Was an implanted device used to treat degenerative spine disease exempt as a prosthetic device in SC PLR 05-3?

Plain-English summary

The South Carolina Department of Revenue ruled that MNO, Inc.'s implanted spinal device was subject to sales and use tax when sold to a doctor or hospital for implantation in a patient.

The device was designed to treat a degenerative spine disease by preserving motion and preventing or correcting a physical deformity or malfunction. But it did not replace a missing part of the body. Under the regulation applied by the Department, a prosthetic device had to be an artificial device replacing a missing body part.

Because the implant corrected function without replacing a missing part, it did not qualify for the prosthetic-device exemption. The doctor or hospital was treated as the user or consumer of the implant furnished during patient care.

What this means for you

Medical-device manufacturers

Implantation inside the body did not by itself make a product an exempt prosthetic device. The PLR focused on whether the product actually replaced a missing body part.

Hospitals and surgeons

The ruling treated the sale to the provider as a retail sale because the provider used or consumed the device in delivering medical services to the patient.

Tax professionals

Distinguish a device that replaces anatomy from one that supports, corrects, or restores function. The latter was taxable on these facts under the definition used in this PLR.

Common questions

Q: What did the implant do?
A: It was surgically placed between spinal processes to treat a degenerative disease and preserve motion.

Q: Why was it not a prosthetic device?
A: It corrected or prevented a malfunction but did not replace a missing part of the body.

Q: Did the ruling decide whether it was sold by prescription?
A: No. The Department said it did not need to reach that question because the product failed the prosthetic-device definition first.

Q: Can another manufacturer rely on this PLR?
A: No. It binds agency personnel only for MNO, Inc. and the specific facts represented.

Citations and references

• S.C. Code Ann. § 12-36-2120(28) — medicine and prosthetic-device exemptions
• S.C. Code Ann. § 12-36-110(1)(i) — medical institutions and practitioners as users or consumers
• S.C. Regulation 117-332 — prosthetic device defined as replacing a missing body part
• South Carolina Act No. 89 of 2005 — amendment noted by the ruling

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: PLR05-3.pdf

Original ruling text

State of South Carolina

Department of Revenue
Office of General Counsel
301 Gervais Street, P. O. Box 12265, Columbia, South Carolina 29211
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #05-3

SUBJECT:

Medical Device Implant
(Sales and Use Tax)

REFERENCES: S. C. Code Ann. Section 12-36-2120(28) (Supp. 2004)
Act 89 of 2005 (Effective July 1, 2005)
SC Regulation 117-332 (Supp. 2004)
AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2004)
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 MNO, Inc. of a medical device implant, for use in treating a degenerative spine
disease, to a doctor or hospital for implanting in a patient subject to the sales and use tax?
Conclusion:
The sale by MNO, Inc. of a medical device implant, for use in treating a degenerative spine
disease, to a doctor or hospital for implanting in a patient is subject to the sales and use tax.
Facts:
MNO, Inc. plans to manufacture and sell an implantable medical device that will be used to treat
a degenerative spine disease that mostly affects the elderly, causing pain or numbness when
walking or standing and ultimately inhibiting mobility. The device is a motion preserving
implant that is placed surgically between spinous processes. The device prevents or corrects a

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physical deformity or malfunction, but it does not replace a missing part of the body. The
surgical procedure will typically be performed by a neurologist or orthopedic surgeon in a
hospital setting. As such, the purchaser of the device would typically be a hospital that would
purchase the implant device to place in its inventory.
Note: At the time of this document, MNO, Inc. was waiting on U.S. Food and Drug
Administration (“FDA”) approval to sell the device in the United States.
Discussion:
Code Section 12-36-2120(28) 1 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 rheumatoid arthritis, cancer, lymphoma,
leukemia, or related diseases, including prescription medicines used to relieve the effects
of any such treatment, 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. SC Regulation 117332, which was approved by the General Assembly in accordance with Article 1 of Chapter 23
of Title 1 of the S.C. Code of Laws, 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.

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The exemption for prescription medicines and therapeutic radiopharmaceuticals used in the treatment of
rheumatoid arthritis, or prescription medicines used to relieve the effects of any such treatment for rheumatoid
arthritis, became effective on July 1, 2005 pursuant to Act 89 of 2005.

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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, or that prevents or
corrects a malfunction of the body without replacing a missing part 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.
Finally, Code Section 12-36-110(1)(i) defines the terms “retail sale” and “sale at retail” to
include “sales of drugs, prosthetic devices, and other supplies to hospitals, infirmaries,
sanitariums, nursing homes, and similar institutions, medical doctors, dentists, optometrists, and
veterinarians, if furnished to their patients as a part of the service rendered.” This statute further
states that “[t]hese institutions, companies, and professionals are deemed to be the users or
consumers of the property.”
Based on the above, the sale by MNO, Inc. of the device described in the facts to a doctor or
hospital (for implanting in a patient) is a retail sale and is subject to the sales and use tax since
the device does not replace a missing part of the body.
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

, 2005
August 1
Columbia, South Carolina

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