Is a hospital's charge for an outside company's inspection and certification of hospital electrical and biomedical equipment (to meet federal or state safety regulations required for licensing) subject to Texas sales or use tax?

Plain-English summary

A taxpayer wrote to the Comptroller's Tax Policy Division asking about the taxability of inspecting hospitals and hospital equipment to certify that federal or state safety regulations are met. Hospitals must have their electrical and biomedical equipment, electrical outlets, laboratory equipment, and other areas inspected and certified in order to meet certification requirements and remain licensed and accredited. An outside company visits the hospital on a monthly, quarterly, or annual basis to inspect the biomedical equipment that must be certified under federal or state regulations, verifying that it is in good condition and does not pose an electrical or safety hazard. Any exceptions or hazards found are reported to the hospital, and the equipment isn't certified until the necessary repairs are made — either by hospital personnel (who pay tax on repair supplies) or by an outside third party (who either charges sales tax or triggers the hospital's use tax accrual).

The Comptroller held that the inspection and certification service itself — separate from any repairs that result from it — is a nontaxable service. It reasoned that the service is:

• Not the repair or maintenance of tangible personal property;
• Not the repair of nonresidential real property; and
• Not a taxable insurance inspection, because the inspection doesn't evaluate risks to property for the purpose of obtaining insurance coverage.

The letter notes it is based on the facts submitted and that other, similar facts could yield different results. It also carries a note that it replaces a previous accession, 9505703L.

What this means for you

Hospitals and healthcare facilities

If you pay an outside company to inspect and certify your electrical, biomedical, or laboratory equipment so you can maintain licensing/accreditation, that inspection and certification charge itself is not subject to Texas sales or use tax under this ruling. However, if the inspection turns up problems, the repairs needed to bring equipment into compliance are a separate transaction — tax applies to supplies used in those repairs, whether performed by your own staff (who pay tax on the supplies) or by a third-party repair vendor (who should charge sales tax, or whose charge you should self-accrue use tax on if they don't).

Companies providing inspection/certification services

Charges for inspecting and certifying hospital equipment against federal or state safety regulations, standing alone, are treated as a nontaxable service — distinct from repair and maintenance services, which are generally taxable. Keep inspection/certification billing separate from any repair work you perform, since the two are taxed differently.

Accountants and tax professionals

This letter is a useful data point for classifying regulatory compliance inspection services as nontaxable, on the theory that they are neither TPP repair, real property repair, nor risk-based insurance inspection. Because it turns on the specific facts presented (equipment inspected solely to meet licensing/certification requirements, not for insurance purposes), confirm that a client's facts match before relying on it, and remember Texas STAR letters only create detrimental-reliance protection for the original recipient.

Common questions

Q: Is a hospital's fee for inspecting and certifying biomedical or electrical equipment subject to Texas sales tax?
A: No. The Comptroller ruled this inspection and certification service is nontaxable.

Q: Why isn't the inspection and certification service taxed as an insurance inspection?
A: Because the inspection isn't evaluating risks to property for the purpose of obtaining insurance coverage — it's done to meet federal or state safety and licensing requirements.

Q: What about the repairs identified during the inspection — are those taxable?
A: The ruling addresses only the inspection and certification service. The facts describe that repair supplies are taxed separately: if the hospital makes repairs itself, it pays tax on the supplies; if a third party makes the repairs, sales tax is charged by the vendor or the hospital accrues use tax.

Q: Does this ruling apply to all inspection services, regardless of facts?
A: No. The letter explicitly states the opinion is based on the facts submitted and that other, similar facts may yield different results.

Citations and references

No specific statutes, rules, or case law are cited in the letter itself.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9505L1380G09

Original ruling text

May 5, 1995

Dear **:

Thank you for your April 26, 1995, letter concerning the taxability of
inspecting hospitals and hospital equipment to certify that federal or
state safety regulations are followed.

Situation: In order to meet certification requirements and remain licensed,
the hospitals are required to have electrical and biomedical equipment,
electrical outlets, laboratory equipment and other areas inspected and
certified to meet federal or state regulations. The sole purpose for the
inspection is so that the hospitals can remain licensed and accredited.

An outside company will visit the hospital on a monthly, quarterly, or
annual basis and inspect any and all biomedical equipment which must be
certified pursuant to either federal or state regulations. The outside
company will verify that the equipment is in good condition and does not
pose an electrical or safety hazard. During the course of the inspection
any exceptions or safety hazards will be noted and reported to the
hospital. The equipment will not be certified until the necessary repairs
have been made to any equipment which does not meet safety standards.
Any repairs which are needed are made by either hospital personnel or an
outside third party. If the hospital makes the repairs, tax is paid on
the supplies used to make the repairs. Similarly, if a third party makes
the repairs, sales tax is either charged by the vendor or the hospital
accrues use tax.

Response: The inspection and certification service is not the repair or
maintenance of tangible personal property or the repair of nonresidential
real property. The service is also not taxable as an insurance
inspection because the inspection is not evaluating risks to property for
the purpose of getting insurance coverage. The inspection and
certification provided by the outside company to the hospital is a
nontaxable service.

This opinion is based on the facts you submitted. Other facts, though
similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line
is 512/475-0030. You may also write to Tax Administration, Comptroller
of Public Accounts.

Sincerely,

David Somerville
Tax Administration Division

NOTE: Previous Accession Number 9505703L