Does an insurer become the lessee of medical equipment merely because it pays the provider for a covered patient's rental?

Plain-English summary

XX provided home IV therapy/nutritional services and sold/rented pumps and poles used by patients in physician-prescribed therapies, then referred itemized bills to insurers. It said an insurer appeared unwilling to pay the tax. It also asserted that a belt-worn portable pump was nontaxable medicine while a pump with pole was taxable; counsel did not adjudicate or document those product claims.

XX's facts conflicted: it said it paid tax when buying property and again itemized tax to patients. Property bought for resale was ex tax, with sales tax on retail sale. For same-form leases, vendor acquisition tax was an irrevocable tax-paid election, making rent untaxed and lessee tax collection improper. Counsel therefore assumed XX did not pay acquisition tax.

On that assumption, a continuing lease to a patient carried rent-measured use tax owed by the patient and collected/remitted by XX. Insurance coverage—even direct insurer payment to XX—did not change the patient contract or make the insurer purchaser/lessee.

Direct insurer transactions differed. Gross-premiums tax was in lieu of state/municipal tax imposed on the insurer, but a California retail sale to it still imposed sales tax on XX. A direct insurer lease likewise imposed sales tax on XX—not use tax on insurer—measured by rent. XX could contract for insurer reimbursement under Civil Code section 1656.1; reimbursement did not shift legal incidence. Counsel presumed common tax language but no contract is supplied.

No acquisition, patient or insurer contract, invoice/tax record, product-exemption evidence, bill, policy, payment/refusal, return, audit or later outcome is supplied. The live annotation states only the patient-versus-direct-insurer lease incidence.

Common questions

Does direct insurer payment make the insurer the lessee?

No. The patient remained the lessee because the provider contracted with the patient.

Did counsel accept the stated pump exemptions?

The requester stated them; the opinion did not analyze or verify the product classifications.

What if XX paid tax when buying leased property?

For same-form property, that was an irrevocable tax-paid election, so rent was not taxable and collecting lessee tax was improper.

What if the insurance company itself signs the lease?

Sales tax applies to the lessor measured by rent rather than use tax on the insurer.

What about a direct sale to an insurer?

Sales tax still applied to XX as retailer; the insurer's in-lieu protection did not eliminate someone else's tax.

Must the insurer reimburse that sales tax?

Only if the contract provides for reimbursement. The tax remains legally imposed on the lessor.

Did the opinion establish that XX's contract had a tax clause?

No. Counsel presumed common reimbursement language for illustration; the contract is absent.

Who owed tax on the described patient lease?

Under the no-acquisition-tax assumption, the patient owed rent-measured use tax and XX collected/remitted it.

Citations and references

• Sections 6006(g)(5)/6006.1/6010(e)(5)/6010.1 — continuing/tax-paid lease
• Sections 6201-6204; Regulation 1660 — patient rent-measured use tax/collection
• Sections 6007/6051 — resale purchase and retail sales tax
• Constitution article XIII, section 28; sections 12201/12204 — insurer premium/in-lieu tax
• Section 6051; Civil Code section 1656.1; Regulation 1567(b) — direct sale/reimbursement
• Regulation 1660(c) — direct insurer lease puts rent-measured sales tax on lessor
• November 11 request, contracts/tax/product/insurance records and regulation enclosures — absent
• December 18, 1992 Levine letter — express no-acquisition-tax assumption and transaction branches
• Official Annotation 330.2310 — lease-incidence excerpt without sale/acquisition/source limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2310
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2310.pdf

Original ruling text

330.2310

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

December 18, 1992
BURTON W. OLIVER
Executive Director

Re: --Dear Ms. ---:
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 XX, 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 XX purchases these items, we pay the required tax. When a patient buys or rents the pump and pole from XX, 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

Ms. ---

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December 18, 1992
330.2310

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." 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

Ms. ---

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December 18, 1992
330.2310

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 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.

Ms. ---

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December 18, 1992
330.2310

Sincerely,

David H. Levine
Senior Tax Counsel

DHL:es
Encs.: Regs. 1567 & 1660

bc: Sacramento District Administrator