Could a provider exclude custom fitting from taxable orthotic and prosthetic device charges, and did Medicare billing make sales exempt?

Plain-English summary

The provider was a retailer of custom-fitted orthotic and prosthetic devices, not merely a service provider. When a device sale was taxable, the fitting work was part of that sale, so the provider could not deduct fitting charges from taxable gross receipts whether or not labor and materials were separately stated.

Insurance payment did not itself change the result. If a device qualified for an exemption, the provider needed a conforming exemption certificate from the purchaser and records supporting it.

The letter treated a Medicare Part A sale as a direct sale to the United States and therefore exempt under section 6381. Medicare Part B reimbursement was treated as a sale to the patient, so ordinary tax and exemption rules controlled. Billing Medicare or a regional carrier did not by itself decide the issue.

Citations and references

• California Revenue and Taxation Code sections 6007, 6012, 6015(a), 6051, and 6381 (as cited)
• California Sales and Use Tax Regulations 1591(n), 1591(p), and 1667 (as cited)
• Feb. 9, 1996 letter to Assistant Chief Counsel Gary J. Jugum asking about billing custom-fitted orthotic and prosthetic equipment — letter and supporting records not reproduced in the official PDF
• Prescriptions, licensed-professional fitting, commingled material and labor charges, direct medical-provider or insurer billing, Medicare or Medicaid coverage, and regional-carrier billing — facts and questions supplied; prescriptions, licenses, patient records, orders, invoices, cost records, claims, reimbursements, and exemption certificates not reproduced in the official PDF
• The source first says all sales were made under a physician's prescription, then prints that a device “can not be fitted and/or sold ... with a prescription”; Official Annotation 295.0570.650 follows the first account — unresolved printed wording conflict preserved verbatim below
• Copies of Regulations 1591 and 1667 identified as enclosures and advice to contact the seller's-permit Board office about documentation — enclosure copies absent; no later office advice or documentation determination supplied in the official PDF
• Official Annotation 295.0570.650's provider and licensed professionals, prescription sales, commingled charges, insurer reimbursement, exemption certificate, Medicare A and B, full taxable charge, fitting deduction, and April 19, 1996 date — annotation omits the Feb. 9 request, express limit that product taxability was not asked, statutes, missing enclosures and records, office-contact advice, and later outcome and supplies no additional patient or billing record

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-0570-650.pdf

Original ruling text

295.0570.650

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

April 19, 1996

Orthotics & Prosthetics
Dear
I am responding to your letter dated February 9, 1996, to Assistant Chief Counsel Gary J. Jugum. You ask for advice regarding billing for your sales of orthotic and prosthetic equipment in California. You describe your operation as follows: “--- Orthotics and Prosthetics West Inc., hereafter referred to as ---, is primarily in the business of providing orthotic and prosthetic devices which are custom fit by our licensed professionals to meet the needs of each individual patient. Currently, all sales are made under a prescription from the patients physician. An orthotic or prosthetic device can not be fitted and/or sold to patients with a prescription from their physician." You are not asking about the taxability of the products NovaCare sells but rather about billing your charges for such equipment. OPINION A. Sales and Use Tax Generally. In California, except where specifically exempted by statute, Revenue and Taxation Code section 6051 imposes a sales tax, computed as a percentage of gross receipts, upon all retailers for the privilege of selling tangible personal property at retail in this state. (Unless otherwise noted, all statutory references are to the Revenue and Taxation Code.) A "retailer” is one who engages in the business of making retail sales of tangible personal property. (§ 6015(a).) A "retail sale” means a sale for any purpose other than resale in the regular course of business in the form of tangible personal property. (§6007.) The definition of "gross receipts” includes the "cost of the material used, labor or service cost, interest paid, losses or any other expense.” (§ 6012 (a) (2).) The total amount of the sale price includes any services that are a part of the sale. (§ 6012 (b) (1).) B. Tax Consequences.

1. “Since our direct materials and direct labor charges are co-mingled for acceptance
   by Medicare/Medicaid and private insurance carriers, and our direct material costs

equal or slightly exceed direct labor costs, are we properly considering ourselves a retailer of customized orthotic and prosthetics, and not a service provider?”
--- is the retailer of the devices it sells under the above authority since it is in the business of selling tangible personal property at retail. Its fitting services are part of the sale and so charges therefor must be included in the gross receipts derived therefrom.

2. "Since the patient is referred to us by their doctor, on a prescription basis, and we
   sometimes directly bill the prescribing medical provider, or the patients' insurance provider, are we permitted to sell our products exempt from sales tax, provided we obtain a proper resale or exemption certificate from the medical provider or insurance carrier?” The fact that the patient is reimbursed by a medical insurance carrier does not alter the application of tax. (Reg. 1591(n).) If the sale of the product is exempt from tax, --should obtain from the purchaser an exemption certificate conforming to the requirements of Regulation 1667 and retain it in its own records to support the exemption. (Reg. 1591 (p).)
3. “If a patient is a Medicare/Medicaid recipient, and we bill Medicare directly, is
   this sale considered an exempt transaction, as a sale to the federal government? If so, what documentation would be required.” It depends. If the sale is under Medicare A, that is a sale directly to the United States and so exempt from tax. (§ 6381.) If, however, the patient is reimbursed under Medicare B, that is a sale to the patient, and the normal taxation rules apply to determine if the sale was subject to tax. Regulation 1591(p) requires that you maintain the proper records to support the exemption. You should contact the Board office which issued NovaCare it seller's permit, and which would be auditing it, to discuss documentation. As you surmised in your letter, the result is the same whether you bill Medicare itself or a regional carrier. For your information, I have included copies of Regulations 1591 and 1667. I hope the above discussion has answered your question. If you need anything further, please do not hesitate to write again.

Sincerely,

John L. Waid
Senior Staff Counsel
JLW:sr
Enclosures: Regs. 1591 & 1667
cc: District Administrator