SALT Report 2004 – The Missouri Department of Revenue issued a letter ruling regarding an out-of-state Taxpayer who distributes medical hearing aid devices. The devices are surgically implanted in the cochlea of the inner ear and have an external device component that is used for speech processing. The speech processor is attached around the ear and has an external transmitter that is magnetically held in place on the head. The devices, when used in together, enable deaf and hearing impaired people to hear.
The devices are covered by a manufacturer’s warranty for a two year period. Following the expiration of the warranty, the Taxpayer offers its customers an optional service contract to cover repairs or replacement costs related to the speech processor. Under the terms of the service contract, the customer notifies the Taxpayer that the processor is malfunctioning or broken. The Taxpayer then sends a refurbished processor to the customer to replace the nonfunctioning one. Upon receipt of the new processor, the customer returns the broken processor to the Taxpayer so that it can be refurbished.
The Taxpayer requested guidance as to whether the flat fee charged for the service contract is subject to sales tax and if the replacement speech processor provided to its customers is subject to use tax.
The Department determined that the fees the Taxpayer charges for the service contract are not subject to sales tax under Section 144.020 RSMo because the refurbishment or exchange of a medical device under a warranty-like repair contract is not one of the taxable services enumerated in the statute.
In addition, the Taxpayer is not subject to use tax on the replacement speech processors it provides to its customer under the service contract because they are hearing aids and exempt as prosthetic devices under Missouri Code of State Regulations 12 CSR 10-110-013(2)(D).
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