How did California treat fitting charges, insurance billing, and Medicare payments for custom orthotic and prosthetic devices?

Plain-English summary

A provider custom-fit prescription orthotic and prosthetic devices through licensed professionals. The Board treated it as a retailer of tangible personal property, not merely a service provider. Fitting services formed part of each sale, so those charges were included in gross receipts.

Insurance reimbursement did not change whether a product sale was taxable. For an exempt device, the provider needed a compliant exemption certificate from the purchaser and had to keep it in its records.

Medicare treatment depended on the program. A Medicare A transaction was a direct sale to the United States and exempt under section 6381. Medicare B reimbursed the patient, so the sale remained a sale to the patient and ordinary product-taxability rules applied. Billing Medicare or a regional carrier directly did not change that distinction.

What this means for you

Orthotic and prosthetic providers, billers, and tax advisers

Include fitting work in the sales-tax measure when it is part of the device sale. Support product exemptions with the required certificate, and classify Medicare A and B transactions separately rather than relying on who receives the invoice.

Common questions

Q: Was custom fitting a separate nontaxable service?

A: No. It was part of the sale and included in gross receipts.

Q: Did private insurance make a sale exempt?

A: No. Insurance reimbursement did not change the tax rules.

Q: Was Medicare A exempt?

A: Yes, as a direct sale to the United States.

Q: Was Medicare B also a federal sale?

A: No. It was treated as a sale to the patient.

Citations and references

• California Revenue and Taxation Code §§ 6007, 6012, 6015(a), 6051, and 6381
• California Sales and Use Tax Regulations 1591 and 1667

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 505.2250
• Original supporting opinion: 505.2250 PDF

Original ruling text

505.2250

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916)920-6563

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego

April 19, 1996

BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

REDACTED TEXT

E. L. SORENSEN, JR.
Executive Director

Orthotics & Prosthetics
Dear REDACTED TEXT,
I am responding to your letter dated February 9, 1996, to Assistant Chief Counsel Gary J. Jugum. You ask for advice regarding billing for your sales of orthotic and prosthetic equipment in California. You describe your operation as follows: “REDACTED TEXT Inc., hereafter referred to as REDACTED TEXT, is primarily in the business of providing orthotic and prosthetic devices which are custom fit by our licensed professionals to meet the needs of each individual patient. Currently, all sales are made under a prescription from the patients’ physician. An orthotic or prosthetic device can not be fitted and/or sold to patients without a prescription from their physician." You are not asking about the taxability of the products REDACTED TEXT sells but rather about billing your charges for such equipment. OPINION A.

Sales and Use Tax Generally.

In California, except where specifically exempted by statute, Revenue and Taxation Code section 6051 imposes a sales 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.) A "retailer” is one who engages in the business of making retail sales of tangible personal property. (§ 6015(a).) A "retail sale” means a sale for any purpose other than resale in the regular course of business in the form of tangible personal property. (§6007.) The definition of "gross receipts” includes the "cost of the material used, labor or service cost, interest paid, losses or any other expense.” (§ 6012 (a) (2).) The total amount of the sale price includes any services that are a part of the sale. (§ 6012 (b) (1).) B.

Tax Consequences.

1.

"Since our direct materials and direct labor charges are co-mingled for acceptance by Medicare/Medicaid and private insurance carriers, and our direct material costs equal or slightly

exceed direct labor costs, are we properly considering ourselves a retailer of customized orthotic and prosthetics, and not a service provider?” REDACTED TEXT is the retailer of the devices it sells under the above authority since it is in the business of selling tangible personal property at retail. Its fitting services are part of the sale and so charges therefore must be included in the gross receipts derived therefrom. 2.

"Since the patient is referred to us by their doctor, on a prescription basis, and we sometimes directly bill the prescribing medical provider, or the patients' insurance provider, are we permitted to sell our products exempt from sales tax, provided we obtain a proper resale or exemption certificate from the medical provider or insurance carrier?”

The fact that the patient is reimbursed by a medical insurance carrier does not alter the application of tax. (Reg. 1591 (n).) If the sale of the product is exempt from tax, REDACTED TEXT should obtain from the purchaser an exemption certificate conforming to the requirements of Regulation 1667 and retain it in its own records to support the exemption. (Reg. 1591 (p).) 3.

"If a patient is a Medicare/Medicaid recipient, and we bill Medicare directly, is this sale considered an exempt transaction, as a sale to the federal government? If so, what documentation would be required."

It depends. If the sale is under Medicare A, that is a sale directly to the United States and so exempt from tax. (§ 6381.) If, however, the patient is reimbursed under Medicare B, that is a sale to the patient, and the normal taxation rules apply to determine if the sale was subject to tax. Regulation 1591(p) requires that you maintain the proper records to support the exemption. You should contact the Board office which issued REDACTED TEXT it seller's permit, and which would be auditing it, to discuss documentation. As you surmised in your letter, the result is the same whether you bill Medicare itself or a regional carrier. For your information, I have included copies of Regulations 1591 and 1667. 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
Senior Staff Counsel