Is a company that supplies MRI/CT equipment, staff, and supplies to a hospital -- billed per scan -- renting taxable equipment, or providing a nontaxable service? And are its own purchases taxable?

Plain-English summary

A company contracted with a New York hospital to run a diagnostic-imaging facility: it supplies the building and utilities, the MRI and CT machines, the technicians who run the scans, the supplies, and management/scheduling/bookkeeping. The hospital pays a monthly fee based on the Medicare rate per scan (allocated on paper as 20% premises / 13% equipment / 17% supplies / 10% services / 40% personnel). Mark S. Klein of Hodgson Russ asked whether the company is selling/renting taxable medical equipment, or providing a nontaxable service -- and whether the company's own purchases are taxable.

The Office of Counsel concluded the company is providing a nontaxable service, but owes tax on most of its own purchases.

• Service, not equipment rental. When a license to use equipment comes with the services of an operator, the deal is presumptively a sale of a service if the owner keeps dominion and control (20 NYCRR 541.2(p)(2)). Here the company's own employees operate the machines, the company hires/fires and pays them, maintains the equipment, and pays the utilities -- and it bills a fixed Medicare amount per scan, not by the quantity of equipment or supplies. That tracks Greene & Kellogg v. Chu, where per-patient percentage billing meant the taxpayer was providing medical services, not renting equipment. So the company's monthly fees are not taxable (diagnostic imaging is not an enumerated taxable service).
• But the company's own purchases are taxable. Because the company buys the medical equipment and supplies to perform services for compensation, the 1115(a)(3) medical exemption does not apply to those purchases -- they're taxable under 1105(a). Empty syringes and saline-filled syringes are taxable supplies (528.4(h) Ex. 1). Exception: the dyes injected into or ingested by patients are drugs/medicines (or products consumed for the preservation of health) and are exempt regardless of use (1115(a)(3); 528.4(b) Ex. 6).
• Maintenance on the equipment is taxable (1105(c)(3)); the 1115(g) exemption for servicing medical equipment doesn't apply because the equipment itself was bought taxably for performing services for compensation.
• No production exemption. 1105-B / 1115(a)(12) don't apply -- the company is providing a service, not producing tangible personal property for sale (TSB-A-92(19)S).

What this means for you

Equipment-plus-operator arrangements

If you provide equipment together with your own staff and keep dominion and control (you hire/fire and direct the operators, maintain the gear, pay the operating costs) and you bill for the result (per scan, per procedure) rather than by equipment/supply quantity, you're likely selling a nontaxable service -- the contract's internal percentage allocation to "equipment" doesn't change that.

The trade-off: you become the taxable end-user

Winning the "it's a service" argument means you are the consumer of the equipment and supplies -- so you pay tax on those purchases, and the 1115(a)(3) medical exemption won't shield purchases used to perform services for compensation. Genuine drugs/medicines (like imaging dyes) stay exempt no matter how they're used.

Common questions

Q: We bill the hospital a set amount per scan -- is that taxable equipment rental?
A: No. Billing a fixed amount per procedure (not by equipment/supply quantity), while you operate and control the equipment with your own staff, makes it a nontaxable service.

Q: Can I buy the MRI/CT machine and supplies tax-exempt as medical equipment?
A: No. The 1115(a)(3) exemption doesn't apply to items you buy to perform medical services for compensation -- those purchases are taxable, including empty and saline-filled syringes.

Q: Are the contrast dyes taxable too?
A: No. Dyes injected or ingested by patients are exempt drugs/medicines regardless of how they're used.

Citations and references

• Tax Law section 1105(a) (sales of tangible personal property)
• Tax Law section 1105(c)(3) (maintaining/servicing tangible personal property)
• Tax Law section 1115(a)(3) (medical equipment, supplies, and drugs exemption)
• Tax Law section 1115(g) (services on certain medical equipment)
• Tax Law section 1115(a)(12) / 1105-B (production exemption)
• 20 NYCRR 541.2(p)(2) (operator + equipment: service vs. rental indicia)
• 20 NYCRR 528.4(b) Example 6; 528.4(h) Example 1 (drugs/medicines; supplies)
• Greene & Kellogg, Inc. v. Chu, 134 AD2d 755 (3d Dept 1987)
• TSB-A-92(19)S (Advanced Technology Laboratories)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2010.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a10_31s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(31)S
Sales Tax
July 14, 2010

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S080807A

Petitioner Mark S. Klein, Hodgson Russ, LLP, 140 Pearl Street, Suite 100, Buffalo, New York
14202-4040, asks whether (1) his client (Company) is making sales of medical equipment and related
supplies, as described below, or is providing a nontaxable service; and (2) Company’s purchases of
equipment, supplies, and maintenance services for the equipment are subject to sales tax.
We conclude that Company is providing a nontaxable service to the hospital rather than selling or
renting medical equipment and supplies. Company’s purchases of medical equipment, supplies, and
maintenance services for the equipment are subject to tax under Tax Law §1105(c)(3).
Facts
Pursuant to a contract between Company and a healthcare facility located in New York State
(Hospital):
1.

Company grants a license to Hospital for the use of Company’s facility for the
purposes of conducting diagnostic imaging services.

2.

Company pays all costs associated with the utilities necessary for operating the
facility.

3.

Company grants a license to Hospital for the use of furniture, fixtures, and medical
equipment located at the facility. The equipment consists of a magnetic resonance
imaging (MRI) machine and computerized tomography (CT) machine. Company
must keep the equipment in good repair.

4.

Company provides certain administrative services for the facility that include:
i.
ii.
iii.
iv.
v.

General management services (day-to-day operations);
Fiscal reporting services;
Providing supplies;

Scheduling services;
Personnel services (i.e., technicians, receptionists, secretaries,clerks,
bookkeeping and management personnel).

Company provides the facility and pays for all utilities associated with the facility. It provides the
technicians who conduct the MRI and CT scans. It provides the MRI and CT machines as well as all
supplies consumed in conducting the scans. Supplies include dyes that are either injected into or ingested by
patients, empty syringes, and syringes filled with sodium chloride. Company provides management and
bookkeeping services to ensure that the facility is run efficiently. Company provides all scheduling and
secretarial services in order to coordinate a patient’s care with Hospital. In short, Company provides all

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TSB-A-10(31)S
Sales Tax
July 14, 2010

items necessary for Hospital to effectively render imaging services to its patients. Hospital then bills the
patient for such services.
The personnel provided by Company pursuant to the contract remain Company’s employees.
Company is responsible for recruiting, training, managing, supervising, compensating and terminating the
personnel. Company is also responsible for all taxes and insurance necessary with respect to the personnel.
However, the contract provides that “[a]t such times as the Leased Personnel are providing services on
[Hospital’s] behalf, [Hospital] shall have authority and responsibility for [1] the supervision and control of
the Leased Personnel [i.e., the employees] (while providing services on [Hospital’s] behalf); [2] determining
the means and methods by which each leased personnel provides services hereunder.” With respect to
medical technicians, the contract provides that Hospital “shall be solely responsible for supervising all
medical technicians performing Imaging Services on [Hospital’s] patients as required under applicable law,
including but not limited to, 10 NYCRR § 89.4(a).” 1
Hospital managerial staff is generally not present at the facility. Hospital radiologists must
administer dyes to patients at the facility whenever dyes are needed for the imaging procedures. Hospital
radiologists or other physicians are not required to be present when Company’s technicians operate the
equipment and conduct the MRI and CT scans. Hospital physicians provide protocols or directions to
technicians indicating what parts of the body should be scanned, the proper angle at which the scan should be
made, and other specifications for the scan.
In consideration for the items provided by Company pursuant to the contract, Hospital pays
Company a monthly license fee that is based on the applicable Medicare rate for the technical component for
each MRI or CT scan. In other words, for each scan conducted on a patient, Hospital pays Company a set
amount. This charge remains constant regardless of the amount of time it takes to complete the scan or the
amount of supplies used in conducting the scan. According to the contract, the license fee is allocated as
follows:
1.
2.
3.
4.
5.

Premises - 20%
Equipment - 13%
Supplies - 17%
Services - 10%
Personnel - 40%

The contract between Company and Hospital specifically states that “Such payment shall be
inclusive of any and all sales tax associated therewith.” Due to the number of scans that occur daily,
Company does not invoice Hospital for any of the scans it conducts. Instead, Hospital sends Company a
monthly report detailing the scans that have occurred at the facility. Hospital pays Company the applicable
license fee based on this report. Occasionally Company spot checks Hospital’s report to ensure that Hospital
has accurately reported all scans.
Hospital is not an exempt organization under Tax Law §1116(a)(4).

1

It should be noted that the New York State Department of Health regulations were amended after the contract was
made in 2001. 10 NYCRR 89.2 currently covers the practice of radiologic technology under the supervision of a
licensed practitioner.

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July 14, 2010

Analysis
The issue is whether Company is renting medical equipment and related supplies to Hospital
pursuant to their contract, or is providing medical (diagnostic imaging) services. Rentals of medical
equipment and supplies by Company to Hospital would be taxable. The exemption from tax under Tax Law
§1115(a)(3) for medical equipment and supplies does not apply to sales at retail for use in performing
medical and similar services for compensation. The performance of diagnostic imaging services by
Company would not be taxable. Diagnostic imaging services are not enumerated taxable services.
When a license to use equipment includes the services of an operator, the transaction is
presumptively the sale of a service, rather than the rental of tangible personal property, if dominion and
control over the equipment remain with the equipment owner. Indicia that the owner retains dominion and
control are: (i) the owner maintains the right to hire and fire the operators; (ii) the owner or its employees use
their own discretion in performing the work; (iii) the owner retains responsibility for operating the
equipment; and (iv) the owner directs the work, and pays all operating expenses, including operators’ wages
and insurance. Whether a transaction is a sale or rental of equipment or is the sale of a service must be
determined in accordance with the facts and circumstances of the particular transaction and the provisions of
the contract between the parties. See 20 NYCRR §541.2(p)(2).
In Greene & Kellogg, Inc. v Chu, 134 AD2d 755 (3d Dept 1987), the court looked at the taxpayer’s
billing methods in concluding that the taxpayer was providing medical services (inhalation therapy) rather
than selling or renting medical equipment and supplies. In that case, the amounts billed to the hospitals were
a fixed percentage of the hospital’s charges to the patient. The court noted that the hospitals were charged
without regard to the quantity of equipment or supplies. The court further noted that “[c]harges were not
made periodically but only when therapy was offered to patients, and patients were billed for the charges.
There was no accounting as to what services, supplies or equipment were provided to any particular patient.”
The taxpayer had amended its contracts to refer to the equipment transactions as leases and to indicate that
30% of the amounts billed to the hospital would be allocated to the sale or rental of equipment and supplies.
However, the court concluded that there was substantial evidence to support the determination that the
taxpayer was providing medical services rather than selling or renting medical equipment and supplies.
Accordingly, the taxpayer’s purchases of equipment and supplies were subject to sales tax.
In the present case, Company’s billing methods resemble the billing methods used by the taxpayer in
Greene & Kellogg, supra. Company’s fees are not based on the quantity of equipment and supplies provided
to Hospital, but rather on the Medicare rate per scan performed on a patient. Company and Hospital do not
account for the supplies or equipment provided to a particular patient. As in Greene & Kellogg, Company’s
contract allocates 30% of the fees billed to Hospital to supplies and equipment.
The technicians that operate the medical equipment in this case are Company’s employees.
Company is responsible for hiring and firing the technicians, paying their wages, and providing their
insurance. Company is responsible for operating expenses such as utilities in connection with the equipment,
and for maintaining the equipment. The contract between the parties provides that Hospital is solely
responsible for supervising technicians performing imaging services as required under applicable law,
including 10 NYCRR §89.4(a). However, this regulation, as it existed when the contract was made, provided
that physicians are not required to oversee radiologic technicians in measuring and positioning patients, and
in operating equipment. The current regulations do not appear to have taken this discretion away from
technicians. Petitioner states that Hospital’s physicians are not required to be present when Company
technicians perform the scans.

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July 14, 2010

Based on the billing methods used by Company and the other facts in this matter, Company is
providing nontaxable diagnostic imaging services to Hospital rather than renting medical equipment and
supplies. This conclusion is consistent with the holding in Greene & Kellogg, supra, and with the indicia of
service transactions in 20 NYCRR §541.2(p)(2). Accordingly, Company’s monthly fees charged to Hospital
are not subject to sales tax.
Company’s purchases of medical equipment and supplies are subject to sales tax under Tax Law
§1105(a). The exemption from tax under Tax Law §1115(a)(3) does not apply because Company purchases
the medical equipment and supplies for use in performing medical and similar services for compensation.
See Greene & Kellogg, supra. Taxable supplies include empty syringes and syringes filled with sodium
chloride that are purchased by Company. See 20 NYCRR §528.4(h), Example 1. However, Company’s
purchases of dyes that are ingested by or injected in patients for purposes of diagnostic imaging are exempt
from tax. The dyes are drugs or medicines, or products consumed for the preservation of health, and are
exempt under Tax Law §1115(a)(3) regardless of whether they are purchased for use in performing medical
and similar services for compensation. See 20 NYCRR §528.4(b), Example 6.
Company’s purchases of medical equipment and supplies are not exempt from sales tax under Tax
Law §1105-B or 1115(a)(12). Company uses the medical equipment and supplies in providing diagnostic
imaging services to Hospital rather than producing tangible personal property for sale. See Advanced
Technology Laboratories, Inc., Adv Op Comm T&F, March 6, 1992, TSB-A-92(19)S.
Company’s purchases of maintenance services for the medical equipment are taxable under Tax Law
§1105(c)(3). The exemption under Tax Law §1115(g) for services performed on medical equipment does
not apply in this case because Company’s purchases of the medical equipment for use in performing medical
and similar services for compensation are taxable.
It should be noted that Company’s purchases at retail of furniture and fixtures, other than fixtures
purchased on an installed basis that are capital improvements, are subject to sales tax under Tax Law
§1105(a).

DATED: July 14, 2010

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel
An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion.