Was XYZ's tear-duct implant sold to an ophthalmologist exempt as a prosthetic device in SC PLR 04-5?

Plain-English summary

The South Carolina Department of Revenue ruled that XYZ, Inc.'s implanted tear-duct product was subject to sales and use tax when sold to a doctor for implantation in a patient.

An ophthalmologist placed the FDA-approved device in the tear duct. It expanded to fit, remained there permanently unless removed, and reduced tear drainage to relieve dry-eye syndrome.

The problem was South Carolina's narrow prosthetic-device definition. The regulation defined a prosthetic device as an artificial device replacing a missing part of the body. The implant helped replace or improve a bodily function, but it did not replace a missing anatomical part.

Because the device failed that definition, the Department did not need to decide the separate requirement that a non-dental prosthetic device be sold by prescription.

What this means for you

Medical-device manufacturers

An implanted or permanent product was not automatically a prosthetic device. Under this ruling, replacing a missing function was different from replacing a missing body part.

Physicians and medical practices

The purchase by the doctor remained taxable even though the product was FDA-approved and implanted to treat a medical condition.

Tax professionals

Test every element of the exemption separately. Failure to meet the prosthetic-device definition ended the analysis before the prescription issue.

Common questions

Q: Was the implant taxable?
A: Yes. The Department concluded it did not replace a missing part of the body.

Q: Did permanent implantation make it exempt?
A: No. Permanence did not satisfy the missing-body-part requirement.

Q: Did the product treat a medical condition?
A: Yes. It reduced tear drainage to relieve dry-eye syndrome, but that did not make it an exempt prosthetic device.

Q: Did the ruling decide whether it was sold by prescription?
A: No. The Department said that question did not need to be reached.

Citations and references

• S.C. Code Ann. § 12-36-2120(28) — medicine and prosthetic-device exemption
• S.C. Regulation 117-332 — prosthetic device definition applied by the ruling
• SC Revenue Ruling 03-2 — prescription requirement discussion identified in the ruling

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: PLR04-5.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #04-5

SUBJECT:

Medical Device Implant
(Sales and Use Tax)

REFERENCES: S. C. Code Ann. Section 12-36-2120(28) (Supp. 2003)
SC Regulation 117-332 (Supp. 2003)
AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2003)
SC Revenue Procedure #03-1

SCOPE:

A Private Letter Ruling is a written statement issued to a specific taxpayer by
the Department to apply principles of law to a specific set of facts or a
particular tax situation. A Private Letter Ruling is an advisory opinion; it
does not have the force and effect of law and is not binding on the person
who requested it or the public. It is, however, the Department’s opinion
limited to the specific facts set forth, and is binding on agency personnel only
with respect to the person to whom it was issued and only until superseded or
modified by a change in statute, regulation, court decision, or advisory
opinion, providing the representations made in the request reflect an accurate
statement of the material facts and the transaction was carried out as proposed.

Question:
Is the sale by XYZ, Inc. of a medical device implant, known as the XProduct, to a doctor for
implanting in a patient subject to the sales and use tax?
Conclusion:
The sale by XYZ, Inc. of a medical device implant, known as the XProduct, to a doctor for
implanting in a patient is subject to the sales and use tax.
Facts:
XYZ, Inc. is a company located in California which sells an FDA approved medical device
implant in the United States. This implant is called a XProduct. It is implanted by a doctor
(ophthalmologist) into the patient’s tear duct. This prevents drainage and keeps more tears in the
eye in order to relieve dry eye syndrome. Once implanted, the implant expands to fit the tear duct
and is designed to remain there permanently; however, the doctor can remove it if necessary.
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Discussion:
Code Section 12-36-2120(28) exempts from the sales and use tax:
(a) medicine and prosthetic devices sold by prescription, prescription medicines
used to prevent respiratory syncytial virus, prescription medicines and therapeutic
radiopharmaceuticals used in the treatment of cancer, lymphoma, leukemia, or
related diseases, including prescription medicines used to relieve the effects of
any such treatment, and free samples of prescription medicine distributed by its
manufacturer and any use of these free samples;

(e) dental prosthetic devices;
While the statute requires that a prosthetic device, other than a dental prosthetic device, be “sold
by prescription” in order to be exempt, that question does not need to be addressed here (see note
below). The application of the sales and use tax to the device in question is addressed by the
definition of the term “prosthetic device” found in SC Regulation 117-332, which reads in part:
To assist in the administration of this exemption, the Department has adopted
definitions for the terms "medicine" and "prosthetic devices" as follows:
"Medicine" - a substance or preparation used in treating disease.
"Prosthetic Device" - an artificial device to replace a missing part of the body.
The sale of prescription lenses that replace a missing part of the eye are exempted
from the tax, as for example eyeglasses prescribed for a person whose natural
lenses have been surgically removed.
Eyeglasses, contact lens, hearing aids and orthopedic appliances, such as braces,
wheelchairs and orthopedic custom-made shoes, do not come within the
exemption at Code Section 12-36-2120(28). However, sales of hearing aids are
exempt pursuant to Code Section 12-36-2120(38).
Therefore, a device that merely replaces a missing function of the body is not exempt. SC
Regulation 117-332 defines a prosthetic device as “an artificial device to replace a missing part
of the body.” In order for the exemption to apply, the device must be replacing a “missing part”
of the body.
Based on the above, the sale by XYZ, Inc. of the XProduct to a doctor for implanting in a patient
is subject to the sales and use tax since the device does not replace a missing part of the body.

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Note: For a detailed discussion of the requirement that a prosthetic device, other than dental
prosthetic device, be “sold by prescription” in order to be exempt, see SC Revenue Ruling #03-2.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank III
Burnet R. Maybank III, Director

May 13
, 2004
Columbia, South Carolina

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