When could a DME company sell qualifying medicines tax-free to nursing homes and long-term-care facilities?

Plain-English summary

The company asked whether it should collect tax reimbursement on items listed as exempt in Pamphlet No. 45 when selling to nursing homes, long-term-care facilities and intermediate-care institutions. The opinion first clarified that, under the cited California framework, the retailer paid sales tax and could collect reimbursement from a purchaser by agreement.

For items that qualified as medicines, a customer meeting the historical health-facility definition could furnish an exemption certificate. The opinion described that facility as organized, maintained and operated for diagnosis, care, treatment and prevention of human illness, including convalescence and rehabilitation, and admitting patients for 24 hours or longer.

A buyer unable to determine at purchase which items it would resell and which it would use in providing services could instead give a resale certificate for the batch. It then had to report and pay use tax on taxable items withdrawn from inventory for its own use. A facility outside the 24-hour definition still might qualify for a particular purchase under another part of historical Regulation 1591(a).

Live annotation and source posture

The current live annotation accurately condenses the health-facility discussion: qualifying facilities could use resale or exemption certificates, and another Regulation 1591(a) route might apply even when the purchaser was not a defined health facility. The supporting opinion is narrower in two important ways. It addressed items assumed to be listed as exempt medicines, and its resale-certificate passage concerned buyers with mixed resale and own-use intentions who could not determine disposition when purchasing.

The four-page supporting opinion is broader than the live annotation. It also discusses:

• Medicare capped rentals. On the described facts, the opinion treated DME rentals as continuing taxable sales, required tax collection when each rental payment was made, treated required maintenance payments as taxable rental receipts, and said a lease remained a lease until a purchase option was exercised.
• Urinary catheters. It described historical catheter categories and concluded that urinary catheters and related supplies qualified as medicines under the specified prosthetic-device or artificial-opening rules when the conditions of Regulation 1591(a) were met.
• Traction devices. It said an orthotic device had to be fully worn on the patient. The described bed-attached devices, including the referenced Bucks traction example, were taxable because the patient was strapped to the device rather than the device being fully worn.

Those additional holdings rest on missing documents and product facts. The source quotes portions of the company's August 27 request but does not reproduce the Medicare arrangement, lease, equipment, catheter descriptions, facility contracts, certificates or traction illustrations. It supplies no audit, return, assessment, refund or transaction outcome.

For its lease discussion, the opinion cites Annotation 330.3440, whose live page addresses excess maintenance charges required by a computer-equipment lease, and Annotation 330.3500, whose live page addresses specified charges paid when a lessee exercised a purchase option. Those are the cited general propositions; their distinct equipment and transaction facts are not imported here.

The official PDF has a complete native text layer. Its only raster image is the California state seal in the first-page letterhead, 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 the opinion letters are summarized as annotations and statutory law controls when a statute and annotation conflict.

What this means for you

Do not begin with the purchaser's name alone. Confirm that the particular product qualifies under current medicine rules, determine whether the purchaser meets the applicable facility definition or another furnishing route, and document whether each item is for resale or the facility's own use.

Use the correct certificate for the actual intent at purchase, preserve it in substantially compliant form, and track later withdrawals. For rentals, option payments, catheters and traction products, separately document the contract terms and physical product facts before applying any historical conclusion from this multi-topic opinion.

Common questions

Q: Did every product sold by a DME company qualify?

A: No. The facility-sales discussion assumed the items qualified as medicines.

Q: Could a mixed-use facility buy the entire batch without tax at purchase?

A: The opinion said yes with a substantially compliant resale certificate when the buyer could not yet determine resale versus own use, followed by use-tax reporting on taxable withdrawals.

Q: Was a tax-exempt number alone enough?

A: The source discussed exemption and resale certificates, purchaser status, product qualification and intended disposition; it did not treat a number alone as sufficient.

Q: Did a facility have to admit patients for at least 24 hours?

A: That was part of the historical health-facility definition applied. The opinion also said another Regulation 1591(a) route could still exempt a particular purchase on different facts.

Q: Did the opinion decide only facility sales?

A: No. It also addressed capped rentals, urinary catheters and traction devices, none of which the live 425.0030 annotation summarizes.

Missing evidence and references

• August 27, 1991 request letter — quoted in part but not reproduced
• Medicare or insurance program terms, leases and purchase-option documents — not supplied
• Equipment identities, rental invoices, payment dates, maintenance terms and tax receipts — not supplied
• Catheter identities, intended uses, prescriptions and furnishing records — not supplied
• Nursing-home and care-facility contracts, licensing, operations and admission records — not supplied
• Exemption and resale certificates, inventory-withdrawal records and use-tax returns — not supplied
• Pamphlet No. 45 version and traction-device illustrations — referenced but absent
• Regulations 1667 and 1686 enclosures — listed but absent
• Audit, assessment, refund, return or completed transaction outcome — not supplied

Verbatim support

From the official October 22, 1991 Tax Counsel opinion:

Health facilities may purchase medicines free of tax by giving their suppliers exemption certificates in a form substantially conforming to the requirements of Regulation 1667. (Reg. 1591(p)(3).)

The purchasers must then report and pay use tax on the taxable items which they withdraw from inventory for their own use. (Reg. 1668(a)(2).)

As long as your customers are facilities organized, maintained, and operated for the diagnosis, care, treatment, and prevention of human illness, including convalescence and rehabilitation, and admit patients for periods of 24 hours or longer, they qualify as “health facilities” under Regulation 1591(g).

Even though a particular facility might not qualify as a “health facility” because it does not admit patients for twenty-four hours or longer, under the facts of a particular purchase the exemption may still be available if the purchase complies with the other terms of Regulation 1591(a).

Citations and references

• California Revenue and Taxation Code §§ 6006(g)(5), 6051, 6369(c)(2), 6369(c)(4), and 6369(g) — historical lease, retailer-liability, catheter, prosthetic-device and artificial-opening provisions discussed in the opinion
• California Civil Code § 1651.1 — tax-reimbursement agreement provision cited in the opinion
• Historical California Sales and Use Tax Regulation 1591(a), (b)(2), (b)(4), (g), (j), and (p)(3) — medicine, furnishing, facility, catheter and certificate rules discussed in the opinion
• California Sales and Use Tax Regulations 1660(c)(1) and (c)(7), 1667, 1668(a)(2), and 1686 — lease, certificate, withdrawal and receipt rules discussed in the opinion
• Annotation 330.3440 — maintenance-charge guidance cited in the opinion
• Annotation 330.3500 — purchase-option guidance cited in the opinion
• Pamphlet No. 45 — referenced but not reproduced

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 425.0030
• Original supporting opinion: 425.0030 PDF
• Cited live authority: Annotation 330.3440
• Cited live authority: Annotation 330.3500

Original ruling text

425.0030

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-3828

Mr. REDACTED TEXT
President, REDACTED TEXT

October 22, 1991

RE:

SR REDACTED TEXT

Dear Mr. REDACTED TEXT:
I am writing this in response to your letter to me of August 27, 1991. You have requested advice on the application of the Sales and Use Tax Law to various transactions into which your company, REDACTED TEXT enters. OPINION I shall organize my opinion around your specific questions. A.

Medicare Capped Rentals
You describe your problem as follows:
“Often when dealing with insurances, such as Medicare, Medi/Cal and some private insurances, suppliers are not reimbursed for as long as 6 months after the item is sold or rented.… Do durable medical equipment companies pay taxes on moneys not yet received? Do durable medical equipment companies pay taxes on gross taxable receipts? “Medicare has instituted a program called the 6 Point Plan…. Under this program durable medical equipment cannot be purchased because the need/and length of time for such equipment is unknown. At the end of 10 months, if the patient still needs the equipment, an option to buy, or rent, is offered if he wishes to do so. The patient is not obligated to buy and suppliers often recommend he doesn’t because he becomes responsible for maintaining the equipment. Where he does opt to buy or continue the lease, after 15 months no other monies are received from Medicare. If the patient accepts the option to lease, every 6 months Medicare will pay for a maintenance fee equal to one month rent on the specific equipment.

Mr. REDACTED TEXT

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October 22, 1991
425.0030

“Under these conditions does this constitute a sale or a lease?” Leases of durable medical equipment (DME) are governed by the rules normally applicable to any other kind of lease. The lease (or rental) of tangible personal property in California is generally a sale unless (among other exceptions) 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 price of the property. (Rev. & Tax. Code § 6006(g)(5), Reg. 1660. All further statutory references are, unless otherwise stated, to the Revenue and Taxation Code.) If the lease is a sale under this definition, that lease is subject to use tax measured by rentals payable unless it is specifically exempted by statute. The taxable rental payments include all payments required by the lease. (Reg. 1660(c)(1). Sales and Use Tax Regulations are Board promulgations which have the force and effect of law.) Required maintenance payments are thus subject to tax. (II Bus. Tax. L. Guide, Annot. 330.3440. Annotations are excerpts from previous Board staff opinion letters and serve as a guide to staff positions.) Your question indicates that the leases in question are continuing sales and purchases under the above authority and that PMS is collecting from its lessees use tax measured by the rental payments. PMS must collect the tax at the time of each payment and give its lessees receipts of a kind called for by Regulation 1686. Tax is thus not due until the payment is made, whether it is made by the patient or directly by medical insurance. Your letter indicates that the maintenance charges are required by the lease. If so, tax must be reported on them in the quarters in which they are received. A lease with an option to purchase remains a lease until the option is exercised. (Reg. 1660(c)(7).) All charges paid by the lessee at the time the option is exercised are included in the measure of tax arising out of the sale. (Annot. 330.3500.) B.

Urinary Catheters

You ask if urinary catheters are considered to be “medicines”. You list several situations in which urinary catheters are necessary to aid the patient to drain the bladder. You also discuss the various medical problems that can result from improper drainage. Prior to October 1, 1977 only those catheters which were permanently (i.e., for at least six months) “implanted in the human body to assist the functioning of any natural organ, artery, vein or limb and which remained permanently or dissolved in the body” were considered exempt medicines. (§6369(c)(2); Regulation 1591(b)(2).) Effective October 1, 1977, Revenue and Taxation Code section 6369 was amended to add: “Mammary prostheses, and 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.” (Section 6369(g).) “Prosthetic devices, and replacement parts for such devices, designed to be worn on or in the person of the user to replace or

Mr. REDACTED TEXT

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October 22, 1991
425.0030

assist the functioning of a natural part of the human body.” (Section 6369(c)(4).) As a result of the 1977 amendments, certain drainage catheters were considered exempt medicines under section 6369(g) because they were utilized as a result of a surgical procedure by which “an artificial opening is created in the human body for the elimination of natural waste.” Certain other drainage catheters were still considered taxable because they were utilized through a “natural opening.” Since 1977 several types of drainage catheters have been classified as exempt medicines even though they were utilized through a natural opening. The main requirement was that the catheters had to be worn on the person of the user or be permanently implanted. The interpretation to allow drainage catheters used as a result of a natural opening was an extension of the exemption provided to catheters in section 6369(g). As a consequence, the requirement for post-surgical use was maintained. Certain other catheters which are used for diagnostic purposes, irrigation, feeding and administration were not considered exempt under any part of section 6369 and tax applies to their sale. In summary, sales of catheters are generally taxable with three major exceptions: (1) catheters which are permanently implanted are exempted under section 6369(c)(2); (2) catheters which are used for drainage purposes through artificial openings are non-taxable under section 6369(g) dealing with ostomy materials (this exemption includes supplies); and (3) catheters or other types of drainage devices used for drainage through natural openings are non-taxable as prosthetic devices under section 6369(c)(4). Catheters may also be exempted if they are an integral and necessary part of another exempt item. We have previously determined that urinary catheters and related supplies qualify as medicines either as prosthetic devices inserted through a natural opening in the body under Regulation 1591(b)(4) or as drainage devices inserted through an artificial opening in the body under Regulation 1591(j). Sales of urinary catheters are thus exempt from tax when made under the conditions set forth in Regulation 1591(a). C.

Medical Facilities

You indicate that most DME companies are under contract to nursing homes, long care facilities, and intermediate care institutions, and we assume that PMS is too. You ask whether PMS should charge tax on its sales to these facilities of items which are listed as exempt in Pamphlet No. 45. You also ask if the above facilities need tax exempt numbers. Please note that under the California scheme, the retailer – not the purchaser – pays sales tax. (§6051.) The retailer may collect sales tax reimbursement from the purchaser pursuant to agreement. (Civ. Code § 1651.1.) Thus, when you say PMS “charges” tax, you mean that it pays tax and collects reimbursement from the purchaser. Health facilities may purchase medicines free of tax by giving their suppliers exemption certificates in a form substantially conforming to the requirements of Regulation 1667. (Reg. 1591(p)(3).) Some buyers purchase intending to either re-sell the items purchased or use them in purveying their services and be unable at the time of purchase to determine which items will be re-sold and which will be used. In that case, they may purchase all of the items free of tax by

Mr. REDACTED TEXT

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October 22, 1991
425.0030

giving their suppliers resale certificates substantially conforming to the requirements of Regulation 1668. The purchasers must then report and pay use tax on the taxable items which they withdraw from inventory for their own use. (Reg. 1668(a)(2).) As long as your customers are facilities organized, maintained, and operated for the diagnosis, care, treatment, and prevention of human illness, including convalescence and rehabilitation, and admit patients for periods of 24 hours or longer, they qualify as “health facilities” under Regulation 1591(g). PMS may sell to them free of tax by accepting either resale or exemption certificates. Even though a particular facility might not qualify as a “health facility” because it does not admit patients for twenty-four hours or longer, under the facts of a particular purchase the exemption may still be available if the purchase complies with the other terms of Regulation 1591(a). D.

Traction Devices

You indicate that sales of pelvic and cervical traction devices are exempt from tax and you attached to your letter illustrations of the types of traction devices that you believe qualify as medicines. You also attached illustrations of other traction devices and request advice on those. The criteria to be applied in this area are of long standing. For a device, appliance, etc., to be considered an orthosis, Regulation 1591(b)(4) requires that it be designed to be worn on the person of the user. We have previously determined that such devices must be fully worn on the body of the patient. If any portion of the device is stationary, it does not qualify. Those pelvic and cervical traction devices which qualify as medicines are devices such as cervical collars which are fully worn on the body of the patient. The devices your exhibits depict show that the patient is strapped to the device rather than the other way around. These devices are attached to the patient’s bed. We have previously determined that such devices – e.g., the Bucks Traction Device – do not qualify under the regulation as orthotic devices. Therefore, their sales are subject to tax. You apparently already have a copy of Pamphlet No. 45, which includes copies of Regulations 1591 and 1668. 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 Encs.: Regs 1667 and 1686