Certain Medical Devices May be Subject to CDTFA Sales Tax

A recent California Appeals Court ruled certain medical devices may be subject to CDTFA Sales Taxes.  In Medtronic v. CDTFA, a California Appeals court ruled a medical device maker was responsible for paying sales tax on the heart rate monitors it sold in California.  This decision highlights how “logic and taxation are not always the best of friends.”

As a general rule, all tangible personal property sold at retail in California is subject to sales taxes.  (Tangible Personal Property is anything that can be seen, weighed, measured, felt, or touched).  An exception to this general rule is medicines prescribed by a doctor or provided by a health care facility. These medicines are not subject to sales tax.  The statute defines “medicine” as “any substance or preparation intended for use by external or internal application to the human body in the diagnosis, cure, mitigation, treatment, or prevention of disease.”

The statute creates an exception to this general definition of “medicine” (an exception to the exception of the general rule) that states “devices, or other mechanical, electronic, optical, or physical equipment” are not medicines and subject to sales tax.  The statute goes on to create an exception to this rule excluding devices (an exception to the exception to the exception of the general rule) allowing pacemakers and “other articles […] permanently implanted in the human body to assist the functioning of any natural organ.”

The taxpayer in the Medtronic case sold heart rate monitors.  Its heart rate monitors were very similar to pacemakers. The taxpayer argued that the heart rate monitors should be exempt from sales tax because they were just like pacemakers, which is to say the heart rate monitors should fall in the exception, to the exception, to the exception.  However, the heart rate monitors only monitor heart rates unlike pacemakers which actually alter heart rates, i.e., pacemakers assist the functioning of an organ (a heart).  Therefore, the court reasoned, the heart rate monitors did not fall into the exception to the exception to the exception and would be subject to sales tax. 

It should be noted courts generally interpret rules that exempt an item from sales tax or income tax narrowly.  A taxpayer will always have an uphill battle trying to prove a transaction is exempt from sales tax or income tax.  In this case, the court did not take any liberties in opening up the statute’s definition to include the taxpayer’s hear rate monitors. 

This decision can have far reaching impacts on medical device manufacturers and the patients who rely on medical devices.  Not only are heart monitors subject to sales tax in California, but other devices such as blood sugar monitors may be subject to sales tax. 

At RJS LAW, we help businesses with CDTFA audits as well as other California State and Federal Tax Issues.  For a no-cost consultation, please contact RJS LAW on the web or by calling 619-595-1655 if you have any California state tax, sales tax, or Federal tax questions.