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.