Ruling Request No. 2016-01

Request for Ruling Regarding the Application of the Exemption Provided by R.I. Gen. Laws § 44-18-30(11) for Purchases of Medical Devices

Taxpayer requested a declaratory ruling to determine whether the medical device it sells is exempt from the Rhode Island Sales and Use Tax under R.I. Gen. Laws §§ 44-18-7.1(t), 44-18-30(11), and the Rhode Island Streamlined Sales Health Care Item List. R.I. Gen. Laws § 42-35-8 and Regulation DR 03-01 govern declaratory ruling requests.

Facts

The facts set forth herein are taken from the statement of facts presented in the request for ruling dated December 4, 2015.

Taxpayer markets and sells a medical device that is designed to correct a physical deformity in the male urinary tract known as Benign Prostatic Hyperplasia (“BPH”). BPH involves hyperplasia (an increase in the number of cells) of certain cells in the prostate gland that surrounds the urethra. This increase in cells results in the formation of large nodules in the transition zone of the prostate. When sufficiently large, the nodules deform the urethra and increase resistance to flow of urine from the bladder.

Taxpayer’s device corrects this deformation with implants placed by a health care provider during a cystourethroscopy. Each implant is sold to hospital or medical facilities in its own sterile, individual housing, which is designed to couple to a urethroscope. The housing is single use; it is not reloadable or reusable.

The housing includes a handle for positioning the implant and coupling to the urethroscope, a retractable needle for puncturing the capsule of the prostate gland, and a tensioning spring within the handle for allowing adjustment of the implant during placement. Taxpayer’s device is a permanent implant made up of standard surgical implantable materials.

Together, the implant and its housing form the system for which this ruling request is made. As discussed above, the system is sold to hospitals or medical facilities to correct a physical deformity and must be prescribed by a physician.

The implant and its housing are sold together as an indivisible unit. The urethroscope is sold separately and is not included in the system. The Food and Drug Administration cleared the implant and housing to be used together as an indivisible unit. The Centers for Medicare & Medicaid Services (“CMS”) reimburse the placement of the implant and housing as an indivisible unit under a single procedure code (Current Procedural Terminology Code or CPT Code).

Finally, health care providers have been reimbursed by CMS for the use of the device under the CMS Healthcare Common Procedure Coding System Product Code. These reimbursements under the prosthesis description were applied to the implant and housing as an indivisible unit.

Ruling requested

Notwithstanding any ruling in any pending case to which the Division is a party, whether the Taxpayer’s medical device is exempt from sales and use tax because the product is an exempt prosthetic device under R.I. Gen. Laws §§ 44-18-7.1(t), 44-18-30(11), Regulation SU 07-30, and the Streamlined Sales and Use Tax Agreement. Additionally, whether the Taxpayer’s device is exempt to the extent provided by R.I. Gen. Laws § 44-18-30(5)(i) and Regulation SU 07-48.

Pertinent Local Statutory and Regulatory Law

R.I. Gen. Laws § 44-18-18 imposes a sales tax on all retail sales within the state. If the sales tax does not apply, the state imposes a use tax under § 44-18-20 “on the storage, use, or other consumption in this state of tangible personal property.” Pursuant to R.I. Gen. Laws § 44-18-25, all gross receipts are presumed to be taxable until the taxpayer proves otherwise to the Tax Administrator. The burden of proving the contrary is on the person who makes the sale and the purchaser, unless the person who makes the sale takes from the purchaser a certificate indicating that the purchase was for resale. The certificate must be in the form that the Tax Administrator requires. Importantly, R.I. Gen. Laws § 44-18-30 provides a list of specific exemptions to the sales and use tax in Rhode Island.

R.I. Gen. Laws § 44-18-30(11) provides an exemption:

From the sale and from the storage, use, or other consumption in this state, of prosthetic devices as defined in § 44-18-7.1(t), sold on prescription, including, but not limited to: artificial limbs, dentures, spectacles, eyeglasses, and artificial eyes; artificial hearing devices and hearing aids, whether or not sold on prescription; and mobility enhancing equipment as defined in § 44-18-7.1(p), including wheelchairs, crutches and canes. (Emphasis added.)

R.I. Gen. Laws § 44-18-7.1(t) defines prosthetic devices as “replacement, corrective, or supportive devices including repair and replacement parts for same worn on or in the body to: (i) Artificially replace a missing portion of the body; (ii) Prevent or correct physical deformity or malfunction; or (iii) Support a weak or deformed portion of the body.” (Emphasis added.)

Regulation SU 07-30 mirrors the definition of “prosthetic devices” in R.I. Gen. Laws § 44-18-7.1(t) and the exemption in R.I. Gen. Laws § 44-18-30(11). SU 07-30 provides:

“Prosthetic device” means a replacement, corrective, or supportive device including repair and replacement parts worn on or in the body to artificially replace a missing portion of the body; prevent or correct physical deformity or malfunction; or support a weak or deformed portion of the body.

The tax does not apply to sale or rental of prosthetic devices, sold on prescription including artificial limbs, dentures, spectacles and eyeglasses, artificial eyes and braces. Artificial hearing devices and hearing aids are also exempt whether or not sold on prescription.

The Streamlined Sales and Use Tax Agreement (SSUTA), which Rhode Island must comply with pursuant to R.I. Gen. Laws § 44-18.1-1 et seq. and Regulation SST 13-01, defines “prosthetic device” using the exact same language as § 44-18-7.1(t). However, the SSUTA further adds that member states may limit the “prosthetic device” definition’s application by requiring a prescription. That is, states have the option of further limiting the prosthetic device exemption within the SSUTA definition by requiring a prescription.

Further, R.I. Gen. Laws § 44-18-30(5)(i) exempts:

From the sale to, as in defined in this section, and from the storage, use, and other consumption in this state, or any other state of the United States of America, of tangible personal property by hospitals not operated for a profit; “educational institutions” as defined in subdivision (18) not operated for a profit; churches, orphanages, and other institutions or organizations operated exclusively for religious or charitable purposes[.]

Regulation SU 07-48 mirrors R.I. Gen. Laws § 44-18-30(5)(i) and exempts from sales and use tax:

Sales to all other exempt organizations, including hospitals not operated for profit, educational institutions not operated for profit, churches, orphanages, and other institutions or organizations operated exclusively for religious or charitable purposes… but each such organization must file an application for and obtain from the Tax Administrator an exemption certificate covering such exempt organizations.

The exemption applies only to such purchases as are made by the organization itself for its own purposes and not to purchases by any of its members individually. An individual member or group of members belonging to such an exempt organization must pay the tax when purchasing meals, or other tangible personal property for their individual or collective use or consumption.

Discussion

First, Taxpayer claims that its medical device is exempt from sales and use tax by R.I. Gen. Laws §§ 44-18-7.1(t) and 44-18-30(11). The Rhode Island Supreme Court has held that when the language of a statute is clear and unambiguous, the statute must be interpreted literally, and the words of the statute be given their plain and ordinary meanings. Taxpayer’s medical device is implanted in the male urinary tract to correct a physical deformity (enlarged prostate) or support a deformed portion of the body, so it is properly a prosthetic device under § 44-18-7.1(t). As a prosthetic device, Taxpayer’s product qualifies for the sales and use tax exemption under R.I. Gen. Laws § 44-18-30(11) because it is a prosthetic device that must be prescribed by a physician. Regulation 07-30 supports these statutes by echoing their language. Therefore, Taxpayer’s prosthetic device is exempt from sales and use tax under R.I. Gen. Laws §§ 44-18-7.1(t), 44-18-30(11), and Regulation SU 07-30.

Taxpayer also claims that its device is analogous to the exempt prosthetic devices under the Rhode Island Streamlined Sales Health Care Item List. Even though Taxpayer’s device is not on the list, the device is already exempt under R.I. Gen. Laws § 44-18-7.1(t) and § 44-18-30(11). Additionally, the definition of “prosthetic device” under § 44-18-7.1(t) mirrors the “prosthetic device” definition under the SSUTA, which provides a further basis to exempt Taxpayer’s device.

R.I. Gen. Laws § 44-18-30(5)(i) and Regulation SU 07-48 provide another ground for sales and use tax exemption, even though Taxpayer did not propose them. Taxpayer sells its medical devices to hospitals and other medical facilities. § 44-18-30(5)(i) and Regulation SU 07-48 exempt Taxpayer’s devices from sales or use tax only for devices that are sold to non-profit hospitals with valid exemption certificates from the Tax Administrator. R.I. Gen. Laws § 44-18-30(5)(i) and Regulation SU 07-48 thus exempt sales to particular institutions while R.I. Gen. Laws § 44-18-30(11) and Regulation SU 07-30 exempt all prosthetic devices that are sold on prescription.

Ruling

Based on the facts provided, Taxpayer’s medical device is exempt from sales and use tax because the product is an exempt prosthetic device under R.I. Gen. Laws §§ 44-18-7.1(t), 44-18-30(11), Regulation SU 07-30, and the Streamlined Sales and Use Tax Agreement. Additionally, Taxpayer’s device is exempt to the extent provided by R.I. Gen. Laws § 44-18-30(5)(i) and Regulation SU 07-48.

This ruling is limited to the facts stated herein and may be relied upon by the Taxpayer and shall be valid unless expressly revoked because (1) the applicable statutory provisions of law are amended in a manner that requires a different result; (2) the underlying facts described herein materially change; or (3) a decision on point has been issued by the Rhode Island or Federal courts.

Neena S. Savage

Acting Tax Administrator

January 14, 2016

¹Streamlined Sales and Use Tax Agreement, </em>Streamlined Sales Tax Governing Bd., Inc. (Sept. 17, 2015), http://www.streamlinedsalestax.org/uploads/downloads/Archive/SSUTA/SSUTA%20As%20Amended%20through%209-17-15.pdf, at 111.

²Id. at 112.

³Duffy v. Estate of Scire, 111 A.3d 358, 363 (R.I. 2015).