Is a disposable, one-time-use bone-marrow stem-cell concentration kit -- sold to hospitals/physicians, not directly to patients, and used to filter out cancer cells and debris before an autologous bone marrow transplant -- exempt from Texas sales tax as a prescription medicine or therapeutic device?

Plain-English summary

A manufacturer of a new medical product used in autologous bone marrow transplantation had already been told in an earlier letter that its "system" didn't qualify for the Tax Code § 151.313 medicine exemption. This follow-up letter dug into the disposable component specifically: a one-time-use biological kit (separate from the reusable instrument that controls marrow flow through it) used to process bone marrow taken from late-stage cancer patients before they undergo extremely high-dose chemotherapy. Running the marrow through the kit reduces roughly 3 liters of material down to just 4.5 milliliters of vital cells -- a 99.85% volume reduction -- stripping out unnecessary cells, debris, and cancer cells, which significantly reduces dangerous post-transplant complications (nausea, vomiting, hypertension, cardiac arrhythmias, organ failure) and may reduce cancer relapse risk. The manufacturer argued this makes the kit a curative/remedial "medicine." The Comptroller disagreed on two independent grounds. First, Rule 3.284(a)(4) limits "drugs and medicines" to substances applied to or consumed by humans -- the kit is neither a substance nor is it applied to or consumed by the patient (paralleling Administrative Hearing 16,900, which held that sterile wraps, bandages, and sutures aren't drugs/medicines even though they physically touch the patient's body, overturning an earlier contrary ruling in Hearing 5,760). Second, the kit doesn't qualify as an exempt therapeutic/prosthetic/orthopedic device either, because that exemption under Rule 3.284 requires the device to be prescribed AND sold directly to an individual patient. Here, the kit and instrument are sold to the healthcare provider (physician, hospital, clinic), not the patient -- under Tax Code § 151.005(1), a taxable "sale" requires transfer of title or possession for consideration, which never happens with the patient even though the patient is ultimately billed. Administrative Hearing 17,992 reached the identical result for blood transfusion filters sold to hospitals rather than individuals.

What this means for you

Medical device and biotech manufacturers selling single-use disposable kits to hospitals

Being biologically applied to a patient's own tissue during treatment doesn't automatically make a disposable medical kit an exempt "medicine" -- the exemption requires an actual SUBSTANCE applied to or consumed by the patient, not a device or kit that processes material. And even the separate therapeutic-device exemption requires a sale directly to the individual patient, not to the hospital or physician who then bills the patient.

Hospitals and clinics purchasing single-use processing kits, filters, or similar disposables

Expect these items to be taxable purchases (subject to sales/use tax when you buy them) unless they're sold directly to the patient under a prescription -- billing the patient later for use of the item doesn't convert your own purchase into an exempt sale to the patient.

Accountants and tax professionals

Two reusable, general-purpose distinctions here: (1) "applied to the body" isn't the same as being a "substance" for drug/medicine exemption purposes (Hearing 16,900's bandages/sutures/wraps precedent), and (2) the therapeutic-device exemption is keyed to WHO the sale is made to -- a device sold to a provider who then treats the patient is not the same as a device sold to the patient (Hearing 17,992's blood-filter precedent, Tax Code § 151.005(1)'s sale definition).

Common questions

Q: Does processing a patient's own bone marrow through a disposable kit make that kit an exempt "medicine"?
A: No, per this letter -- the kit isn't a substance applied to or consumed by the patient, which Rule 3.284(a)(4) requires for the drugs/medicines exemption.

Q: Could the kit instead qualify as an exempt therapeutic or prosthetic device?
A: No, per this letter -- that exemption requires a sale directly to the individual patient, and this kit is sold to the healthcare provider, not the patient.

Q: Does it matter that the hospital or doctor later bills the patient for use of the kit?
A: No, per this letter -- under Tax Code § 151.005(1), the taxable "sale" is the transfer of title/possession for consideration, and the patient never receives title to or possession of the kit.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.313 (medicine/medical-item exemption)
• 34 Tex. Admin. Code Rule 3.284(a)(4) (definition of "drugs and medicines")
• 34 Tex. Admin. Code Rule 3.284 (therapeutic device exemption)
• Tex. Tax Code § 151.005(1) (definition of "sale or purchase")

Administrative hearings:

• Administrative Hearing 16,900 (1985) (sterile wraps/bandages/sutures not drugs or medicines)
• Administrative Hearing 5,760 (1971) (overturned by Hearing 16,900)
• Administrative Hearing 17,992 (1986) (blood transfusion filters sold to hospitals, not individuals)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9703287L

Original ruling text

March 26, 1997

Dear **:

Thank you for the additional information on your new medical product, the
**. This information is provided to clarify several points related
to the product and its use.

Bettie Peterson's letter of February 21, 1997, advised you that the system did
not qualify for exemption under Texas Tax Code Section 151.313. She sent you
the text of the referenced statute.

Additional Facts: The product is a one-time use disposable biological kit. The
word system in its official name connotes its use in a medical procedure. It
is not an item of equipment. There is a capital item, an instrument, which is
used to control the flow of marrow across the biological kit, but this is
ancillary to the process. You presume that sales of the instrument are
taxable. You question concerns the disposable kit.

You believe that the kit should be exempt from taxation as a prescription
medicine. Section 3.284 describes a medicine as a substance possessing
curative or remedial properties which are applied to or consumed by humans
either internally or externally for the alleviation of pain or for the
diagnosis, cure, or prevention of sickness, disease, or suffering. The product
is available only under the prescription of a licensed physician.

Your product is used as part of the autologous bone marrow transplantation
process. This process is used to treat late-stage cancer patients who have
already failed standard chemotherapy. In this process, 3 liters of bone marrow
are taken from a patient prior to their undergoing myelobalative (extremely
high dose) chemotherapy. In a traditional bone marrow transplantation, this
material is centrifuged and reduced to approximately one liter of material
which is re-infused into the patient, causing a series of dangerous and painful
complications. These complications, include, nausea, vomiting, hypertension,
cardiac arrythmias, and sometimes heart and kidney failures. Processing this 3
liters of bone marrow through your disposable column reduces the volume of
material to 4.5 milliliters of vital cells, a 99.85% reduction in volume.
This reduction in volume and the number of unnecessary cells and debris,
including cancer cells, has the impact of significantly reducing these
dangerous and painful complications. This seems to you to fit squarely in the
realm of a medicine in that it possess remedial and curative properties and
alleviates pain and suffering. Additionally, the removal of cancer cells from
the marrow is believed to significantly reduce the chances of a relapse of the
cancer following treatment, which should certainly be considered curative.

Response: Section 3.284(a)(4) defines "drugs and medicines" as: "Those
commonly recognized substances possessing identification, curative, or remedial
properties which are applied to or consumed by humans or animals either
internally or externally for the alleviation of pain or for the diagnosis,
cure, or prevention of sickness, disease, or suffering. The terms "drugs and
medicines" do not include hardware of any kind, equipment, appliances, devices,
or chemicals used to test body fluids and tissues."
(Emphasis added.)

We agree that the kit is not an instrument, but we disagree that it is a drug
or medicine.

The definition of drugs or medicines includes substances possessing curative or
remedial properties that are applied to or consumed by humans. First, it is
abundantly clear that neither the instrument nor the kit is applied to or
consumed by patients. In Administrative Hearing 16,900 (1985), the
administrative law judge (ALJ) held that sterile wraps, adhesives, bandages,
gauze, and sutures were not drugs or medicines. Although these items were
applied to the patients' bodies, they were not substances. Noting that the Tax
Division agreed with Petitioner that these items were exempt, the ALJ
overturned administrative Hearing 5,760 (1971) in which another ALJ had ruled
that bandages and gauze were drugs and medicines. Please note that the fact
that some of the non-reusable nature of the appliators, clips and staples did
not affect the taxability of the items. (See findings of fact and discussion
of law on pages 4, 5 and 6 and the recommendation on page 7).

Second, the kit is more readily an accessory or a device that must be used with
the instrument. The disposable column is used in the instrument to remove
unnecessary cells and debris from the marrow taken from patients. It does not
appear that either the instrument or the kit is prescribed or sold directly to
the patient, but rather to a healthcare provider (physician, hospital, clinic,
etc.). The kit does not qualify for exemption as a prosthetic, orthopedic, or
therapeutic appliance or device. In Administrative Hearing 17,992 (1986), the
ALJ ruled that the tax assessed on blood transfusion filters should remain in
the audit because the items were sold to hospitals rather than to individuals.
Section 3.284 exempts therapeutic devices prescribed and sold to individuals.
Even though a doctor orders the use and the doctor or hospital charges the
patients for the instrument and kit, a sale or rental of the instrument or kit
is not made to the patient. The Texas Tax Code Section 151.005(1)defines a
"sale or purchase" as the transfer of title or possession of tangible personal
property for consideration. The patient does not take title to or possession
of the kit.

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 1-800-531-5441, extension 3-4683. The direct line is
512/463-4683. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,
Eddie C. Washington
Tax Policy Division