Are synthetic bone-graft drug-device products exempt in NY as prosthetic aids or as products for the preservation of health?

Plain-English summary

The petitioner is a biotech company that makes two synthetic bone-graft "drug-device" products -- ABG (a growth-factor + tricalcium-phosphate scaffold for hindfoot/ankle fusion) and ABBG (a calcium-phosphate/collagen scaffold for bone-void filling and fracture repair). Both provide a scaffold that the body gradually resorbs and turns into bone, promoting healing after surgery. They're sold to New York hospitals and surgery centers (not for cosmetic use). The petitioner asked whether they qualify for the prosthetic aid exemption (Tax Law 1115(a)(4)) or the preservation-of-health exemption (1115(a)(3)).

The Office of Counsel concluded exempt under 1115(a)(3), not as prosthetic aids:

• Not prosthetic aids. A prosthetic aid must completely or partially replace a missing body part or the function of a permanently inoperative/malfunctioning part, and be primarily/customarily used for that (20 NYCRR 528.5(b)(1)). These products speed natural bone regeneration rather than replace a permanently malfunctioning part, so they don't qualify as prosthetic aids (TSB-A-09(48)S).
• Yes, preservation-of-health products. Tax Law 1115(a)(3) exempts products consumed by humans for the preservation of health (including substances used internally/externally not ordinarily considered drugs or medicines; 20 NYCRR 528.4). Both products are used in orthopedic surgery to promote bone regeneration and healing, so they qualify (TSB-A-12(1)S).
• A significant reversal. The Department had previously ruled that resorbable products implanted to facilitate healing were taxable medical supplies when bought by professionals for use in providing medical services for pay (TSB-A-09(48)S; 02(14)S; 92(77)S; 92(43)S). It overruled those opinions, now treating such products as exempt preservation-of-health products -- so they're exempt even when purchased by the medical professionals.

What this means for you

Medical-device and biotech sellers; hospitals and surgeons

Resorbable products that promote the body's own healing (bone grafts, scaffolds, fillers that turn into tissue) are now treated as exempt preservation-of-health products in New York -- exempt even on purchases by hospitals and surgeons. That's a change from the older "taxable medical supply" treatment.

Prosthetic vs. preservation-of-health

The exemptions are distinct. A device that replaces a missing/non-working body part is a prosthetic aid; a product that helps the body heal/regenerate is a preservation-of-health product. Both are exempt here, but the path matters for borderline products.

Common questions

Q: Is a bone-graft scaffold a prosthetic aid?
A: No. It promotes natural bone regeneration rather than replacing a permanently malfunctioning body part, so it isn't a prosthetic aid -- but it's exempt as a preservation-of-health product.

Q: Are these taxable when a hospital or surgeon buys them?
A: No. As preservation-of-health products they're exempt even when purchased by medical professionals -- a change from the older medical-supply treatment.

Q: What about earlier rulings that taxed similar implants?
A: This opinion overruled them (TSB-A-09(48)S, 02(14)S, 92(77)S, 92(43)S). Resorbable healing implants are now treated as exempt preservation-of-health products.

Citations and references

• Tax Law section 1115(a)(3) (exemption for products consumed for the preservation of health)
• Tax Law section 1115(a)(4) (exemption for prosthetic aids)
• Tax Law section 1105(a) (sales tax on tangible personal property)
• 20 NYCRR section 528.4 (preservation-of-health products)
• 20 NYCRR section 528.5(b)(1) (prosthetic aids)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a13_26s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-13(26)S
Sales Tax
September 9, 2013

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

PETITION NO. S120416A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
Petitioner, name redacted. Petitioner asks whether its new combination drug-device products,
Augment ® Bone Graft (ABG) and AugmatrixTM Bicomposite Bone Graft (ABBG), qualify
for the exemptions for products consumed for the preservation of health in Tax Law § 1115(a)(3)
or for the prosthetic aid exemption in § 1115(a)(4). We conclude that the products do not qualify
as exempt prosthetic aids, but that they do qualify for the preservation of health exemption in §
1115(a)(3).
Facts
Petitioner is a biotechnology company specializing in the development and
commercialization of innovative drug-device combination products to promote the healing of
musculoskeletal injuries and diseases, including orthopedic, spine and sports injury applications.
It asks about the sales tax treatment of two products it has developed.
ABG
ABG is a combination product pending marketing approval by the FDA as a Class III
Medical Device. ABG was developed as a fully synthetic replacement to autograft in hindfoot
and ankle surgery. ABG consists of two components: recombinant human platelet-derived
growth factor (rhPDGF-BB) and beta-tricalcium phosphate (B-TCP). It is supplied as a kit for a
single use only. At the point of use, the two primary components are mixed and subsequently
applied to the surgical site. The B-TCP component of ABG is a highly porous, resorbable, and
osteoconductive scaffold that provides a framework for bone regeneration, aids in preventing
soft tissue infiltration, and promotes stabilization of the blood clot. The recombinant human
platelet-derived growth factor (rhPDGF-BB), also known as becaplermin, acts by stimulating the
recruitment, and proliferation of a variety of cell types. ABG is placed on defects, such as gaps
between bones where a surgeon is trying to achieve fusion. It provides a scaffold for natural
occurring tissue (bone) regeneration and is gradually resorbed by the body, and turned into bone.
The presence of the protein stimulates this naturally occurring biological process. Petitioner will
sell ABG to hospitals and surgery clinics in New York for use in hindfoot and ankle surgeries.
ABG is not used in cosmetic surgery.
ABBG
ABBG is a sterile, synthetic, non-pyrogenic material intended for use in combination
with autologous bone marrow for bone void filling and fracture repair of the pelvis and
extremities. It is designed not to cause inflamatory or fever responses. The product material is a

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TSB-A-13(26)S
Sales Tax
September 9, 2013

composition of carbonated apatite and bovine type I collagen. Carbonated apatite is a form of
calcium phosphate that closely resembles the mineral phase of natural human bone. The granules
are interspersed within the collagen, providing an enhanced osteoconductive scaffold to support
bone remodeling. The scaffold is highly porous with ample surface area for absorption of bone
marrow aspirate ("BMA") and stem cell attachment. The ABBG product family is available in a
variety of configurations: pads, strips, blocks, plugs, and paste. Upon saturation with BMA,
ABBG may be manipulated as desired. This flexible structure allows the grafts to be shaped
based on patient anatomy and surgical environment. Pads, strips, blocks and plugs may be
compressed, folded, trimmed or layered. Hydrated paste may be molded. ABBG has been
approved by the FDA as a Class II device for prescription use only. Petitioner will sell ABBG to
hospitals and surgery centers in the State for use in orthopedic surgery. It is not used in cosmetic
surgery.
Analysis
Section 1105(a) of the Tax Law imposes sales tax on retail sales of tangible personal
property. The petition inquires about the applicability of one of the exemptions from that tax,
§ 1115(a)(4). That section exempts prosthetic aids, artificial devices and component parts hereof
purchased to correct or alleviate physical incapacity in humans. Under the Sales and Use Tax
Regulations, for property to qualify as a prosthetic aid, it must, among other things, either
completely or partially replace a missing body part or the function of a permanently inoperative
or permanently malfunctioning body part and that is primarily and customarily used for such
purposes (see 20 NYCRR § 528.5[b][1]). Both ABG and ABBG appear to work by helping to
speed the process of bone regeneration after surgery. Thus, they do not become a replacement
for a permanently malfunctioning body part, and, accordingly, do not qualify as exempt
prosthetic aids (see TSB-A-09[48]S).
Section 1115(a)(3) exempts from sales and use tax the following “. . . products consumed
by humans for the preservation of health, but not including cosmetics or toilet articles
notwithstanding the presence of medicinal ingredients therein.” Regulation § 528.4 provides that
“[p]roducts consumed by humans for the preservation of health include other substances used
internally or externally, which are not ordinarily considered drugs or medicines.” Under this
explanation of the “preservation of health” exemption, both products at issue here qualify for the
exemption because both are used in connection with orthopedic surgery to promote bone
regeneration and healing after surgery (see TSB-A-12[1]S).
The Department has previously ruled that certain products implanted by medical
professionals into a patient in order to facilitate healing and gradually resorbed by the body
constitute medical equipment or supplies and thus are taxable when purchased by the medical
professionals for use in rendering medical services for compensation (see TSB-A-09(48)S
[collagen implant injected into bladder tissue to treat urinary incontinence]; TSB-A-02(14)S
[bone void filler implanted to treat weakened and diseased bone]; TSB-A-92(77)S [tissue
regeneration device placed beneath gums to treat periodontal disease]; and TSB-A-92(43)S
[corneal collagen shield inserted to assist in healing of postoperative or traumatic corneal

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Sales Tax
September 9, 2013

injuries]). These Advisory Opinions are hereby overruled, as we now conclude that these
products should be considered products consumed by humans for the preservation of health and
should not be considered medical supplies. As a result, they are exempt when purchased by the
medical professionals under section 1115(a)(3) of the Tax Law and 20 NYCRR 528.4.

DATED: September 9, 2013

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.