Sales Tax State Activity Update - July 2004

Samples of Medical Equipment Taxable in New York

The New York Tax Appeals Tribunal affirmed the decision of the Administrative Law Judge that use tax was due on a taxpayer’s free of charge distribution of intra-aortic balloon pumps and catheters, in the form of promotional materials, to New York health care providers. The taxpayer, who is based in Pennsylvania and has no physical locations in New York, is a manufacturer and vendor of medical equipment. The taxpayer has several sales representatives in New York and makes frequent sales to New York hospitals.

Under an audit determination, the taxpayer had been assessed use tax for sample pumps, used in the diagnosis and treatment of coronary disease, shipped to New York hospitals free of charge as an incentive for possible future purchases. The taxpayer did not relinquish title to the pumps and fully depreciated the cost of such pumps on its books. The taxpayer was also assessed use tax for catheters provided as free promotional samples to hospitals in New York. The catheters were either distributed directly by sales representatives, shipped by common carrier, or sent through the mail.

According to NY Tax Law § 1110(a)(B)(i) a use tax is imposed on the use within New York of “any tangible personal property … manufactured, processed or assembled by the user, if items of the same kind of tangible personal property are offered for sale by him in the regular course of business.”

Within NY Tax Law § 1101(b)(7), the term “use” is defined in part as “the exercise of any right or power over tangible personal property” and includes “the distribution of only tangible personal property, such as promotional materials…” In turn, “promotional materials” are defined in as NY Tax Law § 1101(b)(12) as any advertising literature, other related tangible personal property and envelopes used exclusively to deliver the same.

Such other related tangible personal property includes, but is not limited to, free gifts, complimentary maps or other items given to travel club members, applications, order forms and return envelopes with respect to such advertising literature, annual reports, prospectuses, promotional displays and Cheshire labels but does not include invoices, statements and the like.

The Administrative Law Judge found that the pumps and catheters are “promotional materials” and their free of charge distribution constitutes a taxable use. The taxpayer reasoned that the exemption under NY Tax Law § 1115(a)(3) for receipts from medical equipment and supplies, “except for those purchased at retail for use in performing medical and similar services for compensation” should be applicable. They claimed that the exception contained within the exemption was not triggered because the medical items at issue were not purchased at retail.

However, as noted by the Administrative Law Judge, the taxable event was the taxpayer’s use of the medical equipment as promotional materials and not as medical equipment. Such equipment became assets used by the taxpayer in their business, as evidenced by the transfer of these items into a capital account and subsequent depreciation on the books. Further, had the equipment at issue been sold to the New York hospitals, such sales would not have been exempt. The exception contained within the medical exemption would have been triggered, because such sales would have been retail sales for use in performing medical services for compensation.

The taxpayer also argued that some of the pumps and catheters were delivered to hospitals that qualify as exempt organizations. The Administrative Law Judge pointed out that NY Tax Law § 1116(a) exempts from sales and use tax “any sale” to exempt organizations. Since the medical items were provided free of charge and not sold, the exemption does not apply.

The taxpayer also maintained that the exemption for promotional materials under NY Tax Law § 1115(n)(4) should apply to their distribution of the pumps and catheters. The Administrative Law Judge negated this argument. In order for this exemption to apply, the promotional items had to be first purchased by the taxpayer. Since the taxpayer manufactured the samples and did not purchase them, this exemption is also invalid.

The New York Tax Appeals Tribunal established that the facts and findings of the Administrative Law Judge were accurate and appropriate. The determinations of use tax due on free of charge distributions of intra-aortic balloon pumps and catheters, in the form of promotional materials, to New York health care providers were sustained.

( Arrow International, Inc., State of New York, Tax Appeals Tribunal, DTA No. 818934, 6/17/2004) 07/04

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