Are a company's charges for letting a medical practice use its leased MRI machine a taxable rental of equipment, or a nontaxable service?

Plain-English summary

Queens MRI Associates leased a Magnetic Resonance Imaging (MRI) system from the manufacturer through an equipment-leasing company, paying sales tax on those lease payments. It then subleased the MRI system (and other equipment) to a professional corporation (PC) that runs the imaging facility, and it also subleased office space to the PC. Queens MRI provided the PC with management, marketing, and consulting services. Critically, the PC's own technicians operate the MRI machine and the PC directs its use; Queens MRI's employees do the management/marketing/admin work, not the scanning. Queens MRI asked whether its charges to the PC for use of the MRI system are subject to sales and use tax.

The Department's answer, under Tax Law §§ 1101(b)(4), 1101(b)(5), and 1105(a):

• This is a taxable rental of equipment. A "sale" includes a rental (§ 1101(b)(5)), and the resale exclusion requires property to be bought exclusively for resale. The Department contrasted two cases: in Greene & Kellogg v. Chu, a firm that supplied respiratory equipment plus its own technicians to operate it was providing a service (so its equipment wasn't bought for resale and was taxable to the firm); but in Sigma Sound Studios, where the customer directed the use of the equipment, the provider was renting it. Here, because the PC operates and directs the MRI system, Queens MRI is renting tangible personal property, not performing a service.
• Queens MRI must collect sales tax on its charges to the PC for use of the MRI system.
• Its own lease from the manufacturer is a purchase for resale. Because Queens MRI re-leases the machine, its lease from the equipment-leasing company is a sale for resale and is not subject to sales tax (so the tax it had been paying on those lease payments was not due).
• Office-space sublease isn't taxed. Subleasing the office space is not a sale of tangible personal property, so it isn't subject to sales tax.

What this means for you

The operator-vs-owner test decides rental vs. service

If your customer's own staff operate the equipment and control how it's used, you're renting tangible personal property — a taxable transaction you must collect tax on. If you supply the personnel who run the equipment as part of a service, you're providing a service (and you, not the customer, are the taxable user of the equipment).

Equipment lessors: re-leasing makes your own lease a resale

When you lease equipment and then re-lease it to a customer in a taxable rental, your upstream lease qualifies as a purchase for resale — so you shouldn't be paying sales tax on your lease payments to your lessor. Give the lessor a resale certificate instead.

Separate the equipment from the real estate

Subleasing office space is not a sale of tangible personal property and isn't subject to sales tax. Keep the equipment rental and the space rental distinct, because they're taxed differently.

Accountants and tax professionals

The opinion turns on the Greene & Kellogg / Sigma Sound line: control and operation of the equipment determine whether the arrangement is a taxable rental of tangible personal property or a nontaxable service in which the provider is the end user.

Common questions

Q: Is subleasing an MRI machine to a medical practice taxable?
A: Yes, when the practice's own technicians operate the machine. That makes it a taxable rental of tangible personal property, and the sublessor must collect sales tax on the use charges.

Q: What if the equipment owner's staff ran the machine instead?
A: Then the owner would be providing a service, not a rental — and the owner (not the customer) would be the taxable user of the equipment, as in Greene & Kellogg.

Q: Does Queens MRI owe tax on its own lease from the manufacturer?
A: No. Because it re-leases the machine in a taxable rental, its upstream lease is a purchase for resale and is not subject to sales tax.

Q: Is the office-space sublease taxable too?
A: No. Subleasing real property (office space) is not a sale of tangible personal property, so it isn't subject to sales tax.

Citations and references

Statutes and authorities:

• Tax Law § 1105(a) (tax on receipts from retail sales of tangible personal property, including rentals)
• Tax Law § 1101(b)(4) (retail sale; resale exclusion requires exclusive resale)
• Tax Law § 1101(b)(5) (sale includes rentals)
• Matter of Micheli Contracting Corp. v. State Tax Commission, 109 A.D.2d 95; Greene & Kellogg, Inc. v. Chu, 134 A.D.2d 755, 521 N.Y.S.2d 571; Sigma Sound Studios, Adv. Op. Comm. T&F, Oct. 1, 1987, TSB-A-87(39)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a92_37s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92 (37) S
Sales Tax
April 30, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S920204A

On February 4, 1992, a Petition for Advisory Opinion was received from Queens MRI
Associates, c/o QMRGP, Inc., Alan M. Winakor, 100 Herricks Road, Suite 206, Mineola, New York
11501.
The issue raised by Petitioner, Queens MRI Associates, is whether charges by Petitioner for
use of a Magnetic Resonance Imaging (hereinafter "MRI") system are subject to sales and use taxes.
Petitioner leases medical equipment, specifically a MRI machine from the manufacturer
through an equipment leasing company. Petitioner also leases space in a building and made all the
necessary leasehold improvements to such space to create a suitable medical office to house the
system.
Petitioner provides a professional corporation (hereinafter "PC") with management,
marketing, and consulting services in order to properly operate an MRI facility. The facility operated
by PC is for the purpose of performing MRI diagnostic scans on patients who have been referred
thereto by health care professionals. By agreement, PC subleases a Picker-Vista 1.0 Telsa MRI
System, along with other medical and administrative equipment to perform its service. In addition,
PC subleases from Petitioner space in a building to use as a medical office.
In consideration for the subleasing of the MRI system and other equipment PC pays
Petitioner a fixed annual rental of $300,000 and an additional $200 for each MRI study performed
by the PC in excess of 1,000 in any year.
In consideration for the subleasing of the office space, PC pays Petitioner a fixed annual
rental of $120,000 for the first three (3) years of the Agreement, $180,000 for the next three (3) years
and $240,000 thereafter.
In consideration for the management and consulting services to be performed by Petitioner,
PC pays to Petitioner a fixed fee for each MRI diagnostic procedure ("use fee"). The initial use fee
will be $202 for each MRI diagnostic procedure performed by the PC. It is the intention of the parties
that the use fee will be prospectively adjusted upward or downward from time to time to compensate
for any significant changes in economic circumstances.
Section "7" of the contract between the parties provides that:
The partnership and the PC are independent contracting parties and the relationship
between them is that of an independent medical practice and an independent supplier
of management and consulting services and Equipment. Nothing in this agreement
shall be construed to create a principal-agent; employer-employee or master-servant
relationship. Each party shall, at all times, be the sole employer of its personnel in the
performance of its business; arrange directly with such
TP-9 (9/88)

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TSB-A-92 (37) S
Sales Tax
April 30, 1992

personnel for all salaries and other remuneration; and be solely responsible for the
payment of all applicable federal, state or local withholding or similar taxes and
provisions of Worker's Compensation and disability insurance.
Section "7" of the contract further provides that:
The PC shall have complete responsibility and supervision for its medical practice
and its personnel. All medical records shall be the property of the PC. The PC shall
employ all medical and technical personnel necessary for the conduct of its practice
and shall bear the salary and related payments to be incurred in connection therewith,
including, without limitation, (i) the payment of $100 per study reading fee, (ii) the
payment of the salaries of the technicians operating the MRI System, as well as all
fringe benefits payable in connection therewith, (iii) payment of the commercial rent
tax due with respect of the sublease of the Premises by the PC, (iv) payment of the
PC's normal legal and accounting charges and iv) any losses resulting from the
uncollectibility of any of the PC's billings and charges. The PC however shall not be
responsible for the payment of any expenses incurred for utilities. The partnership
shall not interfere with the exercise by the PC of its professional and business
judgment, nor shall the partnership interfere with, control, direct or supervise the PC
or any individual whom the PC may employ or contract with in connection with the
provision of its professional services.
Maintenance of the MRI system is the responsibility of Petitioner not the PC. If the MRI
system malfunctions Petitioner will hire someone to repair it. Petitioner has the sole discretion
whether or not to return the MRI system to the lessor at the end of the lease term or to exercise the
purchase option.
The sales tax on the MRI system is paid by Petitioner to the equipment leasing company
based on the leasing agreement between Petitioner and the equipment leasing company. Although
sales tax is paid on the lease payments to the equipment leasing company, no sales tax is charged on
the lease agreement between Petitioner and the PC.
Section 1105(a) of the Tax Law imposes a tax on the receipts from retail sales of tangible
personal property. The term "retail sale" is defined, in part, in Section 1101(b)(4) of the Tax Law,
as:
(i) A sale of tangible personal property to any person for any purpose, other
than (A) for resale as such. . .or (B) for use by that person in performing the services
subject to tax under paragraphs (1), (2), (3) and (5) of subdivision (c) of section
eleven hundred five ....
In order to qualify for the resale exclusion in the Tax Law, tangible personal property must
be purchased exclusively for resale (Matter of Micheli Contracting Corp. v. State Tax Commission,
109 A.D.2d 95). The term "sale and purchase" includes rentals (Tax Law section 1101[b][5]).

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TSB-A-92 (37) S
Sales Tax
April 30, 1992

In the Matter of Greene & Kellogg, Inc. v. Chu, 134 AD2d 755, 521 NYS2d 571, the court
held that medical equipment and supplies purchased by a medical service and supply firm to be
provided to hospitals as part of the firm's respiratory therapy services were not separate sales and
rentals to the hospital since the firm provided technicians and therapists to operate equipment and,
hence, making the equipment and supplies an integral part of the services the firm provided.
Therefore, firm's initial purchases of equipment and supplies were not purchased "for resale," and
were subject to sales tax. (emphasis added)
In Sigma Sound Studios, Adv Op Comm T&F, October 1, 1987, TSB-A-87(39)S the
Commissioner advised that Petitioner's purchases of studio and sound processing equipment used
by producers for artists' recording sessions and subsequent sound mixing and editing of magnetic
tapes were purchased "for resale" since although one of Petitioner's employees was usually present
at recording sessions, equipment was mainly operated by employees or sound engineers engaged by
the producer. Thus, since Petitioner's client had the right to direct the use of the equipment,
Petitioner was deemed to be renting tangible personal property to its customers rather than providing
a service or producing tangible personal property. (emphasis added)
In the instant case the MRI system is operated mainly by employees of PC who directs the
use of the equipment. The technicians who operate the equipment are not employees of the
Petitioner.
Accordingly, pursuant to Sections 1101(b)(4), 1101(b)(5) and 1105(a) of the Tax Law,
Greene & Kellogg, Inc. v. Chu, supra, and Sigma Sound Studios, supra, Petitioner is deemed to have
leased the MRI system from the manufacturer for resale since Petitioner releases the MRI system to
PC and Petitioner's employees merely provide management, marketing and administrative services
to PC rather than providing employees to operate the systems as part of its services to PC. Therefore,
Petitioner must collect sales tax on its charges to PC for use of the MRI system.
It is noted that since the lease of the MRI system by Petitioner to PC is subject to sales tax,
the lease of said equipment by Petitioner from the manufacturer through the equipment leasing
company is considered a sale for resale and is not subject to the imposition of sales tax in accordance
with the meaning and intent of Section 1105(a) of the Tax Law.

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TSB-A-92 (37) S
Sales Tax
April 30, 1992

It is further noted that the sublease of office space by Petitioner to PC is not a sale of tangible
personal property and therefore is not subject to the sales tax imposed by Section 1105(a) of the Tax
Law.

DATED:

April 30, 1992

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.