Were machines that cleaned dialyzers or purified dialysis water exempt with the hemodialysis machine?

Plain-English summary

The redacted requester asked about California leases of three machine types. The letter treated hemodialysis machines themselves as exempt medicine under the specific dialysis provision.

The separate Re-Use machine cleaned artificial kidneys after treatment, and the reverse-osmosis machine purified dialysis water. Tax Counsel concluded that neither machine was a related supply necessary and integral to the hemodialysis machine's own operation or a preparation applied to the patient. Both were appliances or devices excluded from the medicine definition.

The letter assumed the lessor bought the Re-Use and reverse-osmosis machines ex-tax and collected any tax on the rentals. On that assumption, their leases were continuing sales and purchases subject to use tax measured by rental receipts, including applicable district use tax where a machine was shipped.

The letter described a different route if the lessor paid qualifying sales tax when buying the equipment or California use tax measured by purchase price when first leasing it into California: no tax would then be owed on the rental payments. It also discussed crediting tax paid to another state against California use tax on the purchase price, using a historical statewide rate that is not current-rate guidance.

Live annotation and source posture

The current live annotation accurately states the narrow product conclusion: machines used to purify dialysis water or clean artificial kidneys after hemodialysis were not integral related supplies and were not exempt medicines under Regulation 1591(j).

The live page does not preserve the lease posture. The supporting letter assumes ex-tax purchases, treats the lessor as retailer, measures use tax by rentals, discusses district tax at the shipment destination, and describes a purchase-price tax alternative and out-of-state credit. Those conditions matter to the payment path but do not change the product-classification conclusion.

The source says it relied on prior determinations about products used to clean hemodialysis machines and various other water-purification systems, but it does not identify or reproduce them. It says Pamphlet No. 44 and Regulations 1660 and 1827 were enclosed; the official three-page PDF contains no enclosure pages.

Several defects are visible in the native-text official PDF and remain verbatim in the source tail: In you letter, purchase pr:2e, Title 28 before Regulation 1591, an incomplete parenthesis after Regulation 1660(c)(1), and John. L. Waid. The water-purification paragraph says purified water enters the hemodialysis machine and then says the Re-use machine is not applied to the patient; the source does not say whether that second reference was intended to name the reverse-osmosis machine instead.

The official PDF has a native text layer on all three pages. Its one page-one raster image is the California seal, not 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.

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

Separate the product question from the lease-tax election. Document what each machine does and how it connects to the dialysis machine and patient. Then retain purchase invoices, tax-paid evidence, lease terms, rental receipts, first-use dates and shipment destinations to establish whether tax was paid on purchase price or rentals and which local rate applies.

Do not extend the hemodialysis-machine exemption to nearby cleaning or water-treatment equipment merely because it is medically necessary to the overall process. This letter used a narrower necessary-and-integral relationship to the dialysis machine itself.

Common questions

Q: Did the hemodialysis machine itself qualify?

A: Yes. The letter distinguished it from the cleaning and water-purification equipment.

Q: Was water purification medically necessary enough for exemption?

A: No. The letter acknowledged that purification might be necessary for proper hemodialysis but said it was not necessary and integral to operation of the dialysis machine itself.

Q: Did every lease payment necessarily bear use tax?

A: No. The letter's rental-receipts result rested on the assumption that the machines were bought ex-tax. It described purchase-price tax as an alternative.

Q: Did the opinion decide tax on actual leases from complete records?

A: No. The requester and machines are redacted, the letter states an acquisition assumption, and no contracts, invoices, destinations, returns or outcomes are supplied.

Q: Are the historical 7.25-percent rate and district-tax statements current guidance?

A: No. They record the 1994 letter's analysis; current rates, sourcing and credit rules must be checked separately.

Missing evidence and references

• July 8, 1994 fax and telephone-conversation record — absent
• Requester, lessor, lessees and machine manufacturers — redacted or unidentified
• Machine models, specifications, diagrams and integration evidence — absent
• Purchase invoices, ex-tax records, tax-paid receipts and out-of-state credit evidence — absent
• Lease agreements, rental receipts, first-use dates and shipment destinations — absent
• Returns, district allocations, audits, assessments, refunds and final outcomes — not supplied
• Pamphlet No. 44 and Regulations 1660 and 1827 said to be enclosed — absent from the published PDF
• Prior cleaning-product and water-purification determinations — cited generally but not identified or reproduced

Verbatim support

From the official August 29, 1994 Tax Counsel letter:

Hemodialysis machines themselves are specifically listed in Regulation 1591(j) as being deemed to be dispensed on prescription within the meaning of sub-division (a).

We have also previously determined that products used to clean hemodialysis machines after treatment of a patient are not "related supplies" as they are not necessary and integral to the operation of the dialysis machine nor are they applied to the body of the patient.

While we have not considered before the application of tax to sales of Re-Use machines, we have reviewed various other water-purification systems and determined that, while water purification may be necessary for proper hemodialysis it is not necessary and integral to the operation of the dialysis machine itself.

These two machines are thus appliances or devices excluded from the term "medicines" under Regulation 1591(c) (2).

If, however, REDACTED TEXT pays sales tax at the time it purchases the equipment or California use tax measured by the purchase price when it leases the equipment into California, there is no tax owed on the rental payments.

Citations and references

• California Revenue and Taxation Code §§ 6006(g)(5), 6006.1, 6010(c)(5), 6011(b), 6051, 6201, and 6203(c) — general lease, sales-tax and use-tax rules discussed in the letter
• California Revenue and Taxation Code §§ 6369 and 6369.1 — prescription-medicine and dialysis-machine provisions discussed in the letter
• California Revenue and Taxation Code § 6406 — out-of-state tax credit discussed in the letter
• California Sales and Use Tax Regulation 1591(a), (b)(1), (c)(2), and (j) — medicine, excluded-device and dialysis provisions
• California Sales and Use Tax Regulations 1660 and 1827(c)(3) — lease and district-tax rules
• Board of Equalization Pamphlet No. 44 and unidentified prior Board determinations — referenced but absent

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 425.0022
• Original supporting opinion: 425.0022 PDF

Original ruling text

425.0022

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

1020 N STREET, SACRAMENTO, CALIFORNIA
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001
TELEPHONE (916) 920 - 7445

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

August 29, 1994

GRAY DAVIS
Controller, Sacramento

REDACTED TEXT

BURTON W. OLIVER
Executive Director

Re:

REDACTED TEXT
Leasing Hemodialysis Equipment

Dear REDACTED TEXT,
I am responding to your fax to me of July 8, 1994, and our telephone conversation of the same day. You ask about the application of tax to REDACTED TEXT leases of Kidney Dialysis, Re-Use, and Reverse Osmosis machines in California. In you letter you indicate that the Re-Use machine is used to clean artificial kidneys after they have been used on the hemodialysis machine. In our telephone conversation you clarified that the Reverse Osmosis machine is used to purify the dialysis water as it goes into the patient. I assume from the nature of your questions that REDACTED TEXT buys these machines ex-tax and collects tax, if any is owed, on the rental payments. OPINION A. Sales and Use Tax Generally. 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 noted, 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. The lease (or rental) of tangible personal property in California is a continuing sale unless that property is leased in substantially the same form as acquired by the lessor and the lessor has paid sales tax reimbursement or use tax measured by the purchase pr:2e of the property. (Rev. & Tax. Code §§ 6006(g) (5), 6006.1; Reg. 1660.) If the lease is a continuing sale under this definition, that lease is subject to use tax measured by rentals payable unless it is specifically exempted by statute. (Reg.1660(c) (1).) Where the lease is treated as a sale, but not a sale at the inception, the lessor may either pay the use tax measured by the sales price up front or may elect to purchase the item ex-tax and pay use tax measured by the rental receipts as to payments are made. (§§ 6010(c) (5) & 6011(b); Reg. 1660 (c) (1).) The lessor is treated as the retailer of the property and must collect the use tax from the lessee. (§ 6203(c); Reg. 1660(c)(1).

B. Prescription Medicines.
Section 6369, interpreted and implemented by Title 28, California Code of Regulations, Regulation 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." Sub-division (j) includes any appliances and related supplies necessary as a result of any surgical procedure by which an artificial opening is created in the human body for the elimination of natural waste. Interpreting and implementing section 6369.1, it specifically defines kidney dialysis machines, and the tubing, pumps, blood sets, fistula sets, and shunts used in connection with such machines as "appliances" and "related supplies." We have previously determined that "related supplies" must be necessary and integral to the proper functioning of the dialysis machines themselves or preparations intended for external or internal application to the body of the patient undergoing dialysis. Accordingly, items are used by technicians while operating the dialysis process or which are not utilized by the dialysis patient are not exempt from tax under this section. C. Tax Consequences to REDACTED TEXT Hemodialysis machines themselves are specifically listed in Regulation 1591(j) as being deemed to be dispensed on prescription within the meaning of sub-division (a). We have already concluded that such machines qualify as medicines the sales or leasing of which are exempt from tax. We have also previously determined that products used to clean hemodialysis machines after treatment of a patient are not "related supplies" as they are not necessary and integral to the operation of the dialysis machine nor are they applied to the body of the patient. While we have not considered before the application of tax to sales of Re-Use machines, we have reviewed various other water-purification systems and determined that, while water purification may be necessary for proper hemodialysis it is not necessary and integral to the operation of the dialysis machine itself. The purified water goes into the hemodialysis machine, but the Re-use machine is not applied to the patient. These two machines are thus appliances or devices excluded from the term "medicines" under Regulation 1591(c) (2). As a result of the foregoing, REDACTED TEXT must collect from the lessees use tax on such leases of the Re-Use and Reverse Osmosis machines as the leases are continuing sales and purchases in this state, as defined above. Such use tax would also include the use tax of any taxing district into which the machine was shipped. (Reg. 1827(c) (3).) If, however, REDACTED TEXT pays sales tax at the time it purchases the equipment or California use tax measured by the purchase price when it leases the equipment into California, there is no tax owed on the rental payments. In that case, if the sales tax rate where REDACTED TEXT buys

the equipment is less than California's statewide rate of 7.25%, then, in order to avoid use tax being applied to the rental payments when leasing it in California, REDACTED TEXT will need to report use tax on the purchase price measured by the California statewide rate and then take a credit against that amount in the amount of the purchasing state's sales tax. (§ 6406.) (District use tax does not apply in this case.) It would then remit the difference with the return for the period in which the machine is leased. For your information, I have included a copy of Board of Equalization Pamphlet No. 44, "District Taxes," and Regulations 1660 and 1827. 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 Tax Counsel JLW:es Enclosures: Cc:

Pamphlet No. 44
Regs. 1660 & 1827

OH – District Administrator