Were sales of an auditory-feedback speech device to school districts and a state program exempt as medicine?

Plain-English summary

The seller argued that its auditory-feedback speech device could be sold tax-free to school districts and California's Deaf and Disabled Telecommunications Program under a rule for qualifying medicine sales to public agencies.

California said the threshold problem was the product itself. Speech aids were devices rather than substances or preparations, did not replace or assist a natural body part other than through an excluded auditory function, and fell within Regulation 1591(c)(2)'s device exclusion. The sales were taxable.

Because the product was not medicine, the Board said it did not need to decide whether the school districts or state program were qualifying agency purchasers.

Common questions

Did sale to a school district make the device exempt?

No. Purchaser identity did not cure the product's failure to qualify as medicine.

Did the opinion examine a detailed product description?

No. The seller had not provided one.

Citations and references

• California Revenue and Taxation Code sections 6051 and 6091 — general taxable-sales rule and presumption
• California Revenue and Taxation Code section 6369 and Sales and Use Tax Regulation 1591 — prescription-medicine framework
• California Sales and Use Tax Regulation 1591(a)(5) — public-agency sale theory raised by the seller but not decided
• California Sales and Use Tax Regulation 1591(b)(5) and (c)(2) — prosthetic-device provision and device exclusion
• California Health and Safety Code section 26009 — device definition cited by the opinion

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/425-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/425-0167.pdf

Original ruling text

425.0167

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

LEGAL DIVISION
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
TELEPHONE (916) 324 3828

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

August 23, 1994

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

REDACTED TEXT

_____
BURTON W. OLIVER
Executive Director

Re:

[No Permit Number]
Speech Therapy Device

Dear REDACTED TEXT,
I am responding to your letter to the Legal Division dated July 15, 1994. You ask about the application of sales tax to your sales of a device that provides fluency-enhancing auditory feedback to enable the users to speak fluently. You assert that your sales to school districts and the state Deaf & Disabled Telecommunications Program are exempt from tax under Regulation 1591(a) (5). 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 stated, all statutory references are to the Revenue and Taxation Code.) "[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. Rv. Co. v. Cal. St. Bd. of Equal. (1953) 137 Cal.App.2d 87, 96 [290 PO.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 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." Regulation 1591(b)(5) includes prosthetic devices and their replacement parts designed to be worn on or in the person of the user to replace or assist in the functioning of a natural part of the human body. As you note, this sub-division specifically excludes auditory, ophthalmic, ocular, and dental devices from its reach. C.

Tax Consequences to REDACTED TEXT

You did not enclose a description of the product, how it operates, and how it is used. You do refer to it as providing "fluency-enhancing auditory feedback to enable the users to talk fluently." We have previously determined that speech aids do not qualify as prosthetic devices. They are "devices" under Health and Safety Code section 26009 rather than a "substance or preparation" under Regulation 1591(b)(1). They do not replace or assist the function of a natural part of the body, except for the ear, and auditory devices are specifically excluded from the definition of "prosthetic device" under sub-division (b) (5). As devices and appliances are excluded from the term "medicine" per sub-division (c) (2), whether or not school districts and the state Deaf & Disabled Communication Program are the kinds of state or municipal agencies to which medicines may be sold free of tax under Regulation 1591(a)(5) is moot. We thus conclude that speech devices such as yours do not qualify as "medicines." As a result, sales of your product are subject to tax. 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