Which cardiac-surgery supplies and Foley catheter items were exempt as prosthetic devices, and were dressings, bandages, and hospital-record microfilming taxable?

Plain-English summary

Tennessee exempted medical items that temporarily replaced or augmented a natural body function, but taxed surgical tools, wound-care supplies, and other items that did not meet that prosthetic-device test. It also taxed the full charge for converting hospital records to microfilm because the hospital received completed tangible film.

For cardiac surgery, the basic membrane and table tubing packs, membrane oxygenator, arterial line filter, centrifugal pump/flow probe, IABP set, and double-line set were exempt. Those items temporarily replaced or assisted heart and lung functions. The venous oxygen saturation sensor, hemoconcentrator, and cardioplegia tubing set were taxable because they functioned as monitoring, treatment, or preventive tools rather than prostheses.

Dressings and bandages were taxable even though medically important: they protected wounds, stopped bleeding, or supported healing, but did not replace a body part or rise to the required support-device category on the stated facts.

The Foley catheter was exempt because it provided drainage for a patient unable to excrete waste normally. The tray, lubricant, sterile-water syringe, and miscellaneous items remained taxable unless separately exempt as ostomy products used by qualifying patients.

Finally, separately stating the microfilming labor and film did not divide the tax result. The vendor delivered completed microfilm containing the hospital records, so the entire charge was taxable as a sale of tangible personal property.

What this means for you

Hospitals and surgery centers

Do not classify an entire surgical kit or supply category together. Tennessee's analysis turned on the function of each component—whether it actually replaced or augmented a natural function, rather than merely helping clinicians perform or protect a procedure.

Cardiac perfusion suppliers

Core bypass components that temporarily performed heart or lung functions qualified in this ruling. Sensors, fluid-removal devices, and prophylactic tubing did not qualify merely because they were used in the same bypass circuit.

Foley catheter tray sellers and purchasers

The catheter itself was exempt, but bundling it with lubricant, a syringe, a tray, and miscellaneous supplies did not make every component exempt. A separate ostomy-product exemption could apply only under its own stated conditions.

Medical-record vendors

Separately invoicing service and material did not protect the service portion where the transaction delivered completed microfilm. The ruling treated the whole charge as taxable.

Common questions

Q: Which bypass components were exempt?
A: The membrane and table tubing packs, membrane oxygenator, arterial line filter, centrifugal pump/flow probe, IABP set, and double-line set.

Q: Which cardiac-surgery items were taxable?
A: The venous oxygen saturation sensor, hemoconcentrator, and cardioplegia tubing set.

Q: Were dressings and bandages exempt medical supplies? A: No. They were taxable because they did not replace a body part or qualify as the required support devices on these facts.

Q: Was the entire Foley catheter tray exempt?
A: No. The catheter was exempt; the other tray items were taxable unless a separate ostomy-product exemption applied.

Q: Why was microfilming taxable if copying was not a listed taxable service? A: The hospital received completed microfilm, tangible personal property, so the entire charge was taxable despite separate billing for service and film.

Citations and references

• Tenn. Code Ann. § 67-6-314(5) — exemption for prosthetics, orthotics, and specified corrective or support devices.
• Tenn. Code Ann. § 67-6-317 — ostomy-product exemption.
• Tenn. Code Ann. § 67-6-102(23)(F) and (24)(A) — taxable-service and tangible-property sale provisions.
• Cordis Corp. v. Taylor, 762 S.W.2d 138, 139 (Tenn. 1988) — prosthetic-device function test.
• Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621 (Tenn. 1987) — cited for taxing the full microfilm transaction.

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/98-30.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING #98-30
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
Applicability of sales and use tax to medical products and microfilming services. 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 or 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 the taxpayer’s detriment. FACTS
[THE TAXPAYER] is a for-profit institution located in [CITY A, TENNESSEE]. The Taxpayer purchases various medical supplies that are prescribed for the medical treatment of patients by a licensed practitioner of the healing arts. The medical supplies are subsequently included in an itemized bill to the patient.

1. Perfusion supplies
Perfusion supplies and services are purchased from a vendor on behalf of cardiac surgery patients. During cardiac surgery, a patient’s heart must be still. Once the heart is no longer functioning, the pumps and related perfusion supplies immediately assume the responsibilities of both the heart and the lungs. More specifically, the perfusion supplies pump the patient’s blood while adding oxygen and removing excess carbon dioxide from the blood. The surgery is performed by the Taxpayer’s surgeons with the assistance of perfusionists supplied by the vendor of the perfusion supplies. A perfusionist is a skilled person who operates extracorporeal circulation equipment (equipment used to circulate the blood and/or body fluids outside of the body) during any medical situation in which it is necessary to support or replace the patient’s cardiopulmonary/circulatory function and ensures the proper management of physiologic functions by monitoring the necessary variables. Following are some of the products used by the perfusionist during surgery: a. basic membrane tubing pack, table tubing pack, membrane oxygenator, arterial line filter, centrifugal pump/flow probe, and venous oxygen saturation sensor: all absolutely necessary to take the place of the patient’s heart and lungs during the surgery. b. hemoconcentrator: an extra device inserted into the bypass circuit to pull fluids out of the circulation to increase the patient’s hematocrit. c. intraaortic balloon pump (IABP) set: a disposable balloon threaded up the aorta to take the workload off the heart in patients with cardiac failure or failure to come off the cardiopulmonary bypass system. It consists of a balloon attached to a catheter inserted in the aorta that is automatically inflated during diastole and deflated during systole, thereby increasing intraaortic pressure (counterpulsation). d. double line set: contains extra tubing for the bypass circuit. e. cardioplegia tubing set: used for myocardial protection during bypass procedures which keep the patient from having a heart attack. Upon completion of the cardiac surgery, the blood contaminated plastic pumps, tubing, oxygenator and other supplies are disposed of in accordance with OSHA standards for hazardous waste.

2. Dressings

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A dressing is a clean or sterile covering applied directly to wounded or diseased tissue for absorption of secretions, protection from trauma (infection), administration of medications, or to stop bleeding. Dressings include absorbent dressings, antiseptic dressings, occlusive dressings, pressure dressings and wet dressings. Pressure dressing are used to maintain constant pressure, as in the control of bleeding. Dressings may contain a drug, antiseptic, antibiotic, moisturizer, or lubricant.

3. Bandages
   Bandages are a strip or roll of gauze or other material for wrapping or binding any part of the body. Bandages may be used to stop the flow of blood, to safeguard against contamination, or to hold a dressing in place. Bandages may be elasticized, either to provide flexibility of the bandaged area, or conversely to hold a splint in position or to immobilize an injured part of the body, to prevent further injury, or to facilitate healing. Bandages may be sterile when they come into direct contact with the wound.
4. Foley catheter tray
   The tray includes a Foley catheter, lubricant, syringe with sterile water, and other miscellaneous items. The primary usage of the tray is the use of the Foley catheter. Foley catheters are used for the continuous drainage of the bladder.
5. Microfilming service
   The Taxpayer outsources the microfilming of hospital records to a vendor. The vendor copies the records onto film then destroys the original hospital records. The film is ultimately sent to the Taxpayer for storage. The vendor invoices the Taxpayer separately for the service and the film. ISSUES
6. Whether the following perfusionist supplies are subject to sales and use tax:
   a. basic membrane tubing pack, table tubing pack, membrane oxygenator, arterial line filter, centrifugal pump/flow probe, and venous oxygen saturation sensor b. hemoconcentrator c. IABP set d. double line set e. cardioplegia tubing set
7. Whether dressings are subject to sales and use tax.
8. Whether bandages are subject to sales and use tax.

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4. Whether Foley catheter trays are subject to sales and use tax.

5. Whether microfilming services are subject to sales tax.

RULINGS

1. The perfusion supplies are subject to sales and use tax as follows:
   a. Basic membrane tubing pack, table tubing pack, membrane oxygenator, arterial line filter, and centrifugal pump/flow probe, are exempt from sales and use tax as prosthetic devices. The venous oxygen saturation sensor is subject to sales and use tax. b. Hemoconcentrator is subject to sales and use tax. c. IABP set is exempt from sales and use tax. d. Double line set is exempt from sales and use tax as a prosthetic device. e. Cardioplegia tubing set is subject to sales and use tax.
2. Dressings are subject to sales and use tax.
3. Bandages are subject to sales and use tax.
4. The Foley catheter is exempt from sales and use tax. The remaining items on
   the tray are subject to sales and use tax unless they are ostomy products used by a patient who has had a colostomy, ileostomy or urostomy.
5. Microfilming services ,as described, are subject to sales tax.
   ANALYSIS
   Tenn. Code Ann. § 67-6-314(5) provides an exemption from sales tax of the sale 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). The exemption of orthotics has been applied to devices used to brace, support, or align the skeletal or muscular system. There is no specific exemption, however, for surgical tools or appliances used to perform surgery or invasive medical procedures.

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1. Perfusion supplies are subject to tax as follows: a. The basic membrane tubing pack, table tubing pack, membrane oxygenator, arterial line filter, centrifugal pump/flow probe, and venous oxygen saturation sensor are described above as absolutely necessary to take the place of the patient’s heart and lungs during the surgery. Based on this description, it appears these products, with the exception of the venous oxygen saturation sensor, temporarily replace the heart. Accordingly, these products are exempt from sales and use tax as prosthetic devices. The venous oxygen saturation sensor is a sensor, which is not a prosthetic device, but is used as a surgical or medical tool. Accordingly, the sensor is subject to tax. b. A hemoconcentrator is an extra device inserted into the bypass circuit to pull fluids out of the circulation to increase the patient’s hematocrit. The hemoconcentrator is used in the bypass circuit. Based on the description provided, it does not appear that the hemoconcentrator replaces a body part or augments a natural function. Accordingly, it is subject to tax. c. IABP set is a disposable balloon threaded up the aorta to take the workload off the heart in patients with cardiac failure or failure to come off the cardiopulmonary bypass system. Based on the information given, this constitutes more than a mere surgical tool, as it acts to provide counterpulsation and to assist the heart’s function. Accordingly, it is exempt from sales and use tax as a prosthetic device. d. The double line set contains extra tubing for the bypass circuit. Because it is used in the bypass circuit that temporarily replaces the heart, it is also exempt as a prosthetic device. e. The cardioplegia tubing set is used for myocardial protection during bypass procedures which keep the patient from having a heart attack. This set does not appear to act as a true prosthetic device as much as it serves as a prophylactic measure to prevent a heart attack. The cardioplegia tubing set is subject to sales and use tax.

2. As described above, dressings are applied directly to wounded or diseased
   tissue for absorption of secretions, protection from trauma, administration of medications, or to stop bleeding. Although dressings are important in the healing process, dressings do not take the place of a body part so as to serve as prosthetic devices. Dressings are subject to sales and use tax.
3. Bandages can be used for a variety of functions, including to stop the flow of
   blood, to safeguard against contamination, or to hold a dressing in place. Although bandages can be important and necessary in the healing process, they do not rise to the level of either replacing a body part or constituting a necessary support device. Accordingly, bandages are subject to sales and use tax.

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4. Foley catheters provide drainage for patients incapable of excreting waste normally, thereby replacing or augmenting a natural body function. Foley catheters are exempt from tax as a prosthetic device. Tenn. Code Ann. § 67-6314(5). The remaining items, including tray, lubricant, syringe with sterile water, and other miscellaneous items, are not prosthetic devices and accordingly are subject to tax unless they are otherwise exempt as ostomy products. Tenn. Code Ann. § 67-6-317 exempts the sale of ostomy products or appliances used by patients who have had a colostomy, ileostomy or urostomy.

5. Microfilming services involve the copying of hospital records onto microfilm.
   The vendor charges the Taxpayer separately for the service rendered and the film used. Copying records on microfilm is not one of the specifically listed services subject to the sales and use tax. Tenn. Code Ann. § 67-6-102(23)(F). However, charges for copying records onto microfilm are nonetheless taxable. There is a “sale” of tangible personal property to the taxpayer of the completed microfilm containing the hospital records. See, Tenn. Code Ann. § 67-6102(24)(A). Even though the vendor may choose to separate the elements of this charge for the tangible personal property, the entire charge is taxable in this case. See, Thomas Nelson, Inc. v. Olsen, 723 S.W.2d 621 (Tenn. 1987).

______
Caroline R. Krivacka
Tax Counsel

APPROVED: _______
Ruth E. Johnson
Commissioner
DATE:

7-2-98

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