Did inflated reagent prices under a plan that supplied blood-analysis equipment without a separate charge contain taxable equipment rent?

Plain-English summary

A--- sold automated blood-analysis equipment and chemical reagents. Under its Reagent Rental Plan, users received equipment without charge, A--- kept ownership and users promised at least $8,000 annual reagents at elevated prices. Equipment sold for $8,800-$23,745; packaged reagents were $11.50-$36 straight purchase versus $60-$172 plan price, with volume adjustments.

A--- collected sales-tax reimbursement on the entire reagent amount under both methods. Counsel split plan payments: the normal reagent-alone amount bought chemicals; excess was equipment rent. Retained title, transferred possession, minimum buying and measurable excess meant neither sale nor gift of equipment. Per-use payment remained compatible with rent under absent Annotation 330.2740.

Rent was not automatically taxable: the memorandum made it depend on whether equipment was tax-paid and leased in acquired form. It supplies no equipment invoices/tax or form evidence, no calculated reagent/rent allocation and no audit result.

The October 18 question involved lump-sum prepackaged medication with intravenous needle/airway cannula. In 1974 counsel applied Regulation 1591(c)(2), called apparatus nonexempt and taxed the full kit unless separately priced, citing Annotation 425.0510.

A March 11, 1998 note expressly marks both full-kit conclusions Not correct. Allocation required, points to Annotation 425.0149.300 and says 425.0510 was deleted. The correcting authority is absent, so this page records the correction without inventing allocation mechanics/current treatment. Live 330.2322 sensibly publishes only the reagent-plan branch.

Common questions

Was the supplied analyzer really free?

No. The excess over the ordinary reagent price was treated as payment for using the equipment.

How did the memorandum divide the customer's payment?

The ordinary reagent price represented the chemical purchase; the remaining amount was equipment rent.

What prices supported the split?

Equipment was $8,800-$23,745; reagent packages were $11.50-$36 normally and $60-$172 under the plan, subject to volume adjustments.

Was the equipment rent automatically taxable?

No. The memorandum made the result depend on whether the equipment was tax-paid and leased in the same form as acquired.

Did the source compute the rent or resulting tax?

No. It states the method but supplies no complete schedule, invoice, acquisition-tax proof, allocation or audit result.

Can the original medication-kit conclusion be used?

No. The official source itself marks that conclusion incorrect and says allocation was required.

How should the corrected allocation be calculated?

This source does not say; it only points to Annotation 425.0149.300 without reproducing it.

Citations and references

• Annotation 330.2740 — per-use rent proposition; text/history absent
• Regulation 1591(c)(2) — historical medicine/apparatus distinction
• Annotation 425.0510 — 1974 separated-price citation marked deleted in 1998
• Annotation 425.0149.300 — correction's allocation reference; text/history absent
• October 2/18 requests, examples and reagent/equipment/kit/tax/audit records — absent
• October 25, 1974 HLC memorandum; March 11, 1998 DHL correction
• Official Annotation 330.2322 — corrected-away kit branch omitted, reagent branch excerpted

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2322
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2322.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Pasadena Auditing (AMB)

From:

Headquarters – Legal Counsel (HLC)

Subject:

A--- L---

330.2322

October 25, 1974

SR -- XX XXXXXX

This is in reply to your memorandum or October 2, 1974, regarding possible rental of medical equipment by subject taxpayer and your memorandum of October 18,1 974, regarding sale of medications packed with disposable administration apparatus by taxpayer. We understand from your first inquiry that taxpayer sells automated laboratory equipment for analyzing blood samples and chemical reagents for use in the analyses. Taxpayer also will provide the equipment to users without charge in accordance with the terms of a contract entitled “Reagent Rental Plan Agreement.” On this plan the user agrees to purchase at least $8,000 per year of reagents from taxpayer at an elevated unit price. Ownership of the equipment remains in taxpayer. The selling price of the equipment ranges from $8,800 to $23,745. The selling price of packaged reagents ranges from $11.50 to $36.00 on straight purchase and from $60.00 to
$172.00 on the Reagent Rental Plan. There are also certain price adjustments based on the volume of reagents purchased. Taxpayer charges and collects sales tax reimbursement on the entire amount charged for reagents whether sold alone or sold at the higher price charged under the Reagent Rental Plan. Your question is whether a portion of the charge made for reagents can be considered to be actually rent for the use of the equipment. It is our opinion that sales made under taxpayer’s Reagent Rental Plan represent sales of reagents combined with a rental or use charge for the equipment that taxpayer provides to the user. The amount that would have been charged had the reagents been purchased alone represents the cost to the purchaser of the reagents. The remainder of the charge constitutes a rental fee for the use of taxpayer’s equipment. Tax may apply to the rental charge, depending upon whether the equipment is “tax paid” and leased in the form acquired. We understand from your second inquiry that taxpayer sells pre-packaged sets consisting of medication and administration apparatus (intravenous needle and airway cannula in the examples submitted.) Your question is whether the entire set can be considered to be tax exempt prescription medication or whether it is a combination of exempt and taxable items.

Pasadena Auditing (AMB)

-2-

October 25, 1974
330.2322

As to the sale of pre-packaged medication sets, it is our opinion that these constitute taxable sales.1 The terms of the Reagent Rental Plan Agreement provide that the equipment remains the property of taxpayer, that the equipment user will purchase a minimum amount of reagents, and that the reagent price will be as stated in the agreement. The transfer of physical possession of the equipment is thus neither a sale nor a gift. Since there will be a measurable increase in the amount paid by the user to taxpayer as compared to purchase of the reagents alone, this increase constitutes payment for use of the equipment, or rent. The fact that payment is, in essence, on a “per use” basis is not inconsistent with a rental situation (Bus. Taxes Law Guide Anno. 330.2740, January 27, 1966). Regulation 1591 provides that tax does not apply to sales of medicines for treatment of human beings when the medicines are prescribed by an authorized person or furnished by an authorized person or hospital. Paragraph (c)(2) of the Regulation specifically excludes from this exemption articles “in the nature of …instruments, apparatus, contrivances, appliances, devices or other mechanical…or physical equipment or article or the component parts and accessories thereof.” The administration apparatus furnished in taxpayer’s prepackaged medication sets is thus not exempt from tax. Since the apparatus is sold in combination with the medication for a lum-sum price, tax applies to the entire price of the kit.2 If the price were separated between taxable and non-taxable items, tax would be applicable only to the apparatus (Bus. Taxes Law Giude Anno. 425.0510, June 30, 1972).3

HLC:rl
1 & 2. Not correct. Allocation required. See 425.0149.300

3. Annotation 425.0510 has been deleted.
   DHL 3/11/98

330.2322.doc