When did a hospital's central-supply item become a taxable sale to the patient rather than a hospital-consumed supply?

Plain-English summary

The hospital billed patients and insurers through a form summarizing departmental charges, without an itemized bill. California said a hospital was normally the consumer of supplies it used while providing services.

An “other supply” became a sale to the patient only when the hospital made a separate charge and passed title or possession to the patient. Without itemized billing, the hospital was treated as the consumer and could not buy the supply for resale; its supplier had to report tax on the sale to the hospital. Even itemized billing would not create a patient sale if the patient never received possession and control.

Items used by hospital staff, such as surgical masks, limb holders, and incontinence bed pads, were hospital-consumed supplies. An item such as an eggcrate mattress that went home with the patient and was not returned could be bought for resale, but the hospital then owed tax on its gross receipts from the patient sale.

Common questions

Did a summarized departmental charge count as an itemized patient sale?

No. The described non-itemized billing left the hospital as consumer.

Was separate billing enough if the patient never controlled the item?

No. Title or possession and control also had to pass.

Could an item sent home with the patient be resold?

Yes, if the transfer was a sale; the hospital could buy it for resale and then report tax on the patient sale.

Citations and references

• California Sales and Use Tax Regulation 1503(b)(2) — hospital charges for appliances, dressings, and other supplies
• California Sales and Use Tax Regulation 1591(b)(1) and (c)(2) — medicine definition and excluded durable equipment
• California Civil Code section 1656.1 — supplier collection of tax reimbursement discussed in 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/425-0618.pdf

Original ruling text

425.0618

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
LEGAL DIVISION (MIC:82)

MEMBER
First District
BRAD SHERMAN
Second District, Los Angeles

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-3828

ERNEST J. DRONENBURG, JR.
Third District, San Diego

April 15, 1994

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento
BURTON W. OLIVER
Executive Director

Mr. REDACTED TEXT
Controller
REDACTED TEXT
Re:

SR REDACTED TEXT
Central Supply Charges
Application of Tax

Dear Mr. REDACTED TEXT:
I am answering your letters to me dated February 28 and March 15, 1994. In the February 28 letter you ask for an opinion on the application of sales tax on sales of non-administered central supply items. You indicate that all billing is done on a form which summarizes all departmental charges which the patient incurs. Neither the patient nor the insurer receives an itemized bill. In the March 15 letter you ask for an opinion this issue as well as on the taxability of various items of durable medical equipment. You attached a voluminous list of items along with copies of flyers showing the items.

1. Central Supply Items.
   Regulation 1503, provides, in part, as follows:
   "... Tax applies to charges made by institutions to residents or patients for appliances, dressings, and other supplies, except medicines subject to exemption." (Reg. 1503(b)(2).) Hospitals are primarily providers of services and, as such, are consumers or property they use in rendering that service to their patents. The term "other supplies" includes property for which the hospital has made a separate charge to the patient and also for which title and possession has been passed to the patient. It does not include consumable supplies. Such supplies are consumed by the hospital in rendering its services and title or possession of the property does not pass to the patient. Consequently, hospitals are consumers of such supplies. Thus, under the regulation, if there is no itemized billing, then the hospital is considered the consumer of the property. It may not purchase such supplies for resale. As a result, its suppliers must report and pay tax on their sales of those supplies to the hospital and may collect reimbursement from the hospital at that time.

Mr. REDACTED TEXT

-2-

April 14, 1994
425.0618

(Civ. Code. § 1656.1.). We note that there would still be no sale if the patient never received possession and control of the property no matter how the billing.

2. Durable Medical Equipment.
   Regulation 1591(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. As noted above, where the patient never gets possession and control of the item, there is no sale to him no matter what the billing. Most of the items on your list and pictured in the flyers are items used by hospital personnel in the performance of their duties - e.g., surgical masks, limb holders, incontinence bed pads, etc. These items are consumed by the hospital in the performance of its services, with the tax consequences being the same as those in Paragraph 1. You indicate, however, that some items, such as eggcrate mattresses, do go home with the patient. Presumably, they are not returned. If so, they are sold to the patient and may be purchased free of tax for resale, but the hospital must pay tax on the gross receipts from its subsequent sales to the patients. Otherwise, the taxable event is the sale to the hospital. For your information, I have included a copy of Regulation 1503. 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 Enclosure: Reg. 1503 cc: GH - District Administrator