SALT Report 3034 – The New York Department of Taxation issued a technical advisory regarding whether a combination drug/device qualifies for the exemption for products consumed for the preservation of health provided in Tax Law § 1115(a)(3), or for the exemption for prosthetic aids in § 1115(a)(4).
The Taxpayer is a biotechnology company that develops and markets two specific products that aid in the healing of musculoskeletal injuries and diseases, including orthopedic, spine and sports injuries.
The first product, Augment Bone Graft, is a combination product pending approval by the FDA as a Class III Medical Device. ABG was developed for use as a synthetic replacement to autograft in hindfoot and ankle surgery. The second product, Augmatrix Bicomposite Bone Graft, is a sterile, synthetic, non-pyrogenic material intended for use in combination with autologous bone marrow for bone void filling and to repair fractures of the pelvis and extremities. The Taxpayer requested a ruling as to whether the exemptions above apply to either of these products.
In its response, the Department stated that Tax Law §1115(a)(4) provides an exemption for “prosthetic aids, artificial devices, and component parts that are purchased to correct or alleviate physical incapacity in humans.” In order to qualify as a prosthetic aid, the product must completely or partially replace a missing body part, or the function of a permanently inoperative or permanently malfunctioning body part, and it must be primarily used for these purposes.
Based on the Taxpayer’s description of its products, the Department stated that both ABG and ABBG appear to be used to facilitate the process of bone regeneration after surgery. Because of the way they are used they do not become a replacement for a permanently malfunctioning body part, and, consequently, neither product qualifies for the exemption as a prosthetic aid.
However, Tax Law §1115(a)(3) provides an exemption from sales and use tax for products consumed by humans for the preservation of health. Regulation §528.4 clarifies that products consumed by humans for the preservation of health include substances that are used either internally or externally and that are not ordinarily considered drugs or medicines. Based on this explanation of “preservation of health,” the Department stated that both of the Taxpayer’s products qualify for this exemption because both are used in connection with surgeries to promote bone regeneration and healing after surgery.
Additionally, the Department noted that this current decision is contrary to several previously issued Departmental rulings. In these rulings, the Department determined that certain products implanted by medical professionals into a patient to facilitate healing, and that are gradually absorbed by the body, constitute medical equipment or supplies and are taxable when purchased by medical professionals.
Therefore, the Department stated that the following advisory opinions have been overruled because the Department has concluded that the products in these opinions are considered products consumed by humans for the preservation of health, are not considered medical supplies, and are exempt when purchased by medical professionals under Tax Law §1115(a)(3) and Regulation §528.4.
The advisory opinions affected by this determination are:
TSB-A-09(48)S – Collagen implant injected into bladder tissue to treat urinary incontinence
TSB-A-02(14)S – Bone void filler implanted to treat weakened and diseased bone
TSB-A-92(77)S – Tissue regeneration device placed beneath gums to treat periodontal disease, and
TSB-A-92(43)S – Corneal collagen shield inserted to assist in healing of postoperative or traumatic corneal injuries
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