Are a laser-surgery treatment-card fee and a per-procedure patent-license fee subject to NY sales tax?

Plain-English summary

The petitioner sells laser eye-surgery equipment and software for cataract and ophthalmic surgery, and bills two extra charges (invoiced as one combined amount) on top of the equipment price:

1. A $10 fee for a plastic "treatment card" that must be inserted into the laser to operate it -- a new card each time.
2. A $100 per-procedure fee the customer pays every time the laser is used, which the petitioner calls a royalty for sublicensing a patented surgical procedure. (The petitioner itself pays a per-procedure license fee to Visx Inc., the patent holder, and has the right to sublicense.)

It asked whether the two fees are taxable.

The Office of Counsel concluded both are taxable:

• The treatment card -- taxable tangible personal property. The card has utility -- it activates the laser -- so it is tangible personal property, not merely a token or symbol that confers a legal right. Why the card is needed to activate the equipment has no bearing on its tax status.
• The per-procedure fee -- taxable as an expense of selling tangible property. Prewritten software is tangible personal property (Tax Law 1101(b)(6), (b)(14)). A "receipt" includes the sale price without any deduction for expenses of making the sale (1101(b)(3); 20 NYCRR 526.5(e)). If the Visx patent is incorporated (in whole or part) in the laser's software or hardware, the per-procedure fee is simply an itemized expense pertaining to the sale of that tangible property and is part of the taxable receipt -- even if the fee also confers the right to perform the patented procedure.
• Incorporation is presumed here. Because the equipment apparently can only perform the patented Visx procedure, it is highly probable the patent is incorporated into the hardware/software. The facts don't definitively establish it, so the petitioner bears the burden of proving the patent is not incorporated; until it does, the fee is presumed taxable (1132(c)).
• No medical-equipment exemption. Even though 1115(a)(3) exempts medical equipment, the carve-out applies because the buyers (medical practitioners) use the equipment to perform medical services for compensation -- so the equipment and cards are taxable.

What this means for you

Equipment sellers using activation cards and per-use/license fees

You can't strip tax off a sale by splitting it into an "activation card" plus a "patent royalty." A physical card that turns the machine on is taxable property regardless of its purpose. And a per-procedure or per-use license fee that's bound up with software or hardware incorporating the licensed technology is an expense of selling taxable property -- it rides into the taxable receipt, and labeling it a royalty doesn't exempt it. If you want to treat such a fee as a nontaxable intangible, you bear the burden of proving the licensed IP is not built into the equipment. And selling to professionals who use the gear for compensation defeats the medical-equipment exemption.

Common questions

Q: Is the plastic treatment card taxable?
A: Yes. It's tangible personal property with utility (it activates the laser), not a mere token, so its sale is taxable.

Q: We call the per-procedure charge a patent royalty -- is it still taxable?
A: Yes, if the patent is incorporated into the laser's hardware or software. Then it's an expense of selling taxable property and is part of the taxable receipt, even though it also lets the customer perform the procedure.

Q: How do we avoid tax on the per-procedure fee?
A: You'd have to prove the patented procedure is not incorporated into the equipment's hardware or software. Until you do, the fee is presumed taxable.

Q: Doesn't the medical-equipment exemption cover laser surgery equipment?
A: Not here. The exemption doesn't apply when the buyer uses the equipment to perform medical services for compensation, as these surgeons do.

Citations and references

• Tax Law section 1105(a) (tax on retail sales of tangible personal property)
• Tax Law section 1101(b)(6); section 1101(b)(14) (prewritten software is tangible personal property)
• Tax Law section 1101(b)(3) (receipt; no deduction for expenses)
• Tax Law section 1101(b)(5) (definition of sale; license to use)
• Tax Law section 1115(a)(3) (medical-equipment exemption; compensation carve-out)
• Tax Law section 1132(c) (presumption of taxability; burden on vendor)
• 20 NYCRR section 526.5(e) (expenses not deductible from receipts)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2011.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a11_32s.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-11(32)S
Sales Tax
December 7, 2011

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S090921B

The Department of Taxation and Finance received a Petition for Advisory Opinion from name
and address redacted. Petitioner asks whether two fees that it bills in conjunction with the sale of laser
surgery equipment are subject to sales tax. The first is a ten dollar fee for a plastic treatment card,
which must be inserted into the laser surgery equipment in order to operate the equipment. The second
is a $100 per-procedure fee that must be paid by the purchaser of the laser surgery equipment every
time the equipment is used, which Petitioner claims is a royalty for the use of a patented surgical
procedure. The two fees are invoiced as a single amount on the customer’s invoice. We conclude that
the ten dollar fee for a plastic card is a receipt from the sale of tangible personal property because the
card is always sold in conjunction with the laser surgery equipment and is itself tangible personal
property that has utility. The per procedure fee is also subject to sales tax. This fee is taxable because
it is either an expense pertaining to the sale of tangible personal property or it is a component of an
integrated transaction for the sale of tangible personal property.
Facts
Petitioner sells medical laser surgery equipment and software for cataract and other ophthalmic
surgery. Petitioner bills an up-front charge for the sale of laser surgery equipment. Petitioner also bills
two additional charges when it sells the equipment. The first is a ten dollar fee for a plastic treatment
card, which must be inserted into the laser surgery equipment in order to operate the equipment. A
new card must be inserted each time the equipment is used. The second is a $100 per-procedure fee,
which the customer must pay every time the laser equipment is used to perform eye surgery. Petitioner
claims this fee represents a royalty for the licensing to the customer of patented surgical procedures.
The Petitioner invoices the two fees as a single amount on the customer’s invoice.
Petitioner has an agreement with Visx Inc. (Visx) whereby Petitioner pays a per procedure
surgery license fee to Visx for every laser correction surgery performed in the United States using
Petitioner’s laser system and software. That is, Petitioner has the right to sublicense patented surgical
procedures.
Petitioner’s standard contract for the sale of laser surgery equipment states in part:
Section 1.15 - “Refractive Per Procedure Fee” shall mean, except as otherwise provided in this
Agreement, One Hundred Dollars ($100.00) for each Procedure performed using a laser purchased
from or provided by [Petitioner] or leased form a third party leasing company approved by [Petitioner].
Section 3.4 - Monitoring Mechanisms. Customer shall at all times allow [Petitioner] to install in
or attach to, any laser and modify and/or enhance a recording, memory or other system or
mechanism…which monitors and measures the number of procedures performed.

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TSB-A-11(32)S
Sales Tax
December 7, 2011

Section 4.1 - Refractive Per Procedure Fee. At all times, the Customer owns or leases a Laser
… such Customer shall pay [Petitioner] a Refractive Per Procedure Fee for each procedure performed
using such Laser.
Section 4.l2 - Treatment Cards. During the term [Petitioner] shall sell and customer shall
purchase each treatment card for one hundred and ten ($110.00), which shall include the Refractive
Per- Procedure Fee payable by Customer under section 4.1 hereof.
Section 8.9 - Grant of Sublicense. Subject to customer on-going compliance with the covenants
contained in this agreement, Petitioner hereby grants to each Customer purchasing a Laser hereunder a
non-exclusive sublicense under the Visx Patents (the “Sublicense”) to perform Procedures utilizing
such Laser.
It is unclear from the facts provided whether Visx’s patented surgical procedures are
incorporated in whole or in part in the design of the Petitioner’s hardware or are incorporated in whole
or in part as elements of programs in the software component of Petitioner’s laser surgery equipment.
It is also unclear from the facts provided whether the laser surgery equipment can physically be used
for medical procedures other than the patented procedures that are licensed by Visx.
Analysis
Tax Law Section 1105(a) imposes sales tax on the receipts from the sale of tangible personal
property. Tangible personal property is defined in Tax Law section 1101(b)(6) as including prewritten
computer software. Prewritten computer software is any computer software that is not designed and
developed by the author or other creator to the specifications of a specific purchaser. Tax Law §
1101(b)(14). The sale of prewritten software includes any transfer of title or possession or license to
use for consideration. See Tax Law § 1101(b)(5).
Tax Law section 1101(b)(3) defines “receipt” as:
The amount of the sale price of any property and the charge for any service taxable
under this article ... valued in money, whether received in money or otherwise, including any
amount for which credit is allowed by the vendor to the purchaser, without any deduction for
expenses or early payment discounts.
Section 526.5(e) of the Sales and Use Tax Regulations elaborates on this definition:
(e) Expenses. All expenses, including telephone and telegraph and other service
charges, incurred by a vendor in making a sale, regardless of their taxable status and regardless
of whether they are billed to a customer are not deductible from the receipts.
Petitioner’s sale of plastic treatment cards constitutes the sale of tangible personal property
subject to sales tax. These cards have utility: they activate Petitioner’s laser surgery equipment. Stated
negatively, the cards are not merely tokens or symbols that confer legal rights. The reason why the
card is used to activate the equipment has no bearing on the sales and use tax status of Petitioner’s
receipts for the cards.

TSB-A-11(32)S
Sales Tax
December 7, 2011

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If the patent is incorporated in whole or in part in the software of the laser equipment (e.g., the
software contains program instructions on how to perform the entire patented procedure or a part of the
procedure), the fee is merely an expense pertaining to the sale of software that is prewritten computer
software subject to sales tax as tangible personal property. If the design of the hardware component of
the laser surgery equipment incorporates in whole or in part the patented medical surgical procedure,
the same conclusion would hold: the license fee would be an itemized expense pertaining to the sale of
tangible personal property. Because itemized expenses pertaining to the sale of tangible personal
property are part of the receipts from the sale of the tangible personal property, the license fee would
be subject to sales tax as a receipt for sale of tangible personal property if the Visx patent is
incorporated in whole or in part in the software or hardware of the laser surgery equipment. This
conclusion would remain valid even if the license fee confers on the customer the right to perform the
patented procedure.
Because it appears that the Petitioner’s laser surgery equipment that is in question can be used
only to perform the medical procedure patented by Visx, it is highly probable that Visx’s patented
medical surgical procedure is incorporated in whole or in part in the design of the hardware component
of laser surgery equipment or is incorporated in whole or in part in the software component of the laser
surgery equipment. However, Petitioner’s application for an advisory opinion offers no clear guidance
as to whether the patent is in fact incorporated into the hardware or software of the laser; therefore, no
definitive conclusion on the question of incorporation is possible based on the facts presented.
Petitioner has the burden to establish that the license fee in question is for a patent that is not
incorporated in whole or in part in Petitioner’s laser. Until Petitioner can establish that no
incorporation of the patent into the laser surgery equipment has occurred, the fee will be presumed
subject to sales tax. Tax Law § 1132(c).
Tax Law section 1115(a)(3) exempts from sales and use tax the sale of medical equipment and
supplies except when the equipment or supplies are purchased by a person performing medical or
similar services for compensation. Consequently, Petitioner’s receipts from the sale of laser surgery
equipment and cards to medical practitioners who will use the property to provide medical services for
compensation are subject to sales and use tax.

DATED: December 7, 2011

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy 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. The information provided in this document does not cover every situation
and is not intended to replace the law or change its meaning.