A mobile MRI provider believed its own arrangement with medical providers was a taxable equipment lease/rental -- but is furnishing a mobile MRI unit with a technician and full operational support actually a taxable lease, or a nontaxable medical service?

Plain-English summary

A mobile MRI equipment provider ("Company A") contracted with medical providers ("Provider") to bring MRI equipment on-site. Under the agreement, Company A supplies the mobile unit, a licensed driver, hired/trained technicians (who operate the equipment under a physician's supervision), all required licenses/permits, and several kinds of insurance; the Provider supplies the supervising radiologist (who must be the Provider's own employee, not Company A's), the parking location, electrical/phone service, and patient-handling logistics. Company A itself argued -- based on its reading of Rule 3.294(c)(2)'s test for when furnishing equipment with an operator becomes a taxable lease -- that the Provider exercises direct control over Company A's technician (since the equipment legally cannot run without the Provider's physician overseeing it) and that Company A's own intent was to lease the equipment (evidenced by leasing it without a technician on other occasions). On that basis, Company A requested a ruling confirming its arrangement is a taxable lease/rental of tangible personal property.

The Comptroller disagreed with Company A's self-characterization. Citing Hearing No. 34,807 (1996), the Comptroller ruled that transactions like this one have been held to constitute the provision of medical services, not a rental. As a nontaxable-service provider, Company A owes tax on all of ITS OWN purchases used to provide the service, but no tax is due on the charge Company A bills to the Provider.

The letter separately addressed a distinct question -- how Company A's own PURCHASE of the MRI equipment and its trailer/vehicle is taxed -- since that turns on facts not provided in the letter. Per Rule 3.290: if the MRI equipment was built onto a motor vehicle (or attached to one) at the time Company A purchased it, the whole unit is subject to motor vehicle sales and use tax. If Company A instead purchased the MRI equipment and the motor vehicle separately and later had the equipment attached, the MRI equipment itself is subject to limited (regular) sales and use tax while the vehicle is separately subject to motor vehicle sales tax. Separately, if the MRI equipment was built from the ground up as a moveable specialized unit (rather than being a "motor vehicle" trailer attachment), it is treated as moveable specialized equipment subject to limited sales tax (citing Hearing No. 34,807 and prior taxability rulings 9607510L and 8808L1032B07).

What this means for you

Mobile diagnostic imaging (MRI, CT, etc.) equipment providers

Don't assume your own contract language or your preferred characterization ("we intend this as a lease") controls the tax analysis -- the Comptroller looks at who actually exercises operational control given the underlying regulatory/licensing requirements. Where a physician legally must supervise operation and that physician answers to the customer (not you), that customer-side supervision requirement doesn't necessarily establish "control" over your equipment/technician in the way Rule 3.294(c)(2) contemplates, and the whole arrangement can still land as a nontaxable service.

Hospitals and medical providers contracting for mobile imaging equipment

Expect a properly structured mobile-imaging services arrangement (equipment, technician, and related support furnished by the vendor, with your own radiologist supervising diagnosis) to come without sales tax on the charge you pay -- the vendor absorbs tax on its own equipment purchases instead.

Accountants and tax professionals

This letter shows the Comptroller will override a taxpayer's own self-serving lease characterization when the operator-furnished-equipment facts point the other way, and it separately flags that the underlying equipment PURCHASE (motor vehicle vs. limited sales tax under Rule 3.290) is a distinct question from how the service itself is billed to customers.

Common questions

Q: Is furnishing mobile MRI equipment with an operating technician automatically a taxable lease if the customer's own physician must supervise its use?
A: Not necessarily, per this letter -- the Comptroller found this arrangement to be a nontaxable medical service despite the taxpayer's own argument that Rule 3.294(c)(2)'s control-and-intent test was satisfied.

Q: Who pays tax when a mobile-imaging arrangement is ruled a nontaxable service?
A: The equipment provider, per this letter -- it owes tax on its own equipment/supply purchases, and no tax is due on the charge billed to the medical provider.

Q: How is the MRI equipment's PURCHASE (as opposed to its use in the service) taxed?
A: Per Rule 3.290 as discussed in this letter, it depends on whether the equipment was attached to a motor vehicle at time of purchase (motor vehicle sales tax) or purchased/attached separately or built as standalone moveable equipment (limited sales tax).

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.294(c)(2) (furnishing TPP with an operator presumed a nontaxable service, rebuttable by customer control + lease intent)
• 34 Tex. Admin. Code Rule 3.290 (motor vehicle vs. limited sales tax for equipment attached to vehicles)

Prior decisions cited in this letter:

• Hearing No. 34,807 (1996) -- similar mobile-equipment-with-operator arrangements held to be medical services, not rentals
• Taxability rulings 9607510L and 8808L1032B07 (referenced regarding moveable specialized equipment)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9707599L

Original ruling text

July 22, 1997

Dear ***:

Thank you for your letter of June 23, 1997, concerning the taxation of the
treatment of the rental or lease of a mobile Magnetic Resonance Imaging
equipment (MRI). I have included information from your letter and provided a
response below.

FACTS: Company A, with operations located in both Texas and various other
states, is in the business of providing Magnetic Resonance Imaging ("MRI")
equipment to various Medical Providers ("Provider"). In connection with
providing this equipment, the Provider and Company A enter into a binding
written agreement (the "Agreement"). In some instances, Company A will provide
the equipment in accordance with an agreement, which has been assigned to
Company A, from a related party. Although the Agreements vary slightly, they
all provide for the same responsibilities of both parties involved.

The responsibilities of each party according to the Agreements are as follows:

a. Company A shall provide a professional and licensed driver to transport
the mobile unit to and from the Provider's location.

b. Company A shall be responsible for hiring and training personnel to
properly operate the equipment. These individuals are commonly referred to as
technicians and are responsible for operating the equipment under a physician's
supervision. The physician shall be a trained certified radiologist and shall
be an employee of the Provider.

c. Company A is responsible for compensating the technicians.

d. Company A is responsible for obtaining the licenses and permits for the
transportation and operation of the equipment.

e. Company A is responsible for providing worker's compensation insurance
or the technicians, theft and casualty insurance for the equipment and
insurance coverage with respect to the operation of the equipment.

f. Company A is responsible for providing professional liability insurance
(malpractice insurance) which covers Company A, all of Company A's personnel
and the Provider, with respect to the acts and omissions of Company A and/or
Company A's personnel which occur during the term of the Agreement.

g. In most cases, the Provider agrees to utilize Company A's equipment and
services on an exclusive basis.

h. The parking location is to be agreed on by all parties involved with
the Agreement. However, the Provider is responsible for preparing and
maintaining the parking location of the equipment.

i. The Provider is responsible for providing the electrical power and
telephone service to the equipment.

j The Provider is responsible for providing the appropriate equipment and
procedures to facilitate the delivery and retrieval of the patients into and
from the mobile unit.

k. Each Provider is responsible for providing a physician who shall be a
qualified radiologist, together with such other radiologic personnel as may be
required to assist the physician, who, during the period when such medical
Provider's patients are in the mobile unit, perform or cause to be performed
all tasks of general supervision, diagnosis and patient care in accordance with
the professional standards established by the industry. The physician must be a
member of the Provider's staff and not an employee of Company A. Such physician
is solely reading and/or determining the result of the use of the equipment
while under the physician's supervision. Such physician shall also be
responsible for referring physicians, appropriate members of the Provider's
staff and to the patient.

1. Both the Provider and Company A are responsible for developing a
   procedural manual which will deal with the matters of patient care, handling
   and safety, equipment malfunction, risks involved to the Provider's personnel
   and patients in using the equipment, qualification standards for mobile imaging
   personnel, provision for termination of Company A's personnel for cause and
   other matters pertinent to the operation of the mobile unit and the rendering
   and receipt of the services contemplated according to the contract.

m. All patient medical and financial records relating to the procedures
performed while at the Provider's location shall remain the exclusive property
of the Provider.

n. Both the Provider and Company A are responsible for developing a weekly
schedule for the use of the mobile unit.

o. Company A shall not be responsible for preparing or following any third
party payor reimbursement applications or procedures with respect to the
patients who receive the MRI service. By law, Company A is also not permitted
to receive third party reimbursement.

DISCUSSION AND ANALYSIS

Texas Regulation 34 TAC ¤3.294(c)(2) treats leases and rentals as follows:

"The furnishing of tangible personal property with an operator for which a
single charge is made to the customer shall be presumed to be the performance
of a service and no tax may be charged to the customer, unless the service is
taxable under other provisions of the Tax Code, Chapter 151. Sales or use
taxes will be due on the original purchase price of the tangible personal
property."

A. The presumption set forth above may be rebutted by the following
criteria which establish a lease of tangible personal property:

(i) The customer exercised direct control or supervision over the
operator of the tangible personal property; and

(ii) The intent of the agreement was to lease a piece of tangible
personal operator.

B. If it is established that a lessor who made a single charge to
customers did in fact lease the tangible personal property, the tax will
be due on the fair market value of the tangible personal property. If this
cannot be determined, the tax will be due on the total charge reduced by the
charge attributable to the operator determined from lessor's records. If
the charge for the operator cannot be determined from the lessor's
records or it if seems unreasonable, the comptroller will make a determination
of a reasonable operator charge.

Under the terms of the Agreement and Texas state law, the equipment cannot be
operated without a physician furnished by the Provider as stated in Section k
above. The physician performs or causes to be performed all tasks of general
supervision, diagnosis and patient care in accordance with the professional
standards established by the industry during the period when such medical
Provider's patients are in the mobile unit. Company A cannot operate the
equipment without personnel from Provider and, as such, Provider has exercised
direct control and supervision of the equipment. In addition, Company A's
intent is to lease equipment; the technician is provided at an additional cost
to the Provider. Company A leased equipment on several occasions without a
technician.

Company A believes that the transactions described above constitute a rental or
lease of tangible personal property and are subject to sales tax based on the
above discussion and analysis of Texas Law.

REQUEST FOR RULING

With regard to the foregoing discussion, we respectfully request the following
ruling:

The lease or rental of MRI equipment between Company A and the Provider
as described herein constitute a rental or lease of tangible personal
property and are subject to sales tax.

Response: Transactions similar to the transaction between Company A and the
Provider have been held to constitute the provision of medical services rather
than a rental. See Hearing No. 34,807 (1996).

The MRI equipment is a motor vehicle if the equipment was attached to a trailer
(a motor vehicle) rather than built from the ground up. If the MRI equipment
was built from the ground up, it is moveable specialized equipment subject to
limited sales tax. See Hearing No. 34,807 (1996) and taxability rulings
9607510L and 8808L1032B07. As a provider of a nontaxable service, company A
owes tax on all purchases. No tax is due on the charge to the Provider.

Company A may owe limited sales tax and/or motor vehicle sales tax on its
purchases. You did not provide the information about Company A's purchase of
the MRI equipment that would enable me to make that determination, but the
following general guidelines may help you do so.

If Company A purchase a motor vehicle with MRI equipment attached to it at the
time of sale, the unit is subject to the motor vehicle sales and use tax. If
Company A purchased the MRI equipment and motor vehicle in separate
transactions from separate parties and had the MRI equipment attached to the
motor vehicle, the MRI equipment is subject to limited sales and use tax. The
motor vehicle is subject to the motor vehicle sales tax. I am enclosing a copy
of Rule 3.290 which contains these guidelines.

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 3-4987. The direct line is
512/463-4987. You may also write to Tax Policy Division, Comptroller of Public
Accounts, P.O. Box 13528, Austin, Texas 78711.

Sincerely,

Karey W. Barton, Manager
Tax Policy Division