Illinois – Medical Laser Did Not Qualify for 1% Tax Rate

SALT Report 2241 – An Illinois Administrative Law Judge issued a ruling regarding whether a specialized laser device used by physicians to treat skin diseases qualifies as a “medical appliance” under 35 ILCS 105/3-10 of the Use Tax Act.

The Taxpayer in this case purchased the laser in 2008 from an international supplier. At the time of purchase the Taxpayer did not pay customs duties. In 2009, the Taxpayer entered into a lease contract with a Physician to use the laser in its practice. At the end of the lease the Physician purchased the laser from the Taxpayer. The purchase price did not include sales tax.

In 2011, the Department audited the customs records related to the Taxpayer’s purchase of the laser and determined that it was a taxable transaction under the Illinois Use Tax Act. The Taxpayer filed an appeal claiming that the Use Tax Act provides an exemption for medical appliances.

In its response the ALJ referred to 35 ILCS 105/3-10. The regulation states that qualified medical appliances will be taxed at the rate of 1%. However, it does not define the term “medical appliances” it only states that they must be for human use. Because of this, the Department adopted 86 Illinois Administrative Code 130.311(c) which states:

(2) A medical appliance is an item that is intended by its manufacturer for use in directly substituting for a malfunctioning part of the human body…Other medical tools, devices and equipment such as x-ray machines, laboratory equipment, and surgical instruments that may be used in the treatment of patients but that do not directly substitute for a malfunctioning part of the human body do not qualify as exempt medical appliances.”

In this case the laser was used by the Physician to treat skin diseases. As noted above, medical devices that are used for the treatment of patients do not fall within the definition of the term “medical appliance.” Further, the regulation specifically excludes “other medical tools” such as the laser.

Based on the facts presented, the ALJ determined that the laser used to treat skin diseases did not qualify for the Illinois reduced 1% tax rate for medical appliances because the laser device was not used as a substitute for any malfunctioning part of the human body.  Accordingly, the use tax assessment imposed on the Taxpayer was upheld.

For Further Information

Illinois Department of Revenue – Administrative Hearing Decision #UT 13-02