Taxation – Sales Tax – Hospital – Orthopaedic Prosthetic Devices

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CareAlliance Health Services v. South Carolina Department of Revenue (Lawyers Weekly No. 010-032-16, 8 pp.) (Kaye Hearn, J.) Appealed from the Administrative Law Court (Shirley Robinson, ALJ) S.C. S. Ct.

Holding: When a vendor sells an orthopaedic prosthetic device directly to a hospital for use in rendering medical services to its patients, no prescription is required. With regard to such sales, the hospital may not take advantage of a sales tax exemption which requires, among other things, a sale pursuant to a prescription.

We reverse the Administrative Law Court’s decision in favor of the hospital.

Generally, the retail sale of a prosthetic device to a hospital or doctor is a taxable sale if the prosthetic device is furnished to a patient as part of a service being rendered by a hospital. S.C. Code Ann. § 12-36-110(1)(i). The sales tax exemption enumerated in S.C. Code Ann. § 12-36-2120(28) is for prosthetic devices sold by prescription.

Under Home Medical Systems, Inc. v. South Carolina Department of Revenue, 382 S.C. 556, 677 S.E.2d 582 (2009), a device is sold by prescription if (1) the sale requires a prescription, (2) the device is actually sold by prescription, and (3) the device replaces a missing part of the body.

Hospitals are considered the consumers “[w]here drugs, prosthetic devices and other supplies are furnished to their patients as a part of the medical service rendered.” 10 S.C. Reg. 117-308.8.

For labeling purposes, the federal government considers orthopaedic prosthetic devices to be prescription devices. 21 C.F.R. § 801.109(a)(2) allows Class II or Class III prescription prosthetic devices to be sold directly to a practitioner, on the order of a practitioner, or on the prescription of a practitioner. Thus, the regulation envisions that a sale can occur directly to a practitioner, with no prescription or order requirement.

We therefore reject the hospital’s assertion and the ALC’s finding the devices at issue can only be sold by prescription. Instead, the regulation allows for a sale directly between a vendor and practitioner, as an agent of the hospital.

Therefore, the ALC erred in finding that § 801.109(a) satisfies the first prong of Home Medical.

As for other bone, muscle and tissue implants, the record is devoid of any evidence to support the ALC’s finding that they replaced missing parts of the body. The record does not contain the level of substantial evidence necessary to uphold the finding.

Reversed.