Were dialyzer-reprocessing and dialysis data-management systems exempt related supplies?

Plain-English summary

California treated a dialyzer-reprocessing system and its connected data-management system as taxable peripherals rather than exempt dialysis supplies. The first system cleaned, tested, and sterilized a used dialyzer filter; the second recorded reuse history and printed labels.

The memorandum reasoned that a related supply had to be necessary and integral to the dialysis machine, or be a substance or preparation applied to the patient's body. A dialysis machine could operate without either system by replacing its used filter, and neither system was applied to the patient.

Common questions

Did using the systems with an exempt dialysis machine make them exempt?

No. Their connection to dialysis did not make them necessary and integral parts of the machine.

Why was the reprocessing system considered peripheral?

The machine could operate through the normal procedure of discarding and replacing a used filter.

Did the data-management function qualify as medicine?

No. Recording reuse history and printing labels was peripheral, and the system was not applied to the patient's body.

Citations and references

• California Revenue and Taxation Code section 6369 — prescription-medicine exemption cited in the memorandum
• California Sales and Use Tax Regulation 1591(j) — dialysis appliances and related supplies rule applied in the memorandum

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/425-0310.pdf

Original ruling text

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
425.0310
To:

Oakland Auditing

From:

Headquarters - Legal
Robert J. Stipe

Subject:

Regulation 1591 (Prescription Medicines)
S---, Inc.
SR -- XX-XXXXXX

Date:

March 24, 1986

Reg. 1591
The “Dialyser Reprocessing System”
and the “Data Management System” are
considered to be peripheral to dialysis
machines and do not qualify as exempt
related supplies.

Your letter of February 24, 1986 has been referred to me for a response. You request our opinion whether a “dialyzer reprocessing system” or a “data management system” qualify as exempt medicines. Both systems are used in conjunction with kidney dialysis machines. The “dialyzer reprocessing system” cleans, tests and sterilizes the dialyzer (kidney machine filter) after each use. The dialyzer can then be reused. Normal procedure would be for the dialyzer to be used once and then disposed of. The “data management system” is a mini-computer with software and is connected to the “dialyzer reprocessing system.” It records dialyzer reuse history by patient and prints out dialyzer labels. Tax does not apply to the sale of prescription “medicines” as that term is defined under section 6369 of the Revenue and Taxation Code and Sales and Use Tax Regulation 1591. Subsection (j) of Regulation 1591 provides that certain “appliances and related supplies necessary as the result of any surgical procedure by which an artificial opening is created in the human body for the elimination of natural waste, shall be deemed to be dispensed on prescription within the meaning of [Revenue and Taxation Code] section 6369.” Included within the meaning of the term “appliances and related supplies” are kidney dialysis machines and certain related supplies. In order to qualify as a “related supply,” it is our position that an item must be a necessary and integral part of the machine or device itself, or a substance or preparation intended for external or internal applicaton to the body of the patient undergoing dialysis. Accordingly, items which are used by a technician during the operation of the dialysis machine, or items which are peripheral to the dialysis process are not exempt from tax.

Oakland Auditing

-2-

March 24, 1986
425.0310

Using the above guidelines, we are of the opinion that the “data management system” and the “dialyzer reprocessing system” do not qualify under Regulation 1591(j) as “related supplies” since we consider the use of these systems to be peripheral to the dialysis process. The systems are not an integral part of the dialysis machine since, with the normal procedure of replacing the used filter, the dialysis machine can operate without either system. Additionally, the “systems” are not a “substance or preparation intended for external or internal application to the body of the patient undergoing dialysis”. Therefore, the “dialyzer reprocessing system” and the “data management system” do not qualify as exempt medicines.

RJS:sr