Is a single-use spinal implant deployment kit -- where the implant is a small part of the total cost and can't function without the disposable delivery tools -- exempt from Texas sales tax as a medical device?

Plain-English summary

The Texas Comptroller ruled that a medical device maker's single-use spinal implant deployment kits are exempt from Texas sales tax — but reached that result through a different legal category than the manufacturer asked about, illustrating how Texas draws a sharp line between two similar-sounding medical device exemptions.

The manufacturer sells two spinal surgery kits: one to treat spinal fractures (a delivery system preloaded with an implant, plus bone cement and disposable tools) and one to treat degenerative disc disease (a delivery system with a preloaded implant plus a disposal cutting tool), each sold for a single lump-sum price, plus a separately-billed disposable accessory kit needed for the disc procedure. The manufacturer asked whether these qualify as exempt "prosthetic devices" — items that are artificial and replace a missing body part or are permanently implanted. The Comptroller said no: even though the implants themselves ARE permanently implanted, a prosthetic device under Texas's rule must be assessed as presented for sale, and here the implant can't be separated from (or function without) the disposable delivery system, and the implant itself is only a small fraction of the kit's total cost. But the Comptroller then found the kits exempt anyway under a different, broader category — "orthopedic appliances": devices specifically designed to correct or prevent skeletal, joint, or spinal deformities and diseases. Because the whole kit (delivery system, implant, disposable tools) is purpose-built for one specific surgical correction and single-use only, the entire kit qualifies as an exempt orthopedic appliance — as does the separately-sold accessory kit required for the disc procedure.

What this means for you

Medical device manufacturers selling implant delivery systems

Don't assume your product needs to qualify as a "prosthetic device" to be tax-exempt in Texas — if the implant is bundled with disposable delivery tools and can't function or be sold separately, "prosthetic device" status may fail on that technicality, but the broader "orthopedic appliance" category can still cover the whole kit if it's purpose-built to correct a skeletal/joint/spine condition.

Healthcare providers and surgical centers purchasing implant kits

Confirm with your vendor which specific medical-device exemption category (prosthetic device vs. orthopedic appliance vs. other Rule 3.284 categories) applies to a given product — the analysis can turn on technical packaging/bundling facts, not just what the product does clinically.

Accountants and tax professionals

The controlling distinction is between the "prosthetic device" definition in 34 Tex. Admin. Code § 3.284(a)(13) (assessed per Zimmer v. Combs, 368 S.W.3d 579 (Tex. App.—Austin 2012)) and the broader "orthopedic appliance" definition in § 3.284(a)(12) — a bundled, non-separable implant-plus-delivery-system kit can fail the former while still qualifying under the latter.

Common questions

Q: If an implant is permanently placed in the body, does that automatically make the whole delivery kit an exempt "prosthetic device"?
A: Not necessarily. If the implant can't be separated from or function without disposable delivery tools, and represents only a small fraction of the kit's cost, the whole kit may fail the "prosthetic device" definition — but it can still qualify under the broader "orthopedic appliance" category if purpose-built for skeletal/spine correction.

Q: Does a separately-billed accessory kit required for the procedure also qualify for the exemption?
A: Yes, per this ruling — the accessory kit was also treated as an exempt orthopedic appliance because it's a single-use item specifically designed for the same corrective procedure.

Q: Can another medical device manufacturer rely on this ruling?
A: No. It's binding on the Comptroller only for the requesting taxpayer and facts presented, and cannot be relied on by any other taxpayer — the specific bundling and design of your product needs independent review.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.313(a)(5) (Health Care Supplies exemption)
• 34 Tex. Admin. Code § 3.284(a)(12) (orthopedic appliance, definition)
• 34 Tex. Admin. Code § 3.284(a)(13) (prosthetic device, definition)
• Zimmer v. Combs, 368 S.W.3d 579 (Tex. App.—Austin 2012, no pet.) (prosthetic-device definition applied literally)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201710015L

Original ruling text

October 19, 2017

RE: Private Letter Ruling No. 2017010132

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters.[1] We are responding to your initial request dated January 9, 2017, and supplemental submission dated March 29, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of spinal implant deployment systems used in the treatment of spinal fractures and defects.

Facts Presented

** (Taxpayer), is a Delaware corporation based in California. Taxpayer sells two minimally invasive spinal implant deployment systems for use in spinal surgeries: the SYSTEM A and the SYSTEM B. It also sells additional ancillary products for use in spinal implant procedures.

Physicians use the SYSTEM A to treat spinal fractures. The SYSTEM A comes as a sterile, single-use kit containing a deployment system (with a preloaded implant), bone cement, and single-use access instruments. The deployment system allows a physician to insert the spinal implant into the spine through a small incision. Once placed, the physician fills the implant with bone cement for structural support. The physician discards the deployment system and access instruments after each procedure.

The implant itself comprises a small portion of the overall cost of the SYSTEM A. However, each component of the SYSTEM A—the deployment system, implant, bone cement, and single-use instruments—is necessary to place the implant successfully. Taxpayer charges the customer a single, lump-sum price for the SYSTEM A.

Physicians use the SYSTEM B to treat degenerative disc disease. It comes as a sterile, single-use kit containing a deployment system (with a preloaded implant) and one single- use tool. This tool performs a discectomy to clear space for the implant. The deployment system then inserts the implant into the spinal disc. Both instruments are discarded after the procedure.

As with the SYSTEM A, the pre-loaded implant in the SYSTEM B comprises a small proportion of the total cost of the kit. Each component of the SYSTEM B is necessary to place the implant. Taxpayer charges the customer a single, lump-sum price for the SYSTEM B.

Taxpayer also sells an accessory kit separate from the SYSTEM B kit. The SYSTEM B fusion procedure requires physicians to use SYSTEM B accessory kits. Taxpayer bills the customer separately for this ancillary product.

Question, Ruling, and Analysis

Our restatement of the ruling you requested is shown below, followed by the response and analysis.

Question: Do the SYSTEM A, SYSTEM B, and SYSTEM B accessory kits qualify as exempt prosthetic devices under Rule 3.284 (Drugs, Medicines, Medical Equipment, and Devices)?

Ruling: The SYSTEM A, SYSTEM B, and SYSTEM B kits are exempt orthopedic appliances. See Section 151.313(a)(5) (Health Care Supplies) and Rule 3.284(a)(12).

Analysis:

Orthopedic and prosthetic devices are exempt from sales and use tax. Section 151.313(a)(5). A prosthetic device is “an item that is artificial and replaces a missing part of the body, performs the function of a vital organ or appendage of the human body, or is permanently implanted in the body.” Rule 3.284(a)(13). An orthopedic appliance is “any appliance or device designed specifically for use in the correction or prevention of human deformities, defects, or chronic diseases of the skeleton, joints or spine.” Rule 3.284(a)(12).

The SYSTEM A, SYSTEM B, and SYSTEM B accessory kits are not prosthetic devices based on the plain language definition of that term in Rule 3.284(a)(13). See, e.g., Zimmer v. Combs, 368 S.W.3d 579 (Tex. App.—Austin, 2012, no pet.). Although the pre-loaded implants in the SYSTEM A and SYSTEM B are permanently implanted in the body, the implants themselves are only one component of each kit. As stated, the implant cannot be separated from the deployment system and is not functional without the deployment system. Further, the implants comprise only a small portion of the total cost of the kits.

The SYSTEM A and SYSTEM B are exempt orthopedic appliances under Rule 3.284(a)(12). The deployment systems are specifically designed to facilitate a step in one of Taxpayer’s patented procedures to correct spinal fractures and degenerative disc disease. These systems come with spinal implants preloaded. The implants cannot be displaced from the deployment systems until surgically implanted. After surgery, the deployment systems cannot be reloaded or reused with another implant—they are single-use kits specifically designed for use in correcting spinal fractures and diseases.

The SYSTEM B accessory kits are also exempt orthopedic appliances. The SYSTEM B fusion procedure requires physicians to use a SYSTEM B accessory kit to place the spinal implant. The contents of a SYSTEM B accessory kit may be used multiple times on one patient, but cannot be reused for another implant procedure. They are disposed of after each procedure. Like the SYSTEM B system, the SYSTEM B accessory kits are single-use kits specifically designed for use in correcting degenerative disc disease.

The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 2017010132.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE:

[1] Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.