an intravenous (IV) system) that was held to be a prosthetic device. However, that letter is no longer applicable to prosthetic devices as the legislature has classified devices such as the MedPort as exempt IV systems under Section 151.313(e).

Taxpayer also asserts their PRODUCT A is similar to an intrauterine device (IUD) as discussed in STAR Accession No. 200401322L (Jan. 12, 2004), however that letter does not contain a full analysis of the taxability of an IUD device. Long standing Comptroller policy has determined an IUD to be taxable unless it had specific characteristics that qualified it as a prosthetic device. See STAR Accession No. 7608L0027D11 (Aug. 12, 1976). The IUD device discussed in STAR Accession No. 200211581L (Nov. 19, 2002) qualified as a prosthetic device as it became enmeshed into a patient's body and was not intended to be removed, thus becoming “permanently implanted.” Taxpayer’s PRODUCT A is intended to be removed no later than three years after implantation, at the end of the life of the battery powering the device.

Taxpayer's PRODUCT A meets the definition of a therapeutic appliance or device, as it is used as a diagnostic medical tool designed for use in patients with heart conditions. PRODUCT A is exempt only when sold to a patient with a prescription. See Rule 3.284(d)(11)

Question Three: If PRODUCT A does not qualify for an exemption under Section 151.313, may the Taxpayer accept a resale certificate from a medical provider that purchases PRODUCT A on behalf of its patient?

Ruling Three: The Taxpayer cannot accept resale exemption certificate from a medical provider.

Analysis Question Three: Taxpayer may not accept a resale certificate from medical providers under Section 151.006 (“Sale for Resale”) as the medical providers are using the devices to provide of their nontaxable services. See Section 151.006(c). Therapeutic appliances and devices sold to medical providers are subject to sales and use tax. See Rule 3.284(d)(11)(C).

Taxpayer may accept an exemption certificate from a medical provider that qualifies as an exempt organization under Section 151.309 (Governmental Entities) or Section 151.310 (Religious, Educational, and Public Service Organizations).

STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20211119145107.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTES

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.

2. last accessed 07/18/2022