Was a prescription, non-invasive electromagnetic bone-growth stimulator exempt from Tennessee sales tax as a prosthetic device?

Plain-English summary

The prescription bone-growth stimulator was exempt from Tennessee sales and use tax as a prosthetic device. The Department concluded that it replaced or augmented a reduced natural body function: healing a fracture by stimulating bone cells to resume bone production.

The device was portable and non-invasive and used combined magnetic-field technology for non-union fractures that had not healed after nine months. A licensed physician prescribed and fitted it, and the patient used it daily for up to nine months. It was dedicated to one patient and returned for disposal after treatment rather than reused.

The ruling applied a Tennessee exemption for prosthetics, orthotics, surgical supports, and similar corrective or support devices. Relying on the cited Cordis decision, the Department treated a device as prosthetic when it replaced a missing body part or augmented a natural function. The stimulator qualified because it augmented the body's impaired bone-healing function.

What this means for you

Medical-device companies

The analysis focused on what natural body function the device replaced or augmented, not solely on whether it was implanted or external.

Healthcare providers

The ruling's facts included prescription-only access, physician fitting and instruction, patient-specific use, and disposal after treatment.

Accountants and tax professionals

Classify the device from its actual corrective function and compare current exemption language. This ruling applied the statute and medical facts as they stood in 1996.

Common questions

Q: Was the bone-growth stimulator taxable?
A: No. The Department treated it as an exempt prosthetic device.

Q: Why did an external device count as a prosthetic? A: It augmented a reduced natural function—the body's ability to heal a broken bone—which satisfied the test used in the ruling.

Q: Did the device have to be prescribed?
A: On the stated facts, it could be obtained only by prescription from a licensed physician.

Q: Was the device reused for another patient?
A: No. It was dedicated to one patient and returned for disposal after treatment.

Q: Can another seller rely on this ruling?
A: No. It binds the Department only for the addressed taxpayer and facts.

Citations and references

• Tenn. Code Ann. § 67-6-314(5) — exemption for prosthetics, orthotics, specified supports, and similar medical corrective or support devices, as cited in the ruling.
• Cordis Corp. v. Taylor, 762 S.W.2d 138 (Tenn. 1988).

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/96-12.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING #96-12
WARNING

Letter rulings are binding on the Department only with respect to the individual taxpayer being addressed in the ruling. This presentation of the ruling in a redacted form is informational only. Rulings are made in response to particular facts presented and are not intended necessarily as statements of Department policy.

SUBJECT
The application of the sales and use tax to the sale and/or use of a medical apparatus which utilizes an electromagnetic field to stimulate bone cell growth. SCOPE This letter ruling is an interpretation and application of the tax law as it relates to a specific set of existing facts furnished to the department by the taxpayer. The rulings herein are binding upon the department, and are applicable only to the individual taxpayer being addressed. This letter ruling may be revoked or modified by the commissioner at any time. Such revocation of modification shall be effective retroactively unless the following conditions are met, in which case the revocation shall be prospective only: (A) The taxpayer must not have misstated or omitted material facts involved in the transaction; (B) Facts that develop later must not be materially different from the facts upon which the ruling was based; (C) The applicable law must not have been changed or amended; (D) The ruling must have been issued originally with respect to a prospective or proposed transaction; and (E) The taxpayer directly involved must have acted in good faith in relying upon the ruling and a retroactive revocation of the ruling must inure to his detriment. FACTS

The bone growth stimulator is a portable, non-invasive, device which utilizes combined magnetic field technology to stimulate bone growth in non-union fractures, which are fractures that have not healed after nine months. In a non-union fracture the production of bone has either slowed or ceased after nine months from the time of injury. The external stimulation delivered by this apparatus stimulates bone cells at the fracture site to produce insulin-like growth factors. These growth factors are small proteins which have the capability of directly stimulating bone cells to divide and produce collagen, which is the precursor to bone. These events stimulate the production of bone and ultimately the healing of the non-union fracture. In a normal healing situation, the body produces the growth factor without the need for external stimulation. However, in the case of a nonunion fracture, the bone cells at the fracture site have slowed or ceased to produce bone. This condition presents a serious health risk if the fracture is in a weight-bearing bone since failure to intervene and correct this situation often results in the amputation of a limb. This device can only be obtained by prescription from a licensed physician. The physician will fit the stimulator to the patient and explain its use. The patient will then use the device daily for a period of up to nine months until the fracture heals. The bone growth stimulator is dedicated to that patient and at the completion of treatment it is returned to the physician and then the company for disposal. There is no reuse. The bone growth stimulator is a U.S. Food and Drug Administration approved device which has been designated as a proprietary Class III medical device. Other Class III medical devices include the artificial heart and valves. Attached and incorporated by reference in the facts of this ruling is a photograph of the bone growth stimulator and information regarding its use. QUESTION Whether the sale of a bone growth stimulator is exempt from sales tax under T.C.A. Section 67-6-314(5) as a prosthetic device. RULING The sale of a bone growth stimulator is exempt from sales tax under T.C.A. Section 67-6314(5). ANALYSIS T.C.A. Section 67-6-314(5) provides an exemption from the sales tax for “[t]he sale or repair of prosthetics, orthotics, special molded orthopedic shoes, walkers, crutches, surgical supports of all kinds, and other similarly medical corrective or support appliances and devices.” A device is a prosthetic if it replaces a missing body part or augments the performance of a natural function. Cordis Corp. v. Taylor, 762 S.W.2d 138, 139 (Tenn.

1988). Cordis held that an implantable cardiac pacemaker is a prosthesis because it replaces or augments the missing or reduced body function of providing a stimulus for the beating of a heart. Id. Cordis also held that a hydrocephalus valve system is a prosthesis because it is an artificial part which augments the natural flow of cerebral spinal fluid from the brain into the bloodstream. In this case, the bone growth stimulator replaces or augments the missing or reduced body function of healing within a broken bone. It is therefore a prosthetic device exempt from sales and use tax under § 67-6-314(5).

Steven Thomas
Senior Tax Counsel

APPROVED: Ruth E. Johnson

DATE: 3/13/96