Is a custom 'bio-engineered' orthotic shoe insert exempt from Colorado sales and use tax as a prosthetic device or durable medical equipment?

Plain-English summary

A company described a custom-made "bio-engineered orthotic" that places a person's feet in proper alignment. The Department assumed from that description that the product was a shoe insert and discussed whether it might be a prosthetic device or durable medical equipment. It did not determine whether the product qualified for either exemption.

The letter describes a prosthetic device as an artificial device that aids or replaces a bodily function and is designed, manufactured, or adjusted to fit a particular individual. It distinguishes therapeutic devices, which Colorado does not exempt as a class. It also explains that durable medical equipment must satisfy all listed conditions, including that it is not worn in or on the body and is prescribed by a licensed medical provider.

The Department says its description of the product lacks the details needed for a specific determination. It notes that exemptions are narrowly construed and discusses other states' medical-necessity approaches as research, not as a Colorado holding.

What this means for you

Orthotic products

A custom label or an alignment claim does not answer whether an item is exempt. The product's function and the requirements of the applicable exemption must be examined. This GIL does not decide the described insert's treatment.

Durable medical equipment

The letter lists five conditions for the DME exemption and notes that an item worn in or on the body would not meet one of them. It does not decide whether any particular orthotic meets the other conditions.

Common questions

Q: Are the described orthotics exempt?
A: The Department did not determine that. It discussed the prosthetic-device and DME rules and said the request lacked enough product detail for a specific determination.

Q: Did Colorado adopt a medical-necessity or prescription rule for all orthotics?
A: No such holding appears in this GIL. The letter reports that other states often restrict orthotic exemptions to demonstrated medical necessity and separately lists prescription as one DME condition; it does not adopt a general Colorado orthotic rule here.

Q: Does wearing an item in a shoe satisfy the DME requirements?
A: The letter lists as a DME condition that the item is not worn in or on the body. It does not decide the described product's complete tax treatment.

Citations and references

Statutes and regulation:

• § 39-26-717, C.R.S. — exemptions for prosthetic devices and durable medical equipment
• Reg. (39)-26-717.1 — definition of prosthetic device (aids/replaces a bodily function; fitted to a particular individual)

Authorities referenced:

• Security Life & Accident Co. v. Heckers, 177 Colo. 455, 495 P.2d 225 (1972) — exemptions narrowly construed
• 42 U.S.C. § 1395y(13) — Medicare exclusion of flatfoot supports, foot-subluxation treatment, and routine foot care
• Out-of-state authorities cited as persuasive (Cal. Code Regs. 1591; Fla. Admin. Code 12A-1.020; Ill. PLR ST 95-0059-PLR; Mo. PLR L6177; RCW 82.08.0283)
• Reg. 24-35-103.5 (general information letters vs. private letter rulings)

Related Colorado rulings (medical exemptions §39-26-717):

• [[gil-13-012-sutures-and-iv-catheters]]
• [[gil-14-012-infusion-pumps]]
• [[gil-14-014-hemodialysis-devices]]
• [[gil-14-024-walk-in-bathtubs-wheelchair-lifts-modular-ramps]]
• [[gil-15-021-medical-equipment-and-supplies]]

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-12-002.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-12-002
February 14, 2012

xxxxxxxxxxxx
ATTN:XXXXXXX
xxxxxxxxxxxx
xxxxxxxxxxxx
Re: Bio-engineered Medical Device/Orthotic
Dear XXXXXXXX,
You submitted on behalf of XXXXXXXXX ("Company") a request for guidance on the application of sales tax on the sale of your Bio-engineered Medical Device/Orthotic (Product). The department issues general information letters and private letter rulings. A general information letter provides a general overview of the relevant tax issue, but does not provide a determination regarding a specific set of facts and is not binding on the department. A private letter ruling provides a determination for a specific set of facts, is binding on the department but not the taxpayer, and requires payment of a fee. For more information about general information letters and private letter rulings, please see Department regulation 24-35103.5 at www.taxcolorado.org > FYI/Publication > Rulings. The department initially treats your request as one for a general information letter. If you would like the department to issue a private letter ruling on the issues you raise, you can resubmit a request and fee in compliance with regulation 24-35-103.5. It is important to remember that general information letters, such as this one, are general discussions of tax law, not determinations of the tax consequences on any specific circumstance and are not binding on the department. Issue Is the sale of Product exempt from sales and use tax? Background Company sells what is characterized as "bio-engineered orthotics." The correspondence does not describe the specifics of the product other than to stress "it is custom made to fit the individual" (purchaser) and aids the function of an individual's feet by placing a "person's feet in proper alignment based on their unique body requirements." We assume from this description that the product is manufactured for insertion into an individual's footwear (shoe insert).

Discussion
Colorado imposes sales tax on the sale of tangible personal property. Certain medical devices and supplies are exempt from sales and use tax. Insofar as relevant to Company's Product, Colorado exempts prosthetic devices and durable medical equipment, which we discuss below. §39-26-717, C.R.S. The department defines a prosthetic device as an artificial device which aids or replaces a bodily function and which is designed, manufactured, or adjusted to fit a particular individual. Department regulation (39)-26-717.1 Prosthetic devices that replace a body part of function include such things as artificial limbs, glass eye, and teeth implants. Prosthetic devices that do not replace a body part or function, but which aid in the functioning of a body part include such items as eyeglasses and a cardiac pacemaker. In contrast, devices that treat or cure an injury are generally classified as a therapeutic device and not prosthetic device. Colorado does not exempt the sale of therapeutic device as a class, although Colorado does exempt certain therapeutic devices. §39-26-717, C.R.S. Your correspondence describes the Product as "aiding" a person's foot by placing the foot "in proper alignment based upon their individual body requirements." Colorado is cautious in extending the prosthetic exemption to shoe inserts. For example, many shoe manufacturers represent that their shoe design will have ameliorative effects on posture, spine alignment, arch support, muscle tone, and on other foot related issues. Manufacturers of bed pillows and mattresses make similar claims. However, we do not believe that the prosthetic device exemption extends to these types of products. Our research suggests that many, if not most, states that have addressed orthotic shoe inserts have restricted the exemption only to cases where there is a demonstrated medical necessity. See, e.g., Cal. Code of Regs. 1591, Fla. Admin. Code Ann. 12A-1.020, Illinois Private Letter Ruling No. ST 95-0059-PLR, 02/02/1995 , Missouri Private Letter Ruling No. L6177, 08/24/1992, RCW 82.08.0283 We also note that the Federal Medicare program excludes similar products from coverage.1 When there is some ambiguity whether a product falls within an exemption, courts and the Department are guided by rules of statutory construction. In general, exemptions are narrowly construed and are not applied unless the product clearly falls within the exemption. Security Life & Accident Co. v. Heckers, 177 Colo. 455,495 P. 2d 225, 226 (1972). Colorado also exempts durable medical equipment. §39-26-717, C.R.S. However, in order to qualify for this exemption, the equipment must meet the following conditions: (1) withstand repeated use; (2) is primarily and customarily used to serve a medical purpose; (3) is 1 The Federal Medicare Program will not cover as medially necessary:

1. the treatment of flatfoot conditions and the prescription of supportive devices therefore;
2. the treatment of subluxations [incomplete or partial dislocation of a bone or joint] of the foot; or
3. routine foot care (including the cutting or removal of corns or calluses.42 U.S.C. Section
   1395(y)(13)
   2

generally not useful to a person in the absence of illness or injury, (4) is not worn in or on the body; and (5) is prescribed by a licensed medical provider. Because this is a general information letter, we do not determine here whether the Product falls within either exemption. A general information provides an overview of the tax provisions that may apply. Moreover, the information provided on the Product is lacking in particulars which would be necessary for such a determination. As noted above, you may apply for a private letter ruling to request such a determination. Miscellaneous Pursuant to state law and department regulation 24-35-103.5, noted above, the Department will make public a redacted version of this letter. Your letter requesting this general information is not made public. I enclosed a proposed redacted version of this letter. Please contact me within 60 days from the date of this letter if you have any questions, comments or objection concerning the redacted letter. I hope this is helpful. Please feel free to contact me if you have any questions.

Sincerely,

Office of Tax Policy
Colorado Department of Revenue

3