Were cold-compression therapy devices exempt as prescription medicines?

Plain-English summary

The requester described cold-compression units as applying controlled compression to reduce blood filling joint cavities and swelling, together with cold to reduce pain. The official source prints the condition as hemothrosis; the current live annotation uses hemarthrosis.

Senior Tax Counsel said the Board had previously determined that cold-compression devices did not apply a substance or preparation within Regulation 1591(b)(1). On that hypothetical description, the letter concluded that their sales were taxable.

The client was not identified, and the letter carried no permit number. Counsel therefore treated the four product categories as hypothetical facts, said the advice did not qualify under section 6596, and warned that it would not estop the Board from asserting tax after an adverse audit.

Live annotation and source posture

The current live annotation accurately preserves the compression, joint-bleeding, swelling, cold and pain description and the conclusion that the units did not qualify as medicines. It silently changes the source's hemothrosis to hemarthrosis.

The live page omits the source's most important reliance limit. The supporting letter expressly says the unidentified taxpayer received only general comments on hypothetical facts, not specific written advice under section 6596, and that the Board remained free to assert tax after an adverse audit.

The letter says We have previously determined that cold-compression devices did not apply a qualifying substance or preparation, but it neither identifies nor reproduces that prior determination. It supplies no product name, mechanism beyond the short description, substance, preparation, physician order, prescription, purchaser, invoice, sale date, tax amount, return or audit result.

The same letter analyzes three other product categories: ankle braces and two kinds of sequential-gradient pumps. Its discussion of physician orders, worn orthotic devices, foot supports and Annotation 425.0542 belongs to those separate categories, not to the stated reason for taxing cold-compression units.

The printed 137 Cal.App.2d 87 reporter resolves to Market Street Railway Co. v. California State Board of Equalization, filed in 1955 with the parallel citation 290 P.2d 20. The official letter instead prints 1953 and 290 P.2d 201; both defects remain verbatim below. The printed Standard Oil reporter and parallel citation resolve to the named 1974 case.

The official three-page PDF has a native text layer. Its one page-one stencil is letterhead artwork rather than scanned body text, so no OCR was required. Two fresh direct PDF downloads and two live-page downloads were byte-identical; duplicate default text extractions also matched. Regulation 1591 and Pamphlet No. 45 are listed as enclosures but do not appear in the published PDF.

CDTFA's Annotated Legal Opinions collection says these documents are summarized as annotations and statutory law controls over an inconsistent annotation.

What this means for you

Therapeutic purpose alone did not establish the medicine exemption in this letter. Preserve specifications showing exactly what the unit applies to the patient, whether any substance or preparation is involved, and every current prescription and furnishing condition.

Identify the taxpayer before seeking written advice intended for statutory reliance. This source says an opinion about an unnamed client's hypothetical facts did not prevent a different result at audit.

Common questions

Q: Did use for pain, swelling and joint bleeding make the device medicine?

A: No. Counsel said the devices did not apply a qualifying substance or preparation.

Q: Was this specific written advice under section 6596?

A: No. The client was unidentified, and the letter expressly denied that protection.

Q: Did the letter document the earlier cold-compression determination it relied on?

A: No. It identifies neither the opinion nor its facts.

Q: Did the ankle-brace and sequential-pump analysis control the cold-compression result?

A: No. Those were separate product categories. The cold-compression conclusion rested on the absence of an applied substance or preparation.

Q: Does the source itself use the word hemarthrosis?

A: No. The live annotation does; the supporting letter prints hemothrosis and explains it parenthetically as blood filling joint cavities.

Missing evidence and references

• August 7, 1996 request and any attachments — absent
• Client identity, permit, business location and nexus facts — absent or not supplied
• Cold-compression product names, specifications, diagrams and instructions — absent
• Substances, preparations, prescriptions and physician orders — absent
• Purchasers, invoices, sales dates, prices, returns and tax payments — absent
• Audit workpapers, proposed adjustments, assessments, refunds and final outcomes — not supplied
• Prior cold-compression determination — cited generally but not identified or reproduced
• Regulation 1591 and Pamphlet No. 45 listed as enclosures — absent from the published PDF

Verbatim support

From the official October 15, 1996 Senior Tax Counsel letter:

Since you did not identify the taxpayer, this letter does not constitute specific written advice to the taxpayer under Revenue and Taxation Code Section 6596. Rather, it constitutes general comments regarding the applicability of California Sales and Use Tax Law to a set of hypothetical facts.

Your client may thus rely on this letter as the opinion of the Legal Division, but it is not effective to estop the Board from asserting tax in the event of an adverse result at audit.

Cold Compression Therapy. As you note, “[t]hese units apply controlled compression to minimize hemothrosis (blood filling joint cavities) and swelling along with the cold to minimize pain.”

We have previously determined that cold compression therapy devices do not apply a substance or preparation as contemplated in Regulation 1591(b)(1). As a result, their sales are subject to tax.

Citations and references

• California Revenue and Taxation Code §§ 6051, 6091, 6201, and 6303 — general tax, collection and burden rules discussed in the letter
• California Revenue and Taxation Code § 6369 and California Sales and Use Tax Regulation 1591(a), (b)(1), and (c)(2) — medicine exemption and excluded equipment
• California Revenue and Taxation Code § 6596 — specific-written-advice protection denied because the taxpayer was unidentified
• Market Street Railway Co. v. California State Board of Equalization, 137 Cal. App. 2d 87, 96 (1955) — reporter resolves, but the letter prints the wrong year and parallel page
• Standard Oil Co. v. State Board of Equalization, 39 Cal. App. 3d 765, 769 (1974) — reporter and parallel citation resolve to the named case
• Annotation 425.0542 (12/28/93) — cited only in the separate sequential-gradient-pump analysis
• Unidentified prior cold-compression determination — relied on but not reproduced

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 425.0022.700
• Original supporting opinion: 425.0022.700 PDF

Original ruling text

425.0022.700

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 324-3828
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

October 15, 1996
E. L. SORENSEN, JR.
Executive Director

Mr. D--- H. D---, CSM
A--- T--- A---, Inc.
XX --- --- Street
---, Ohio XXXXX
[No Permit Number]
Medical Devices
Dear Mr. D---:
I am responding to your letter dated August 7, 1996, to Assistant Chief Counsel Gary J. Jugum. You ask about the application of use tax to your client’s sales. You break your client’s products down into four general categories. Since you did not identify the taxpayer, this letter does not constitute specific written advice to the taxpayer under Revenue and Taxation Code Section 6596. Rather, it constitutes general comments regarding the applicability of California Sales and Use Tax Law to a set of hypothetical facts. Your client may thus rely on this letter as the opinion of the Legal Division, but it is not effective to estop the Board from asserting tax in the event of an adverse result at audit. II.

OPINION

A.

Use Tax on Tangible Personal Property

In California, except where specifically exempted by statute, Revenue and Taxation Code Section 6051 imposes an excise 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 stated, all statutory references are to the Revenue and Taxation Code.) Likewise, Section 6201 imposes a use tax on the storage, use, or other consumption in this state of tangible personal property purchased from any retailer for use, storage, or other consumption in this state, unless otherwise exempted from taxation by statute, purchased for use in this state in a transaction not subject to sales tax. The retailer must collect the use tax from the purchaser if engaged in business in this state. (§ 6303.)

Mr. D--- H. D---

-2-

October 15, 1996
425.0022.700

"[I]t shall be presumed that all gross receipts are subject to tax until the contrary is established. The burden of proving that a sale of tangible personal property is not a sale at retail is upon the person who makes the sale ..." (§ 6091.) "Exemptions from taxation must be found in the statute." (Market St. Ry. Co. v. Cal. St. Bd. of Equal. (1953) 137 Cal.App.2d 87, 96 [290 P.2d 201.]) "The taxpayer has the burden of showing that he clearly comes within the exemption." (Standard Oil Co. v. St. Bd. of Equalization (1974) 39 Cal.App.3d 765, 769 [114 Cal.Rptr. 571].) B.

Prescription Medicines.

Section 6369, interpreted and implemented by Title 18, California Code of Regulations, Section 1591, provides that sales of medicine, when prescribed and sold or furnished under certain conditions for the treatment of a human being, are exempt from sales or use tax. (Reg. 1591(a).) Subdivision (b)(1) defines "medicine" to "mean and include any substance or preparation intended for use by external or internal application to the human body in the diagnosis, cure, mitigation, treatment, or prevention of disease and which is commonly recognized as a substance or preparation intended for such use." However, Regulation 1591(c)(2) adds that "medicines" do not include "articles which are in the nature of splints, bandages, pads, compresses, supports, dressings, instruments, apparatus, contrivances, appliances, devices, or other mechanical, electronic, optical or physical equipment or article or the component parts and accessories thereof." (Sales and Use Tax Regulations are Board promulgations which have the force and effect of law.) As a rule, then, items used to diagnose a condition or to apply medicine or treatment to the patient are not considered to be medicines. Regulation 1591(b) does provide that certain items which might otherwise be considered as being devices, etc., are defined as "medicines." Regulation 1591(b)(4) includes orthotic devices, or their replacements, designed to be worn on the person of the user as a brace, support, or other correction for the body structure. C.

Tax Consequences.

1. You describe this line of products as follows:
   “[T]he cornerstone of the business is a line of ankle braces used to treat various sprains and strains. The braces stabilize the ankle inside and outside, but allow movement up and down.... 98% of all sales are based on a physician’s order or advice.”

Mr. D--- H. D---

-3-

October 15, 1996
425.0022.700

First of all, items that are not furnished pursuant to the written order of a licensed physician or podiatrist do not qualify for the exemption for sales of orthotic devices. (Reg. 1591(I).) Second, we cannot give you a definitive opinion, because whether or not an ankle brace qualifies as an orthotic device depends precisely on the function of the individual item. Although many such braces do qualify, many others do not, because they are supportive devices for the foot, which are excluded from the definition of an orthotic device under Regulation 1591(b)(4).

2. Cold Compression Therapy. As you note, “[t]hese units apply controlled compression
   to minimize hemothrosis (blood filling joint cavities) and swelling along with the cold to minimize pain.” We have previously determined that cold compression therapy devices do not apply a substance or preparation as contemplated in Regulation 1591(b)(1). As a result, their sales are subject to tax.
3. Sequential Gradient Pumps. Your last two categories both involve sequential gradient
   pumps used to prevent blood clots from forming in the veins of the lower leg and to treat lymphedema, venous ulcers, and associated complications. We have previously determined that such devices generally do not qualify as orthotic devices since the pump itself rests on a table beside the patient during treatment and is usually not worn on the patient. (See, e.g., Annot. 425.0542 (12/28/93). Sales and Use Tax Annotations are excerpts from previous Board Staff opinion letters and serve as guides to Staff positions.) Sales of such items are thus generally subject to tax. For your information, I have included a copy of Regulation 1591 and Tax Tip Pamphlet Number 45, “Hospitals.” 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 Tax Counsel
JLW:sr
Enclosure:

Reg. 1591
Pamphlet No. 45