Is medical equipment loaned 'free' to hospitals along with catheters taxable, and does the medical-equipment exemption apply?

Plain-English summary

The Petitioner (a Washington company registered for NY sales tax) sells catheters to New York hospitals and also gives those hospitals medical equipment "free to use on loan" to use with the catheters. The equipment works only with the Petitioner's catheters (and vice versa); the Petitioner keeps ownership, and if a hospital stops buying catheters, the equipment must be returned. The Petitioner says all its NY catheter sales and equipment loans are to tax-exempt hospitals. It asked whether the loaned equipment is subject to sales or use tax.

The Office of Counsel reached a two-part conclusion:

• The "free" loan is part of the taxable sale. A "sale" is any transfer of title or possession for consideration (Tax Law 1101(b)(5)). Because the equipment is loaned in conjunction with the catheter sales, the loan is part of the sale of the catheters, and the total sales price would be subject to tax. The combined sale/loan does not qualify for the medical-equipment exemption (Tax Law 1115(a)(3)) because it is being sold at retail to hospitals for use in performing medical services for compensation -- the exception that pulls the item back into tax.
• But the buyers are exempt, so no tax is due. Since the hospitals are exempt organizations under Tax Law 1116(a), no sales tax is owed on the sales/loans. The Petitioner must keep records documenting the exemption -- its invoice naming the exempt hospital plus the hospital's Exempt Organization Exempt Purchase Certificate (Form ST-119.1).

What this means for you

Medical-device sellers using "free" placed equipment

The common razor-and-blades model -- place equipment for free, sell the consumables -- doesn't make the equipment a separate tax-free item. New York treats the loaned equipment as part of the taxable sale of the consumable it's tied to, so its value rides on the taxable transaction.

The 1115(a)(3) medical-equipment exemption has a big exception

Medical equipment and supplies are exempt unless they're sold for use in performing medical services for compensation. Sales to hospitals and providers who use the items to treat patients for a fee generally fall in that taxable exception -- so don't assume "medical equipment" automatically means exempt.

Exempt buyers are the real shelter -- document it

Here the saving grace was that the buyers were exempt hospitals. To rely on that, keep the exemption certificate (ST-119.1) and an invoice showing the exempt organization as purchaser for every sale/loan.

Common questions

Q: We place equipment for free and only sell the supplies. Is the equipment taxable?
A: Its value is treated as part of the taxable sale of the supplies it's tied to -- it's not a separate, tax-free loan.

Q: Isn't medical equipment exempt under 1115(a)(3)?
A: Not when it's sold to a provider for use in performing medical services for compensation. That exception makes it taxable -- unless another exemption (like an exempt buyer) applies.

Q: So why is no tax due here?
A: Because the buyers are tax-exempt hospitals. Keep Form ST-119.1 and an invoice naming the exempt hospital to support the exemption.

Citations and references

• Tax Law section 1105(a) (sales tax on tangible personal property)
• Tax Law section 1101(b)(5) (definition of sale; transfer of possession)
• Tax Law section 1115(a)(3) (exemption for medical equipment and supplies)
• Tax Law section 1116(a) (exempt organizations, including hospitals)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2014.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a14_16s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-14(16)S
Sales Tax
July 2, 2014

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

PETITION NO. S130201A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTED. Petitioner asks whether medical equipment (“the Medical Equipment”) it provides
on loan to hospitals to be used in conjunction with catheters it sells to the hospitals are subject to
sales or use tax. We conclude that the Medical Equipment Petitioner loans to hospitals under the
circumstances described in the Petition along with the catheters are both subject to sales tax.
Facts
Petitioner is located in the State of Washington and is registered for sales tax with the
Department. Petitioner sells catheters to hospitals in this State. Petitioner also provides those
hospitals with Medical Equipment to be used in conjunction with the catheters. The Medical
Equipment can be used only with the Petitioner’s catheters and vice-versa. Petitioner explicitly
states that it does not sell the Medical Equipment, but rather, it is provided “free to use on loan”
with the catheters. Ownership of the equipment remains with Petitioner. If a hospital ceases
buying catheters from Petitioner, the Medical Equipment is required to be returned to Petitioner.
Petitioner also notes that all of its sales in this State of catheters and associated loans of Medical
Equipment are to tax exempt hospitals.
Analysis
The receipts from every retail sale of tangible personal property are subject to sales tax
unless otherwise exempt or excluded. See Tax Law § 1105(a). A “retail sale” includes every
purchase of tangible personal property that is not resold as such. See Tax Law § 1101(b)(4)(i).
A “sale” includes any transfer of title or possession, conditional or otherwise, in any manner
whatsoever, for a consideration. See Tax Law § 1101(b)(5). Purchases of medical equipment
and supplies used in the cure, mitigation, treatment or prevention of illnesses or diseases in
human beings, or to correct or alleviate physical incapacity, are exempt from sales and use tax
unless they are purchased at retail for use in performing medical services for compensation. See
Tax Law § 1115(a)(3)) and 20 NYCRR §428.4(h). “Medical supplies” include those used in the
cure, mitigation, treatment or prevention of illnesses or diseases or for the correction or
alleviation of physical incapacity. See 20 NYCRR § 528.4(g)(1).
Petitioner’s Medical Equipment is being loaned in conjunction with the sales of the
catheters, although for no charge. As a result, the loan of the equipment must be viewed as part
of the sale of the catheters and the total sales price would be subject to sales tax. The combined
sale/loan would not qualify for exemption under Tax Law § 1115(a)(3) as a sale of medical

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TSB-A-14(16)S
Sales Tax
July 2, 2014

equipment and supplies as it is being sold at retail to hospitals for use in performing medical
services for compensation.
However, Petitioner states that all of its sales of the catheters and associated loans of
Medical Equipment are to hospitals that are exempt from sales tax under Tax Law § 1116(a).
Accordingly, no sales tax would be owed on such sales/loans. Petitioner must maintain records
documenting the exemptions. The records for each sale/loan should include a copy of
Petitioner’s invoice listing the exempt hospital as the purchaser and the copy of the Exempt
Organization Exempt Purchase Certificate (Form ST-119.1) completed by the hospital.

DATED: July 2, 2014

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.