Tag Archives | Sales Tax

Texas Fails to Take a Cut out of Surgical Instrument Sales

By on August 21, 2012 in General, Tax

Sandersen Knox & Associates LLP, CPA, Tax Accountants, Auditors Surgical Instruments Designed for Orthopedic Procedures Exempt for Sales and Use Tax

Surgical instruments purchased outside Texas and loaned to health care providers in Texas for use in specific orthopedic procedures were qualified for exemption from Texas use tax as orthopedic devices. The instruments at issue included cutting guides that ensured proper cuts to bone surfaces, “reamers” that prepared bones to accept prostheses, and “provisional” instruments that served as trial implants by replicating aspects of the eventual prostheses.

The rule that implements the statutory exemption for orthopedic devices is found in Tex. Tax Code Section 151.313(a)(5) exempts from tax “a brace; hearing aid or audio loop; orthopedic, dental, or prosthetic device; ileostomy, colostomy, or ileal bladder appliance; or supplies or replacement parts for the listed items.” In 34 TAC Section 3.284(a), the Comptroller defined an “orthopedic appliance” as “[a]ny appliance or device designed specifically for use in the correction or prevention of human deformities, defects, or chronic diseases of the skeleton, joints, or spine.”

The Court held that Zimmer’s surgical instruments met the rule’s definition of “orthopedic appliance” because they were designed specifically for use in orthopedic surgeries, which are undertaken for “the correction or prevention of human deformities, defects, or chronic diseases of the skeleton, joints, or spine.” Zimmer demonstrated that the implantation of the prosthetics would be impossible without the surgical procedures, making the procedures an essential part of the “correction” of the defect or disease. Therefore, they became part and parcel to the device, in effect.

Because the taxpayer’s evidence conclusively demonstrated that the instruments satisfied the definition of an orthopedic device or appliance, the Texas Court of Appeals reversed the trial court and rendered a summary judgment in favor of the taxpayer. The court held that the rule was not ambiguous and provided a reasonable interpretation of orthopedic device that the comptroller was obliged to follow.

Comptroller’s Interpretation was a No-Go

The comptroller’s interpretation of the exemption was rejected because it contradicted the plain language of the rule. Under the comptroller’s interpretation, an item was exempt only if the item was implanted and supported, corrected, or replaced a part of the body on an ongoing basis and only if the item took effect as a result of, or was affected by, the actions of the human body. These exemption requirements were not applicable to orthopedic devices in the rule.

The fact that the comptroller’s interpretation was long-standing and reflected in years of prior letter rulings issued to taxpayers did not bind the court to accept an erroneous interpretation. Zimmer US, Inc. v. Combs, Texas Court of Appeals, Third District, Austin, No. 03-11-00178-CV, February 9, 2012. It is unclear at this time whether the Comptroller will seek a rehearing or further appeal of the decision.

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Get a Handle on Multistate Sales and Use Tax Issues

By on April 11, 2012 in Construction, General, Tax, Technology

Over the last few years, the recession has caused many companies to step out of their comfort zones just to stay competitive. For some, this means taking on larger projects or new types of work. For others, it means expanding into other states or even exploring international options.

If you do business in several states, it’s critical to understand how each state’s sales and use tax laws will affect your business. Please note: Multistate tax issues are complex — in every industry and particularly in the construction industry — so a detailed explanation is well beyond the scope of this article. Our intention here is to help illustrate the importance of examining these issues before you bid on an out-of-state project in the case of Construction Contractors, and to introduce automation concepts for sales and use tax administration in general.

Know Your Costs

As you know, accurate estimates are essential to a contractor’s success. One mistake can make the difference between a profitable job and a loser. Before you take on work in another state, it’s important to understand how that state’s tax laws differ from those in your home state.

Getting a handle on multistate tax issues will help you avoid underestimating your tax costs on a job. It may also help you identify opportunities to reduce your tax bill.

Avoid the traps

Sales and use tax laws and regulations can vary widely from state to state, and these differences can create traps for the unwary. In most states, contractors are treated as the ultimate consumers of building materials that are incorporated into a construction project. This means that the contractor pays sales or use tax on its materials purchases and treats those taxes as a cost of doing business that’s passed on to the customer.

In a handful of states, however, construction services are subject to sales tax. In those states, the contractor collects sales tax from its customer on the gross proceeds under the contract. Because the customer is treated as the ultimate consumer in these states, the contractor’s materials purchases are tax-exempt.

Many states also require contractors to collect sales tax from their customers under “retail sale plus installation” contracts. These are contracts under which materials are separately described, itemized and priced. The customer receives title to materials (and assumes the risk of loss) when they’re delivered to the job site.

Understand the Differences

 States also differ in their treatment of contracts with tax-exempt entities. All sales to the U.S. government are tax-exempt, while many states also exempt sales to certain state and local government agencies and certain not-for-profit organizations.

In some states, provided certain requirements are met, a contractor that purchases materials for a contract with a tax-exempt entity can take advantage of the customer’s exemption and avoid sales and use taxes altogether. In others, materials are tax-exempt only if the entity purchases them directly. In those states, you may be able to avoid taxes by having your customer supply the materials rather than purchasing them yourself.

Plan Carefully

If you’re expanding the geographical reach of your business to other states, plan carefully to ensure that you estimate your costs accurately. Only by familiarizing yourself with the tax laws in these states can you determine whether you’ll need to collect sales and use taxes from your customer, pay the tax yourself and incorporate the cost into your bid, or take steps to qualify for an exemption.

As mentioned above, this article is meant to provide just a few examples of the risks and opportunities associated with multistate sales and use taxes. Your tax advisor can help you deal with the many complexities involved, as well as provide assistance with multistate issues associated with other taxes, such as income and franchise taxes.

Automate

There are several software vendors offering specialized sales tax software applications, and these can save you a bundle – time in the short run, and potentially company killing sales tax audit losses in the long run.  Two examples of these are:

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