Did an insurer become the purchaser or lessee merely because it paid a patient's bill for home-therapy equipment?

Plain-English summary

The home-therapy provider sold or leased pumps and poles to patients, then sent the patients' bills to their insurers. Even when an insurer paid the provider directly, the contract remained with the patient. The insurance company did not become the purchaser or lessee merely by reimbursing a covered medical expense.

For a taxable continuing lease, use tax was imposed on the patient-lessee and collected by the lessor. The insurer's “in lieu” gross-premiums tax protection did not transfer to the patient.

If the provider contracted directly with an insurer, a retail sale would still be subject to sales tax imposed on the provider. A direct lease to an insurer would also use sales tax on the lessor, measured by rentals, because Regulation 1660 substituted sales tax when the lessee was exempt from use tax. In either case, the provider could collect sales-tax reimbursement from the insurer only if their contract provided for it.

The letter also flagged the provider's inconsistent statement that it paid tax when acquiring equipment and then itemized tax on patient leases. If the provider bought equipment tax-paid and leased it in substantially the same form, that payment could be an irrevocable election to treat the leases as nontaxable, making collection from lessees improper.

Common questions

Did insurance coverage make the insurer the lessee?

No. The contracting patient remained the lessee even if the insurer paid the invoice directly.

Was an insurer always free from a tax-related charge?

No. Use tax could not be imposed on the insurer, but a retailer or lessor's sales tax could apply and be contractually reimbursed by the insurer.

Citations and references

• California Revenue and Taxation Code sections 6006(g)(5), 6006.1, 6010(e)(5), and 6010.1 (lease treatment and lessor election, as cited)
• California Revenue and Taxation Code sections 6051 and 6201-6204 (sales and use tax incidence and collection, as cited)
• California Revenue and Taxation Code sections 12201 and 12204; California Constitution article XIII, section 28(f) (insurance gross-premiums tax, as cited)
• California Civil Code section 1656.1 (sales-tax reimbursement, as cited)
• California Sales and Use Tax Regulations 1567 and 1660 (insurers and leases, as cited; enclosures not reproduced)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/135-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/135-0225.pdf

Original ruling text

135.0225

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

December 18, 1992
Ms. REDACTED TEXT
Patient Accounts Representative
REDACTED TEXT
Re:

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

SY KH REDACTED TEXT

Dear Ms. REDACTED TEXT:
This is in response to your letter dated November 11, 1992 regarding the application of sales or use tax to sales and leases of tangible personal property when an insurance company makes certain payments with respect to those transactions. You state: “I am from REDACTED TEXT, which provides home IV therapy and nutritional services. Our company purchases and rents pumps and poses which are used by patients in their therapies as prescribed by their physicians. “When REDACTED TEXT purchases these items, we pay the required tax. When a patient buys or rents the pump and pole from REDACTED TEXT, the proper tax is itemized on their bill. this bill is then referred to their insurance company. It appears that the insurance company will not pay the tax for this item. “We realize that a portable pump which is worn on a patient's belt, for example, is noted as medicine and therefore non-taxable. A pump with a pole is not considered medicine and thus taxable. “My question is, does the law require insurance companies to pay the tax and if so what law would apply?” Discussion A lease of tangible personal property is a continuing sale unless the lessor leases it in substantially the same form as acquired and has made a timely election to pay sales tax reimbursement or use tax measured by the lessor's purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1, 6010(e)(5), 6010.1.) A lease that is a continuing sale is subject to tax measured by rentals payable. The tax imposed on the lease is generally the use tax which is owed by the lessee and which the lessor is required to collect from the lessee and pay to this Board. (Rev. & Tax. Code §§ 6201, 6202, 6203, 6204, Reg. 1660.) You state that when you purchase the property in question, you “pay the required tax.”

Ms. REDACTED TEXT

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December 18, 1992
135.0225

You go on to state that when you sell or lease the property to the patient, the proper tax is itemized. These statements appear to be inconsistent. When you purchase property for resale prior to any use, no sales or use tax would apply to your purchase. (Rev. & Tax. Code §§ 6007, 6051.) Rather, sales tax would apply to the retail sale, that is, to your sale to the purchaser. With respect to your leases, assuming that you lease the property in substantially the same form as you acquire it, your payment of sales tax reimbursement or use tax to your vendor would be an irrevocable election to treat the lease of such property as not subject to tax. It would then be improper for you to collect tax from the lessees with respect to such leases since those leases would not be taxable continuing sales. For purposes of this opinion, I assume that you do not pay sales tax reimbursement or use tax to your vendors when purchasing the property in question. You ask whether the law requires an insurance company to pay the tax. Insurance companies pay a tax which is imposed on their gross premiums. (Cal. Const. Art. XIII, sec. 28, Rev. & Tax. Code § 12201.) As relevant here, that tax is in lieu of all other state and municipal taxes imposed on the insurance company, including sales and use taxes. (Cal. Const. Art. XIII, sec. 28(f), Rev. & Tax. Code § 12204.) California's sales tax is imposed in the retailer, not on the purchaser. (Rev. & Tax. Code § 6051.) The retailer may, however, collect reimbursement for its sales tax liability from its purchaser if their contract of sale so provides. (Civ. Code § 1656.1.) If you contracted directly with an insurance company to sell it tangible personal property in California, the in lieu provisions of the insurance tax mentioned above would have no effect on the application of tax to that sale. (This is covered by subdivision (b) of Regulation 1567, a copy of which is enclosed.) You would still owe sales tax and you would still be entitled to collect sales tax reimbursement from the insurance company if your contract so provided since that sales tax would not be imposed on the insurance company. As mentioned above, the tax on a lease is generally the use tax, which would be owed by the lessee. However, subdivision (c) of Regulation 1660 states: “When the lessee is not subject to use tax (for example, insurance companies), the sales tax applies. The sales tax is upon the lessor and is measured by the rentals payable.” Thus, even if you contracted directly with the insurance company to lease the property to that insurance company, the applicable tax would not be imposed on the insurance company because the tax would be a sales tax imposed on you. Since it would be a sales tax, the provisions of Civil Code section 1656.1 apply, meaning that you could collect reimbursement from the insurance company for your sales tax liability. Since sales tax reimbursement is a contract term and not a tax imposed on the purchaser/lessee, the in lieu provisions of the insurance tax do not apply. Thus, applying the rules discussed above, even if you were contracting directly with the insurance company to sell or lease it the property in question, tax would still apply. Your contracts presumably include the common provisions regarding tax (such as “purchaser/lessee to pay applicable taxes”). Thus, the insurance company, who also presumably would have agreed to that provision, would owe you tax reimbursement per the contract. (I note that just because your contract may have stated that the purchaser or the lessee will pay the applicable taxes does not alter the legal incidence of the tax. If it is a sales tax, that tax is imposed upon you regardless of

Ms. REDACTED TEXT

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December 18, 1992
135.0225

the wording of your reimbursement provision.)
I note that I have provided you the analysis above because I believe it will help you in your dealings with this and other insurance companies. Based upon your description, however, I do not believe the discussion above is truly relevant to the transactions about which you inquire. My understanding is that you contracted with your patients to sell or lease the property to those patients. That they may have insurance coverage to reimburse them for their medical expenses, including the cost of leasing or purchasing the property in question, does not alter the fact that you contracted with those patients, and not with the insurance companies, to sell or lease the property. Even if the insurance coverage provides that the insurance company will pay you directly, without requiring the patient to pay you and then seek reimbursement from the insurance company, the analysis remains the same. In summary, my understanding is that you have not contracted with the insurance company to sell or lease it anything. Thus, you are selling and leasing to your patients and the general rules for application of sales or use tax apply to your sales and leases. However, even if you were contracting directly with the insurance company to sell or lease it tangible personal property, those sales and leases would be subject to sales tax, imposed on you, for which the insurance company must reimburse you if the contract of sale or lease so provides. If you have further questions, feel free to write again. Sincerely, David H. Levine Senior Tax Counsel DHL:es Encs.: Regs. 1567 & 1660 bc:

Sacramento District Administrator