Texas – Taxability of Surgical Instruments for Use in Orthopedic Procedures

SALT Report 1625 – The Texas Court of Appeals reversed a decision by a lower trial court in favor of a Taxpayer’s request for refund of use taxes. The Taxpayer markets and sells surgical instruments to hospitals and healthcare providers and develops surgical techniques to facilitate the implantation of the prosthetics.
Between July 2003 and February 2007 the Taxpayer paid use tax on certain out-of-state purchases of surgical instruments that were used in Texas. Typically, surgical instruments purchased outside Texas and loaned or sold to health care providers in Texas for use in general orthopedic surgical procedures qualify for an exemption as an “orthopedic device.”
However, the Taxpayer’s surgical instruments did not include tools for “general orthopedic surgical procedures”, but instead were specialized instruments intended for use in “specific orthopedic surgical procedures.”  For example, the surgical instruments include cutting guides to ensure accurate cuts to bone surfaces, reamers that prepare the bone to accept the prosthetic device, and other temporary instruments that are used as trial implants that replicate the eventual prostheses.
In their suit, the Taxpayer asserted that their surgical instruments qualified for an exemption from use tax under Texas Tax  Code  section  151.313(a)(5) which exempts , “a  brace; hearing aid or audio loop; orthopedic, dental, or prosthetic device; ileostomy, colostomy, or ileal bladder appliance; or supplies or replacement parts for the listed items.” The Taxpayer claimed the tax code applied to their surgical instrument for the following reasons:
  • They are orthopedic devices, and
  • They are related components and supplies for use with the Taxpayer’s exempt prosthetics
During the appeals process the Texas Comptroller claimed that rule 3.284 only exempts items if they are permanently “implanted and support, correct, or replace a part of the body on an ongoing basis and only if the item took effect as a result of, or was affected by, the actions of the human body.”  However, the Court of Appeals determined that the Comptroller’s interpretation of the rule was too narrow and contradicted the plain language of the tax code.
Therefore, the Texas Court of Appeals ruled that the Taxpayer’s evidence established that their surgical instruments were exempt from use tax under 3.284 as interpreted by tax code 151.313(a)(5).  In doing so, the Court of Appeals reversed the trial court’s decision and ruled in favor of the Taxpayer’s request for refund.
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