Sales Tax State Activity Update - November 2004

Kentucky Circuit Court Reversed Prosthetic Device Exemption Ruling

The Commonwealth of Kentucky Franklin Circuit Court reversed the April 2003 decision of the Kentucky Board of Tax Appeals, ruling in favor of the Kentucky Revenue Cabinet (KRC) in a case involving the exemption of prosthetics and physical aids.

The chief component of this case involved differing interpretations of KRS § 139.472(2), which states in pertinent part:

"Prosthetic devices and physical aids" for the purpose of this section shall mean and include artificial devices prescribed by a licensed physician, or individually designed, constructed or altered solely for the use of a particular crippled person so as to become a brace, support, supplement, correction or substitute for the bodily structure including the extremities of the individual..

The KRC maintained that the intent of the above was a single exemption for artificial devices prescribed by a physician or individually designed, constructed… only for the “use of a particular crippled person so as to become a brace, support, supplement, correction or substitute for the bodily structure including the extremities…”. In other words, a mere prescription by a physician for an artificial device is not sufficient for the exemption.

The opposing party to the KRC, the taxpayer, insisted on interpretation based on the plain language of the statute. The taxpayer perceived two separate exemptions in the above statute: one exemption for artificial devices prescribed by a physician and a second exemption for devices individually designed, constructed or altered solely for the use of a particular crippled person. The taxpayer claimed exempt status for items such as heating pads, trapeze bars, commode chairs, nebulizers, ventilators, urostomy supplies, and catheters based on the first perceived exemption. The Kentucky Board of Tax Appeals had agreed with the taxpayer’s interpretation of the statute in question.

However, the Commonwealth of Kentucky Franklin Circuit Court has now ruled against the taxpayer, stating that the intent of the statute was to provide tax relief for a certain identifiable group (e.g. crippled persons) in need of a prosthetic or physical aid. The court agreed with the KRC’s construal of the statute, in which a mere prescription by a physician for an artificial device is not sufficient for the exemption. The device must also be for the use of a particular crippled person so as to become a brace, support, supplement, correction or substitute for the bodily structure including the extremities of the individual.

It is important to note that effective July 1, 2004, in accordance with Kentucky’s conformity with the Streamlined Sales and Use Tax Agreement, KRS §139.472 was updated with new language. There is no longer any reference to “solely for the use of a particular crippled person”. Instead, per KRS §139.472(1)(e) and (f), exemptions are provided for prosthetic devices purchased by any healthcare provider for use in the treatment of a specific individual or purchased by an individual as prescribed by a person authorized under the laws of the Commonwealth to issue prescriptions; and prosthetic devices that are individually designed or created for an individual regardless of the purchaser. Prosthetic devices are defined by KRS §139.472(3)(c) to mean a replacement, corrective, or supportive device…worn on or in the body to artificially replace a missing portion of the body, prevent or correct a physical deformity or malfunction, or sup-port a weak or deformed portion of the body.

(Commonwealth of Kentucky, Revenue Cabinet v. King Drugs, Inc. and King Home Health Care, Inc., Franklin County Circuit Court, Kentucky, No. 03-CI-00550, September 8, 2004

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