Does a bone growth stimulator device, prescribed by a physician but applied and owned by the physician in the physician's own office rather than by the patient at home, qualify for Utah's home medical equipment sales tax exemption?

Plain-English summary

A distributor of the "OL 1000" bone growth stimulator -- an FDA-approved Class 3 device that treats non-union bone fractures by delivering electrical stimulation to the fracture site -- asked whether its sales/rentals to patients qualified for Utah's sales tax exemption for home medical equipment.

The Commission laid out the exemption's five requirements, all of which must be met:

1. Prescribed or authorized in writing by a licensed physician;
2. Purchased or leased by or on behalf of a home patient and used personally and exclusively by that patient to serve a medical purpose treating an existing disease or injury;
3. Of a type generally not useful to a person absent illness or injury;
4. Appropriate for home use; and
5. Listed as eligible for payment under Titles 18 or 19 of the Social Security Act (Medicare/Medicaid).

The device failed on requirement 2. Although prescribed for a specific patient, the OL 1000 must be applied by the physician in the physician's own office, and the physician retains ownership of the unit throughout treatment -- it's returned to the company for disposal once treatment is complete, with no reuse. Because the physician, not the patient, holds ownership and controls application, the Commission characterized the transaction as a sale to the physician for use in his or her medical practice, which doesn't qualify as home medical equipment regardless of how the device is later used day-to-day by the patient at home between office visits.

What this means for you

Medical device manufacturers and distributors

Ownership and control matter as much as where or how the patient ultimately uses a device. If your product is prescribed for an individual patient but the physician retains title and administers/applies it (even if the patient wears or uses it at home between visits), expect the sale to be classified as a taxable sale to the physician's practice rather than exempt home medical equipment -- unless you restructure the transaction so the patient (not the physician) purchases or leases the device.

Physicians and clinics that provide equipment as part of treatment

If you retain ownership of devices used in patient treatment, purchases of that equipment from your suppliers are likely taxable to you as equipment used in your professional practice -- the home medical equipment exemption generally won't reach items you own and administer rather than sell or lease directly to the patient.

Accountants and tax professionals

This ruling is a useful companion to PLR 96-112 (medical devices generally) and PLR 96-139 (home medical equipment exemption excludes sales to a health care provider for its own practice, discussed in a prior session's enrichment): all three anchor the same "who owns/controls the equipment" distinction as the dispositive factor, independent of whether the device is otherwise appropriate for home use or Medicare/Medicaid-eligible.

Common questions

Q: Does a device qualify for the home medical equipment exemption just because a doctor prescribes it for a specific patient?
A: No -- prescription is only one of five required elements. The device must also be purchased or leased by or on behalf of the patient for the patient's own exclusive use, among other requirements.

Q: What if the patient uses the device at home but a doctor applies it and keeps ownership?
A: Per this ruling, that's treated as a sale to the physician for use in the physician's practice, not a sale to the patient -- so it doesn't qualify as exempt home medical equipment.

Q: Could this device qualify under a different structure?
A: Possibly, if the patient (rather than the physician) purchased or leased the unit directly and retained it. This ruling doesn't address that alternative structure.

Q: Can I rely on this ruling for my own medical device?
A: Not automatically -- it binds the Commission only for the taxpayer and facts presented (the OL 1000's specific ownership and application model). A device sold or leased directly to and owned by the patient could come out differently.

Citations and references

No specific statute or rule section is quoted verbatim in the surviving text of this ruling; the five-part home medical equipment exemption test described above is drawn from the Commission's own summary of the applicable exemption criteria.

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/95-021.pdf

Original ruling text

95-021

Request

May 2, 1995

Utah State Tax Commission

Attn: Commission Chairman

210 North 1950 West

Salt Lake City, Utah 84134

Dear Gentlemen:

We represent a company in the business of selling, among other items,
bone growth stimulators -- referred to as the OL 1000 -- to patients pursuant
to prescriptions from licensed physicians.

Our client has requested advice concerning its obligation to collect
and pay over state and local sales tax on sales of the OL 1000. Our client believes that sales of the OL
1000 constitute sales of home medical equipment and supplies or sales of
prescription drugs and medicine and are therefore exempt from this tax.

We would appreciate it if you would provide us with an advisory opinion
as to whether the OL 1000 is exempt from sales tax either pursuant to the
exemptions described above, or under some other relevant exemption. In order to give you further insight on the
OL 1000, we have enclosed a detailed description of the product as well as
company produced materials showing the results of clinical studies.

If you require any additional information to assist in your
determination , please contact the undersigned.

Sincerely,

XXXXX

RE: Advisory Opinion - Application of Sales Tax
Exemption for Home Medical Equipment to Bone Growth Stimulators

Dear
XXXXX,

You
requested an advisory opinion as to whether the OL 1000 bone growth stimulator
is eligible for the sales tax exemption applied to home medical equipment. From the materials accompanying your
request, it appears that the bone growth stimulator does not fulfill the
requirements for the exemption.

To
qualify for exemption, sale or rentals of home medical equipment and supplies
must meet all of the following criteria:

1. it is prescribed or authorized in writing by
   a licensed physician;

2. it is purchased or leased by or on behalf of
   a home patient and used personally and exclusively by that patient to serve a
   medical purpose in treating an existing disease or injury;

3. it is of a type which is generally not
   useful to a person in the absence of illness or injury;

4. it is appropriate for home use; and

5. it is listed as eligible for payment under
   Titles 18 or 19 of the Social Security Act.

Medical
equipment and supplies which are sold or rented to any hospital, clinic,
doctor, nurse or other health professional for use in their professional
practice do not qualify for the sales tax exemption.

The
descriptive material accompanying your letter states that the device must be
applied by a physician in the physicians office. Although the device is dedicated for use only on one patient, the
physician retains ownership of the equipment until treatment is complete and
the equipment is returned to the company for disposal. We interpret the sale of the bone stimulator
device to be a sale to the physician for use in his or her medical
profession. As such, it does not
qualify for an exemption as home medical equipment.

This
opinion is based only on the information provided. If you do not agree with this determination, you may appeal to
the Tax Commission for a formal hearing.
The results of that hearing would constitute a declaratory judgement and
be appealable to the Utah State Supreme Court.
Also, if new facts arise which present additional questions, please fell
free to ask for another advisory opinion.

For
the Commission,

Alice
Shearer

Commission

The OL 1000 is a proprietary Class 3 medical device. The device is FDA approved for the treatment
of non-union fractures. Non-union fractures
are bone fractures that have failed to heal in the expected and usual healing
time. Generally if a fracture has not
healed after 9 months from the time of injury it is considered a non-union. There are approximately 100,000 NU occurring
in the U.S. every year. Non-unions are
a very serious medical condition where the biological healing process has
slowed or stopped and if the condition has occurred in a weight-bearing bone
the patient will be unable to walk.
Normally the orthopaedic surgeon will attempt numerous surgical
procedures including bone grafts to attempt to heal the fracture. Obviously these subsequent surgical
procedures are painful, risky and costly to the patient. If the NU is not resolved many of these
patients ill face surgical amputation as the ultimate solution to their
problem. The OL 1000 is designed to be
applied externally to the patient to stimulate the NU fracture site to
heal. The bone cells at the NU sites
have slowed or ceased to produce bone.
The specific biophysical stimulation delivered by the OL 1000 stimulates
the bone cells at the site to produce and secrete Growth Factors. Growth factors are small proteins that have
the capability of directly stimulating cells to divide to make more cells and
also stimulate cells to be more active.
In the case of the bone cells they stimulate a growth factor known as
IGF-2 (Insulin Like Growth Factor-2).
IGF-2 stimulates the bone cells to divide and to produce and secrete
collagen which is the precursor to bone.
These events stimulate the production of bone and ultimately the healing
of the previously non-union fracture.

The Orthologic 1000 is regulated by the FDA as a Class 3 significant
risk device. This is the same level of
regulation that is applied to devices such as artificial hearts and
valves. These devices require extensive
pre-clinical and clinical testing prior to approval by the FDA. In the case of the OL 1000 there was 5 years
of preclinical testing as well as 4 years of clinical testing in human clinical
trials and 2 years of review of this data by the FDA prior to approval. Our data has shown that the OL 1000 can heal
60% of all these serious Nus and in the tibia (the bone between the knee and
the ankle) which represents half of the NU population the results were over 75%
healed.

The device can __only __be obtained by prescription from a licensed
physician and then must be applied by the physician in their office. After application the OL 1000 is used daily
buy the patient for a period up to 9 months until the NU heals. The OL 1000 once applied to a patient is
dedicated to that patient and at the completion of treatment it is returned to
the physician and then the company for disposal. There is no reuse.

See file for more information, charts and diagrams of the OL 1000.