Pennsylvania – Taxability of MRI and CT Machines

SALT Report 2823 – A Pennsylvania Appeals Court Judge issued a ruling regarding a Taxpayer’s claim for a refund of sales tax paid on magnetic resonance imaging and computed topography machines, related software, and electricity used to power the equipment.

The Taxpayer operates a radiology clinic and provides diagnostic imaging services, such as MRI’s and CT scans.  The Taxpayer does not charge or collect sales tax from the patient or the insurer for its services.  In addition, the Taxpayer does not charge sales tax when a copy of the medical report, an MRI, or a CT image is provided to the patient or referring physician, as the patient is considered the owner of the medical report, the film, and the compact disc.  At issue in this case is whether the imaging equipment, software, and electricity qualify for the manufacturing exemption provided in the Tax Reform Code of 1971.

According to the Taxpayer, the installation of the imaging equipment creates a permanent addition to the property and, therefore, is a nontaxable construction activity.  Additionally, the Taxpayer argued that the imaging equipment constitutes photographic equipment; therefore the equipment, supplies, and electricity are nontaxable under the manufacturing exemption.

The Department of Revenue disagreed with the Taxpayer and argued that (1) the equipment remained tangible personal property after installation, and (2) the equipment constituted medical diagnostic equipment, not photographic equipment.  Because of this, the Department denied the refund request.

The Taxpayer filed another appeal arguing that equipment’s imaging process qualifies as “other operations” as defined in the Tax Code’s definition of  “manufacture.”   Further, the Taxpayer argued that the imaging process produces a change in the form, composition or character of the items used to produce MRI and CT images.

The Taxpayer explained that when the captured image is stored on the hard drive of the computer, or transferred to film or a compact disc, the process creates a change in the form, composition and character of the hard drive, film or disc. The Taxpayer equates this to the process used to produce a photograph from an image captured on film.

Upon review of the case, the Judge ruled that the Taxpayer’s purchase and use of the items at issue are taxable under both 61 Pa. Code § 31.6 – Persons rendering nontaxable services, and 61 Pa. Code § 52.1 – Purchases of medicines, medical supplies, medical equipment, etc.

Specifically noted was that under the provisions of Section 31.6, if a listed profession’s services are not taxable to their patients or clients, that professional must pay tax on the personal property and services used in its businesses. Consequently, the Judge ruled that when the Taxpayer produces images of patients and downloads them onto film or discs, the equipment and supplies it uses are taxable.

Further, the Judge stated that under Section 52.1 medical equipment is subject to tax unless it is a “[t]herapeutic or prosthetic device designed for the use of a particular individual to correct or alleviate a physical incapacity.” In this case, the Judge determined that the Taxpayer’s equipment is diagnostic, not therapeutic.  As a result, the MRI and CT machines are taxable.

For Further Information

Pennsylvania Commonwealth Court – Case Number 639 F.R. 2010