Does Illinois tax single-use catheters and rented catheter-driving equipment (laser/electrical signal generators) sold by a medical device company to hospitals at the 1% low medical-appliance rate, or the 6.25% general rate, and how are the equipment rentals and hospital sales taxed?

Plain-English summary

A medical device company that makes and sells single-use catheters — plus the electrical-signal- and laser-light-generating equipment ("PRODUCT") the catheters plug into — asked Illinois whether its sales to hospitals and surgical facilities qualify for the state's low 1% medical-appliance sales tax rate, and how rentals, "rent credits," and hospital sales should be taxed.

The Department's bottom line: these items don't qualify as tax-favored medical appliances. Illinois taxes "drugs, medicines, and medical appliances" at a reduced 1% state rate (plus local taxes) under 86 Ill. Adm. Code 130.311, but only if the item is a medicine/drug with a medicinal label claim, or a "medical appliance" that directly substitutes for a malfunctioning part of the human body — things like artificial limbs, dental prostheses, wheelchairs, pacemakers, dialysis machines, hearing aids, and eyeglasses. The catheters and the signal/laser-generating equipment described in the request are diagnostic and treatment tools, not body-part substitutes, so the Department concluded they don't fit that category and are instead taxed at Illinois's general merchandise rate of 6.25% plus any applicable local taxes.

On the separate questions about renting the PRODUCT equipment: Illinois treats "true leases" differently from "conditional sales." A true lease (no bargain buyout, customer can walk away at lease-end, no guaranteed sale) means the lessor — not the lessee — owes Use Tax on its own cost of the equipment, and the rental receipts themselves are not subject to Retailers' Occupation Tax at all. The Department couldn't rule on the specific "rent credit" mechanics or the exact lease agreement without reviewing it, since a GIL can't resolve fact-specific questions like a PLR can. Finally, equipment leased to qualifying tax-exempt hospitals (active exemption number, one-year-plus lease term, executed at time of purchase) can be exempt from Retailers' Occupation Tax under 86 Ill. Adm. Code 130.2011.

What this means for you

Medical device sellers

If you sell or rent diagnostic or treatment equipment (imaging systems, catheters, signal generators, and similar devices) into Illinois, don't assume the low 1% medical-appliance rate applies just because the product is used in a medical procedure. The Department's test is narrow: the item must directly substitute for a malfunctioning body part. Diagnostic tools, consumable single-use accessories, and equipment that merely assists a physician — without itself replacing a body function — will usually fall into the general 6.25% rate instead.

Businesses structuring equipment rentals

How you paper a rental matters. A true lease (no guaranteed sale, no bargain-price buyout, lessee can return the equipment at term-end) shifts the Use Tax burden to you as lessor (on your own cost) and takes the rental receipts themselves out of Retailers' Occupation Tax. A lease that guarantees a sale (e.g., a nominal $1 buyout) is instead treated as a conditional sale, making the full receipts taxable. If your leases include volume-based "rent credits" that reduce or zero out payments, get a specific ruling (a PLR, not a GIL) if you need Department certainty on how those credits are taxed.

Sellers and lessors to hospitals

Equipment sold to a party that leases it to a tax-exempt hospital can escape Retailers' Occupation Tax, but only if all the conditions are met: the equipment is purchased specifically for lease to the exempt hospital, the lease is executed (or in effect) at the time of purchase, the lease term is one year or longer, and the hospital holds an active Illinois tax-exemption number under Section 1g of the Retailers' Occupation Tax Act. Confirm each of these before assuming a hospital sale is exempt.

Common questions

Q: Are the single-use catheters taxed at the 1% medical-appliance rate?
A: No. The Department concluded the catheters described (diagnostic imaging catheters and photoablasion/laser catheters) don't directly substitute for a malfunctioning body part, so they're taxed at the general 6.25% merchandise rate plus local taxes, not the 1% rate under 86 Ill. Adm. Code 130.311.

Q: What does qualify for the 1% medical-appliance rate?
A: Items that directly substitute for a malfunctioning body part — for example, artificial limbs, dental prostheses, orthodontic braces, crutches, orthopedic braces, wheelchairs, heart pacemakers, dialysis machines (including the dialyzer), hearing aids, eyeglasses, and contact lenses.

Q: Are the rental charges for the signal/laser-generating equipment taxable?
A: It depends on whether the lease is a "true lease" or a "conditional sale." Under a true lease, the lessor owes Use Tax on its own cost of the property, and the rental receipts are not subject to Retailers' Occupation Tax; the lessee has no tax liability on the rent. A conditional sale (effectively guaranteeing a future sale, such as with a nominal buyout) makes all the receipts taxable as a sale.

Q: Do "rent credits" that offset the rental fee reduce the taxable base?
A: The Department did not decide this. Without reviewing the actual lease agreement, it could not determine the taxability of the volume-based rent credits or the parties' specific tax obligations — a limitation inherent to a GIL, since a GIL only points to relevant regulations and can't resolve fact-specific determinations the way a Private Letter Ruling can.

Q: Are sales to nonprofit charitable hospitals exempt?
A: Equipment sold to persons who lease it to a tax-exempt hospital can be exempt from Retailers' Occupation Tax if: the equipment is purchased for lease to the exempt hospital, the lease is executed (or in effect) at the time of purchase, the lease term is one year or longer, and the hospital has an active tax-exemption number under Section 1g of the Retailers' Occupation Tax Act (86 Ill. Adm. Code 130.2011).

Q: Is this ruling binding on the Department?
A: No. This is a General Information Letter (GIL), which only directs the taxpayer to relevant regulations and sources of information. It is not a statement of Department policy and is not binding, unlike a Private Letter Ruling (PLR), which is binding on the Department as to the specific taxpayer and facts presented.

Citations and references

Statutes and rules:

• 35 ILCS 120/2; 86 Ill. Adm. Code 130.101 (Retailers' Occupation Tax imposed on sellers of tangible personal property)
• 35 ILCS 105/3; 86 Ill. Adm. Code 150.101 (Use Tax imposed on the privilege of using tangible personal property in Illinois)
• 86 Ill. Adm. Code 130.311 (Drugs, Medicines, Medical Appliances, and Grooming and Hygiene Products — 1% low rate vs. 6.25% general rate)
• 86 Ill. Adm. Code 130.2010 (distinguishing true leases from conditional sales)
• 86 Ill. Adm. Code 130.2013(g) (true-lease rental receipts not subject to Retailers' Occupation Tax)
• 35 ILCS 155/1 et seq. (Automobile Renting Occupation and Use Tax Act — carve-out for short-term auto leases)
• 86 Ill. Adm. Code 130.2011(a)-(b) (exemption for equipment leased to tax-exempt hospitals)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedure)
• 2 Ill. Adm. Code 1200.120 (General Information Letter procedure)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2021/st21-0009-gil.pdf

Original ruling text

ST-21-0009 02/04/2021 MEDICAL APPLIANCES
A medical appliance is an item that directly substitutes for a malfunctioning part of the human
body. Products that qualify as medical appliances are taxed at a lower State rate of 1% plus
any applicable local taxes. See 86 Ill. Adm. Code 130.311. (This is a GIL).
February 4, 2021
Dear Xxxx:
This letter is in response to your letter dated January 25, 2021, in which you requested
information. The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are
issued by the Department in response to specific taxpayer inquiries concerning the application of a
tax statute or rule to a particular fact situation. A PLR is binding on the Department, but only as to the
taxpayer who is the subject of the request for ruling and only to the extent the facts recited in the PLR
are correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information
Letter (“GIL”) is to direct taxpayers to Department regulations or other sources of information
regarding the topic about which they have inquired. A GIL is not a statement of Department policy
and is not binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website
at www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to
your inquiry.
The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:
Below is a request for guidance as to the applicability of sales and/or use tax in your
state, on certain transactions involving our client. Thank you in advance for your
prompt attention, and please reach out to me at ADDRESS1 and/or to ADDRESS2 if
additional information required, or any questions.
Introduction
Our Client makes sales of certain medical equipment and associated consumable
supplies into your state to hospitals, surgeons and surgical facilities. We are
respectfully requesting guidance regarding the taxability of the two types of items
provided by our client to its customers. These two items are 1) the recurring sale of
various types of single-use catheters; and, 2) the rental of electrical signal
generating and laser light generating medical devices (equipment) used in
conjunction with the catheters. Both 1 and 2 are sold only on the order of a
physician pursuant to Federal Law.
Facts
Our Client develops, manufactures, markets and distributes medical devices used to
diagnose and treat peripheral artery and coronary artery disease. The equipment
and catheters using electrical signals are used in the diagnosis and analysis of
various arterial conditions, while the laser light generating equipment and catheters
are used in the procedure/treatment of arterial blockage, using photoablasion.
Photoablasion is the use of laser light to break-down, vaporize, and remove matter.
The types of devices used in these procedures are

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February 4, 2021

1.
Catheters
a.
Single-use laser catheter devices are connected to the photoablasion
equipment and used to deliver the laser light during the procedure to remove
arterial blockages. The catheter is inserted into the patient's vein or artery but is
removed after completion of the procedure. The catheter is a single-use device and
must be disposed of when the procedure is completed. The catheter must also be
disposed of if the catheter package has been compromised causing it to be nonsterile.
b.
Imaging catheters are used to aid in the diagnosis of various types of arterial
blockages, including coronary and peripheral artery disease. These catheters are
connected to the imaging equipment and help identify the placement, size, etc. of
arterial blockages. These catheters are also single-use catheters, and must be
disposed of after each diagnostic procedure.
2.
PRODUCTS - The two different PRODUCTS are essentially the equipment
which either generates the electrical signals which are carried through the catheters
during diagnostic imaging procedures; or, the equipment which generates the laser
light delivered into a narrow-gauge wire catheter, and through photoablasion, is
used to remove arterial blockages. In either case, the PRODUCT reads back the
responses from the catheter unit. The PRODUCT, by itself, does not come into
contact with the patient and cannot contribute anything to the diagnosis or treatment
by the physician/surgeon without an appropriate catheter. The medical service
provider must have the PRODUCT delivered and installed, and in some cases
integrated with the existing X-Ray surgery suite equipment prior to ordering and
using the catheters. As discussed below, the Client rents the PRODUCT to the
medical service provider.
As stated above, both the catheters and the electrical signal generating
equipment ("PRODUCT") are sold only on the order of a physician pursuant to
Federal Law.
The above described PRODUCTS work in conjunction with our Client's specific
catheter units. The catheters, such as the photoablasion catheter, are either a metal
wire or a fiber optic cable small enough to insert through the patient's leg vein, and
moved up through the patient generally toward the heart. Each type of catheter has
specific functionality while inserted into the patient including the photoablasion
procedure, or measuring blood flow, or imaging by providing a reference point for
the surgical X-Ray system.
The catheters are only sold to medical service providers who rent the PRODUCT
from our Client. The catheters are used on specific procedures being performed.
Consequently, a medical facility may order dozens of these catheters, of various
types, during a typical year. The single use catheters are useless by themselves,
and must be used with the specific PRODUCT.

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February 4, 2021

The catheters are plugged in to the PRODUCT through a proprietary interface plug
drawing signal and/or laser light from the PRODUCT. The electric signals or laser
light sent down the catheter activates the features in the patient end of the catheter
to enable the surgeon to complete the procedure. Client's catheters are not
compatible with other PRODUCTS that may try to perform the same function.
Our Client rents the signal generating PRODUCT to customers. Upon installation,
the customer has ninety (90) days in which to evaluate the system. The initial rental
term begins immediately following the expiration of the evaluation period and ends
on December 31st of the current year. The term may be renewed for additional oneyear periods by the customer issuing a purchase order for each one-year period.
The rental fee for each system is $xxxxx per year and can be partially or
completely offset by rental credits which are earned and dependent upon the
volume of catheters purchased by the customer. This is commemorated in a
"volume based" rental agreement executed between our Client and their
customer.
Ruling Requests
1.

Is the sale of the single-use catheters taxable in your state?

2.

Are the rental charges for the PRODUCT (laser or electrical signal
generating equipment) taxable in your state?

3.

As stated above, the rental agreement (between our Client and their
customers) contains ''volume based" provisions by which the rental price of
the PRODUCT (laser or electrical signal system) is offset based upon the
volume of catheters purchased during the rental period ("rent credits"). Do
these rent credits serve as a "discount" to reduce the taxable base of the
laser equipment assuming the equipment is in fact taxable in your state?

4.

If the earned rent credits are large enough such that there is no rental
payment due by the customer for the laser equipment, and the catheters are
subject to tax, does the tax collected on the catheters satisfy my client's
sales tax collection obligation?

5.

If the earned rent credits are large enough such that there is no rental
payment due by the customer for the PRODUCT equipment, and if the
catheters are not subject to sales tax, is there any sales tax collection
obligation by my client?

6.

Regarding the PRODUCT, does my client have any use tax obligation under

4 or #5 above?

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February 4, 2021

7.

Are sales to non-profit charitable hospitals (i.e., those customers who
qualify as a 501(c)(3) under the Internal Revenue Code) exempt from
sale/use tax in your state?

8.

Does the taxability answer on #6 above change if the PRODUCT units are
provided under an agreement structured as a loan - with no-charge provided the customer exclusively purchases and uses the disposable items
from my client.

DEPARTMENT’S RESPONSE:
he Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged in this State in
the business of selling tangible personal property to purchasers for use or consumption. 35 ILCS
120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is imposed on the privilege of using, in this
State, any kind of tangible personal property that is purchased anywhere at retail from a retailer. 35
ILCS 105/3; 86 Ill. Adm. Code 150.101.
Please see the Department’s regulation at 86 Ill. Adm. Code Section 130.311, which is its
regulation governing Drugs, Medicines, Medical Appliances, and Grooming and Hygiene Products.
Those products that qualify as drugs, medicines and medical appliances are taxed at a lower State
rate of 1% plus any applicable local taxes. Those items that do not qualify for the low rate of tax are
taxed at the general merchandise rate of 6.25% plus applicable local taxes.
A medicine or drug is any pill, powder, potion, salve, or other preparation for human use that
purports on the label to have medicinal qualities A written claim on the label that a product is
intended to cure or treat disease, illness, injury or pain, or to mitigate the symptoms of such disease,
illness, injury or pain constitutes a medicinal claim. See Section 130.311 for examples of medicinal
claims. Examples of qualifying products include prescription drugs or medicines and nonprescription
drugs or medicines such as aspirin or other pain relievers that purport on the label to have medicinal
qualities. The term "nonprescription medicines and drugs" does not include grooming and hygiene
products. Grooming and hygiene products include, but are not limited to, soaps and cleaning
solutions, shampoo, toothpaste, mouthwash, antiperspirants, and suntan lotions and screens, unless
those products are available by prescription only. If an item is a nonprescription grooming and
hygiene product, it will be taxed at the State 6.25% general merchandise rate regardless of any
medicinal claims made on the product’s label.
A medical appliance is an item that is used to directly substitute for a malfunctioning part of the
human body. Included in the exemption as medical appliances are such items as artificial limbs,
dental prostheses and orthodontic braces, crutches and orthopedic braces, wheelchairs, heart
pacemakers, and dialysis machines (including the dialyzer). Corrective medical appliances such as
hearing aids, eyeglasses and contact lenses qualify for exemption. Moreover, generally, home
glucose monitors, test strips and related supplies
Based on the items listed in your letter, it does not appear that the items are drugs or directly
substitute for a malfunctioning part of the human body or is a drug and, thus, would not qualify for the

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February 4, 2021

1% rate. The items would be subject to general merchandise rate of 6.25% and any applicable local
taxes.
LEASES
Please note that the State of Illinois taxes leases differently for Retailers’ Occupation Tax and
Use Tax purposes than the majority of other states. For Illinois sales tax purposes, there are two
types of leasing situations: conditional sales and true leases. A conditional sale is usually
characterized by a nominal or One Dollar purchase option at the close of the lease term. Stated
otherwise, if lessors are guaranteed at the time of the lease that the leased property will be sold, this
transaction is considered to be a conditional sale at the outset of the transaction, thus making all
receipts subject to Retailers’ Occupation Tax. See 86 Ill. Adm. Code 130.2010.
A true lease generally has no buyout provision at the close of the lease. If a buyout provision
does exist, it must be a fair market value buyout option in order to maintain the character of the true
lease. Lessors of tangible personal property under true leases in Illinois are deemed end users of the
property to be leased. As end users of tangible personal property located in Illinois, lessors owe Use
Tax on their cost price of such property. The State of Illinois imposes no tax on lease receipts.
Consequently, lessees incur no tax liability. See 86 Ill. Adm. Code 130.2010.
The above guidelines are applicable to all true leases of tangible personal property in Illinois except
for automobiles leased under terms of one year or less, which are subject to the Automobile Renting
Occupation and Use Tax found at 35 ILCS 155/1 et seq.
While we cannot rule specifically in the context of a General Information Letter, a lease
contract meeting the following conditions would generally be considered to be a true lease rather than
a conditional sale: (1) a customer who has otherwise met the requirements of the agreement can
cease making payments and return the property at the end of any lease term without further payment
obligation, (2) the customer is never under any obligation to purchase the property, and (3) the
agreement does not guarantee a sale of the tangible personal property at the inception of the
contract. Because, under this type of lease agreement, the lessee is free to walk away from the lease
at the end of each lease term and therefore a sale of the property is not guaranteed at the time the
lease is entered into, it is the Department’s opinion that such an agreement would be a true lease. A
lessor engaging in this type of lease should pay Use Tax to his supplier for all items that he
purchases to lease. Receipts from the rental of tangible personal property under a true lease are not
subject to Retailers’ Occupation Tax liability. See 86 Ill. Adm. Code 130.2013(g).
Without reviewing the actual lease agreement, the Department cannot determine the tax
obligation of COMPANY or the lessee. The Department also cannot determine the taxability of the
rent credits.
SALES TO HOSPITALS

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February 4, 2021

Sales of computers and communications equipment utilized for any hospital purpose that are
sold to persons who lease those items to exempt hospitals are not subject to Retailers' Occupation
Tax. The exemption is otherwise available, provided that:
1)

the computers and communications equipment described above must all be purchased
for lease to a tax exempt hospital under a lease that has been executed or is in effect at
the time of purchase;

2)

the lease must be for a period of one year or longer; and

3)

the lease must be to a hospital that has an active tax exemption identification number
issued by the Department under Section 1g of the Retailers' Occupation Tax Act. 86 Ill.
Adm. Code 130.2011(a).

Sales of equipment, other than that specified in subsection (a), used in the diagnosis, analysis,
or treatment of hospital patients that is sold to persons who lease that equipment to exempt hospitals
is not subject to Retailers' Occupation Tax. The exemption is otherwise available, provided that:
1)

the equipment described above must all be purchased for lease to a tax exempt
hospital under a lease that has been executed or is in effect at the time of purchase;

2)

the lease must be for a period of one year or longer; and

3)

the lease must be to a hospital that has an active tax exemption identification number
issued by the Department under Section 1g of the Retailers’ Occupation Tax Act. 86 Ill.
Adm. Code 130.2011(b).

I hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.
Very truly yours,
Richard S. Wolters
Associate Counsel
RSW:rkn