NOTICE: Under IC 4-22-7-7, this document is required to be published in the Indiana Register and is effective on its date of publication. It shall remain in effect until the date it is superseded or deleted by the publication of a new document in the Indiana Register. The publication of this document will provide the general public with information about the department's official position concerning a specific issue.

Sales and Use Tax - Sales of Medical Devices to Nonprofit Health Care Facilities

Authority: IC 6-2.5-1-23; IC 6-2.5-2-1; IC 6-2.5-5-8; IC 6-2.5-5-18; IC 6-2.5-5-25; 45 IAC 2.2-5-27; 45 IAC 2.2-5-55; Indiana Dept. of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96 (Ind. Ct. App. 1974); Indiana Dept. of State Revenue v. Kimball Int'l Inc., 520 N.E.2d 454 (Ind. Ct. App. 1988); Sales Tax Information Bulletin #10 (May 2022).

A taxpayer ("Company") is seeking a determination regarding whether the sale of its medical devices to nonprofit health care facilities located in Indiana is exempt from Indiana sales tax.

Company is based outside of Indiana. Company manufactures and sells various medical devices. Company sells its devices to nonprofit health care facilities located in Indiana. Company will be selling a suite of devices to be used for a specific medical procedure. There are eighteen separate devices within this suite. Some of the devices are reusable, while others are not.

Company requests that the Department find that the suite of devices is exempt from Indiana sales tax because it will be sold to nonprofit health care facilities. Indiana imposes an excise tax called "the state gross retail tax" (or "sales tax") on retail transactions made in Indiana. IC 6-2.5-2-1(a). A person who acquires property in a retail transaction (a "retail purchaser") is liable for the sales tax on the transaction. IC 6-2.5-2-1(b). In general, all purchases of tangible personal property are subject to sales and/or use tax unless an enumerated exemption from sales and/or use tax is available.

In applying any tax exemption, the general rule in Indiana is that "tax exemptions are strictly construed in favor of taxation and against the exemption." Indiana Dept. of State Revenue v. Kimball Int'l Inc., 520 N.E.2d 454, 456 (Ind. Ct. App. 1988). A statute which provides a tax exemption is strictly construed against the taxpayer. Indiana Dept. of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96, 97 (Ind. Ct. App. 1974). "[W]here such an exemption is claimed, the party claiming the same must show a case, by sufficient evidence, which is clearly within the exact letter of the law." Id. at 100-101.

The second part of the test at IC 6-2.5-5-25(a) is that the person acquiring the property "uses the property . . . to carry on or to raise money to carry on its not-for-profit purpose." 45 IAC 2.2-5-55(b)(3) further provides that:

Sales Tax Information Bulletin #10 (May 2022) provides additional guidance on this topic as follows:

Therefore, a nonprofit organization's purchases of medical devices would be exempt from sales tax if they are used for the same purpose as that for which the organization is being exempted. 45 IAC 2.2-5-55(d) provides the following examples of purchases by nonprofit organizations, and guidance on whether or not the purchases would be exempt, depending on whether they further the nonprofits' purpose:

Applying the elements of this second requirement to the matter at hand, a nonprofit health care facility's purchase of Company's suite of medical devices would be exempt from sales tax if the devices are used in carrying on the organization's purpose, the purchase is not for the private benefit of any member, and the purchase is invoiced to and paid by the organization. If a nonprofit health care facility meets these requirements, they would need to be registered with the department as a nonprofit, and they would need to provide Company with an Indiana General Sales Tax Exemption Certificate (Form ST-105)¹ before the purchase could be made exempt.

If a nonprofit health care facility does not meet the second requirements under IC 6-2.5-5-25, then the exemption at IC 6-2.5-5-18, which provides an exemption for medical supplies and devices, would not apply to the nonprofit health care facility's purchase. IC 6-2.5-5-18(c) provides the following in pertinent part:

The exemption requires that the devices must be prescribed to the end user purchaser by a licensed practitioner in order for the transaction to qualify for the exemption. A "prescription" is defined by IC 6-2.5-1-23 as "an order, a formula, or a recipe issued in any form of oral, written, electronic, or other means of transmission by a licensed practitioner authorized by Indiana law." The Department's regulations at 45 IAC 2.2-5-27 further clarifies the definition of "prescribed" as follows:

Because IC 6-2.5-5-18 requires that any equipment subject to the exemption must be sold to an end user "upon a prescription or drug order . . . from a licensed practitioner," Company's suite of devices² would not be exempt when sold to a nonprofit health care facility. The department has consistently held that doctors, hospitals, and other medical offices and professionals are not eligible to purchase these types of equipment exempt pursuant IC 6-2.5-5-18.³

Despite this, the devices may still be exempt under IC 6-2.5-5-8(b), which provides:

If Company sells the suite of devices to a nonprofit health care facility that does not qualify for the exemption at IC 6-2.5-5-25, and the devices are subsequently sold to an end user patient, then the devices would be exempt from sales tax when sold to the hospital or medical professional under IC 6-2.5-5-8(b). Company would still have to require the nonprofit health care facility to provide Form ST-105 at the time of purchase in order to qualify for this "sale for resale" exemption.

Company's sale of its suite of medical devices to an Indiana nonprofit health care facility would be exempt under IC 6-2.5-5-25 as long as the nonprofit meets the requirements of that statute, it is registered with the department, and it provides company with an ST-105 (until it is replaced by the NP-1). A nonqualifying nonprofit would not be eligible for the exemption under IC 6-2.5-5-18 because the exemption requires that devices not be sold to the end user patient. However, Company's devices would instead be eligible for the sale for resale exemption under IC 6-2.5-5-8 if the nonprofit health care facility subsequently resells the devices to end user patients.

This ruling is issued to the taxpayer requesting it on the assumption that the taxpayer's facts and circumstances as stated herein are correct. If the facts and circumstances given are not correct, or if they change, then the taxpayer requesting this ruling may not rely on it. However, other taxpayers with substantially identical factual situations may rely on this ruling for informational purposes in preparing returns and making tax decisions. If a taxpayer relies on this ruling and the Department discovers, upon examination, that the fact situation of the taxpayer is different in any material respect from the facts and circumstances given in this ruling, then the ruling will not afford the taxpayer any protection. It should be noted that subsequent to the publication of this ruling a change in statute, regulation, or case law could void the ruling. If this occurs, the ruling will not afford the taxpayer any protection.

___________

¹ At a certain point this year, nonprofits will be required to obtain a special exemption certificate, Form NP-1 (Indiana Nonprofit Sales Tax Exemption Certificate), from the department instead of using the ST-105.

² It does not matter whether any of the devices at issue within the suite meet the definition of a prosthetic device, durable medical equipment, or any listed types of devices or equipment within IC 6-2.5-5-18, because the end user is not acquiring the devices with a prescription from a licensed practitioner.

³ See Revenue Ruling # 2016-01ST (20160831-IR-045160366NRA); Revenue Ruling # 2015-16ST (20160330-IR-045160125NRA)