STATE OF
TAX APPEALS COMMISSION
ZIMMER US, INC., DOCKET
NO. 17-S-264
Petitioner,
vs.
WISCONSIN DEPARTMENT OF
REVENUE,
Respondent.
RULING AND ORDER
Lorna Hemp Boll,
COMMISSIONER:
This case comes before the
Commission for decision on a Stipulation of Facts submitted by the parties and
cross motions for summary judgment. The Petitioner, Zimmer US, Inc., is
represented by Erica Love and Brian Browdy of Ryan,
LLC, of Dallas, TX. The Respondent, the Wisconsin Department of Revenue
(“the Department”), is represented by Attorney Julie A. Zimmer.[1] For the
reasons set forth below, we grant summary judgment to the Department.
FACTS
Procedural Facts
1.
During the period at issue, January 1, 2012,
through June 30, 2015, Petitioner accrued and paid use tax on the cost price of
instruments[2]
it purchased from third-party vendors and provided to hospitals in Wisconsin in
conjunction with prosthetic implant devices. (Stip., ¶ 14.)
2.
On March 15, 2016, Petitioner filed a claim for
refund of this tax; the claim amount is $656,274.29 (plus interest). (Stip., ¶
15.)
3.
In a letter dated March 19, 2017, the Department
issued a Notice of Determination, denying the claim in its entirety. (Stip.,
Ex. A.)
4.
On May 9, 2017, Petitioner filed a Petition for
Redetermination, which the Department denied in a Notice of Action dated
October 16, 2017. (Stip., Exs. B and C.)
5.
Petitioner filed a timely Petition for Review with
the Tax Appeals Commission on December 15, 2017. (Commission file.)
Material
Facts
6.
Petitioner is an Indiana-based manufacturer of
prosthetic implant devices, such as artificial hips, knees, and elbows. (Stip.,
¶ 1.)
7.
Petitioner markets and sells prosthetic devices to
healthcare institutions nationwide, including hospitals and other surgical
facilities in Wisconsin (collectively, “hospitals”). (Stip., ¶ 2.)
8.
The prosthetic devices marketed and sold by
Petitioner in Wisconsin are replacements, correctives, or supportive devices
that are placed in people’s bodies to artificially replace a missing portion of
the body, to prevent or correct a physical deformity or malfunction, or to
support a weak or deformed portion of the body. (Stip., ¶ 3.)
9.
When Petitioner sells a prosthetic device to one of
its customers, it also provides a specialty instrument kit at no charge to that
customer which contains instruments used to insert the accompanying prosthetic
device. (Stip., ¶¶ 4, 7.)
10.
Petitioner purchases the specialty instrument kits
from third-party suppliers and from an affiliated industrial processor.
(Petition.)
11.
The specialized instrumentation provided by
Petitioner is necessary for a surgeon to safely or accurately implant a Zimmer
prosthetic device into a patient’s body. (Stip., ¶ 5.)
12.
Once the specialized instruments are used to insert
the prosthetic device, they do not remain in the body and have no ongoing or
permanent connection to the prosthetic device. (Stip., ¶ 6.)
13.
The contract between Petitioner and its customers
for purchase of prosthetic devices includes a provision that states that
Petitioner shall provide to its customers, at no additional charge, standard
non-disposable instruments necessary to perform a case. (Stip., ¶ 7.)
14.
When Petitioner provides specialized instruments to
a customer to be used with a prosthetic device, the invoice generated by
Petitioner states “no charge” as the amount due for such specialized
instruments. (Stip., ¶ 8.)
15.
The contract between Petitioner and its customers
for purchase of prosthetic devices includes a provision in which the customer
promises to indemnify Petitioner for any loss, damage, or destruction of the
instruments Petitioner provides. (Stip., ¶ 9.)
16.
The contract between Petitioner and its customers
for purchase of prosthetic devices also provides that the specialty instruments
shall at all times remain the property of Petitioner and shall be returned to
Petitioner upon termination of the contract. (Stip., ¶ 10.)
17.
Not every implant device is sold with a set of
specialized tools. Hospitals use and reuse the surgical instruments for
implanting Zimmer devices. (Zimmer Aff. ¶ 3, Ex. 2.)
18.
The specialized instruments have a useful life of
seven to ten years. (Stip., ¶ 11.)
Applicable
Law
Under Wis. Stat. § 77.53(1), an excise tax is imposed on the “storage,
use or other consumption in this state of tangible personal property . . .
purchased from any retailer.” The statutes explain that the use tax applies
“unless an exemption in this subchapter applies.” Wis. Stat. § 77.53(1b).
A taxpayer who seeks to recover a refund bears the burden of proving the
invalidity of the Department's determination. MRC Industries, Inc. v. Dep't
of Revenue, Wis. Tax Rptr. (CCH) ¶ 203-273 (WTAC
1991). To
be entitled to a tax exemption, the taxpayer must fall within the exact terms
of the exemption statute. Wausau
Paper Mills Co. v. Dep’t of Revenue, Wis. Tax Rptr. (CCH) ¶
400-375 (Cir. Ct. 1998). The statute must be given a strict but
reasonable construction in favor of taxation. Wauwatosa Avenue United Methodist Church v. City of Wauwatosa, 2009
WI App 171, 321 Wis. 2d 796, 776 N.W.2d 280.
Relevant to this case, the statutes allow an exemption from the
sales/use tax for some durable medical equipment and for prosthetic devices.
Accessories to such exempt equipment are also exempt. The parties disagree as
to whether the exemption applies to the cost price of the specialized
installation tool kits Zimmer provides to Wisconsin hospitals that use the
tools to implant the prosthetic devices made and sold by Petitioner. The
relevant exemption reads as follows:
Wis.
Stat. § 77.54 General Exemptions.
(22b) The sales price from the
sale of and the storage, use, or other consumption of durable medical equipment
that is for use in a person’s home, mobility-enhancing equipment, and
prosthetic devices, and accessories for such equipment or devices, if the
equipment or devices are used for a human being.
The
following definitions, and lack thereof, are important to this case.
Wis.
Stat. § 77.51 Definitions.
(3pm) “Durable medical
equipment" means equipment, including the repair parts and replacement
parts for the equipment, that is primarily and customarily used for a medical
purpose related to a person; that can withstand repeated use; that is not
generally useful to a person who is not ill or injured; and that is not placed
in or worn on the body. “Durable medical equipment" does not include
mobility-enhancing equipment.
(11m) “Prosthetic
device" means a replacement, corrective, or supportive device, including
the repair parts and replacement parts for the device, that is placed in or
worn on the body to artificially replace a missing portion of the body; to
prevent or correct a physical deformity or malfunction; or to support a weak or
deformed portion of the body.
Alas, the
statutes do not include a definition of the term “accessory.”
ANALYSIS
Summary judgment is granted if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with affidavits, show there
is no genuine issue as to any material fact and that the moving party is
entitled to judgment as a matter of law. Wis. Stat. § 802.08(2). Here, both parties have moved for summary
judgment. The effect of cross motions for summary judgment is an assertion by
the parties that the facts are undisputed, that in effect the facts are
stipulated, and that only issues of law remain. Healthcare Services Group, Inc. v. Dep't of Revenue, Wis. Tax Rptr. (CCH) ¶ 402-086 (WTAC 2016).
The
parties agree to the underlying facts. Petitioner sells prosthetic devices,
such as artificial knee joints, to hospitals in Wisconsin. When a hospital
purchases a prosthetic device, Petitioner supplies a set of specialized tools
which are needed for the safe and proper installation of these particular
devices. Petitioner provides the tools to the hospitals, which use the tools
for no additional charge.
The
prosthetic devices cannot be installed without the use of the specialized tools
Petitioner supplies. Petitioner does not supply a set of tools with every
device. Once a hospital has a set of tools, the tools can be reused to install
additional devices purchased from Petitioner. A set of tools can be used for up
to ten years.
Petitioner
supplies the tools to the hospitals through an agreement separate from the
purchase of the devices. Under the terms of the agreement, Petitioner retains
ownership of the tools. The hospital is allowed to keep the tools and to reuse
them until Petitioner replaces them or the contract ends. If a tools breaks or
is lost, the hospital must indemnify Petitioner, essentially paying for the
replacement. As with the original tool, Petitioner retains ownership of any
replaced tools.
Wisconsin imposes a use tax on the use in Wisconsin of tangible personal
property purchased from a retailer. Wis. Stat. § 77.53(1). Petitioner purchased
specialized tools from third-party vendors. Those initial purchases were at
retail; the purchases were not exempt as sales for resale because Petitioner
retains ownership of the tool kits. Because Petitioner provided the tools for
use at hospitals in Wisconsin, Petitioner paid Wisconsin use tax on the cost
price of the tools.
Petitioner subsequently requested a refund of the use tax, claiming the
tools to be exempt from sales/use tax under Wis. Stat. § 77.54(22b) as
“accessories” to the prosthetic devises.[3]
Although the parties did not address the issue, logic first drew the
Commission to the definition of “durable medical equipment.” The specialized
tool kits required for installation of the prosthetic devices are equipment
“that is primarily and customarily used for a medical purpose related to a
person; that can withstand repeated use; that is not generally useful to a
person who is not ill or injured; and that is not placed in or worn on the
body.” Thus, we find that the specialized tool kits fall squarely within the
definition of “durable medical equipment.”
Under Wis. Stat. § 77.54(22b), some durable medical equipment is exempt
from sales and use tax. The tools in this case, however, are not because the
statutory language limits the exemption of durable medical equipment to that
which is “for use in a person’s home.” These tools are only used at a hospital.
Given that these tools would not be exempt as “durable medical equipment,”
Petitioner must show that these tools fall under another specific exemption to
not be taxable.
Petitioner looks to Wis. Stat. § 77.54(22b), which extends to prosthetic
devices and to “accessories” for prosthetic devices. Petitioner presents two
arguments. First, the tools are so integrally involved with the artificial joints
as to be part of the “prosthetic device” itself. Second, Petitioner argues that
the tools used to install the devices are exempt as “accessories” to those
prosthetic devices.
As noted above, the statutes provide no definition of the term “accessory.”
Of note, Wis. Tax Bulletin 175 – April 2012, Tax Releases, p.18, Analysis 2,
addressed “accessories” to prosthetic devices in the context of neck cords and
small screwdrivers designed for glasses:
Section 77.54(22b), Wis Stats. (2009-10), provides, in part, an exemption from
Wisconsin sales and use tax for “. . . prosthetic devices, and accessories for
such . . . devices, if the . . . devices are used for a human being.” Neck cords, sunglasses designed to be worn over eyeglasses,
repair parts and tools specifically for eyeglasses . . . are accessories and
qualify for this exemption if purchased for corrective eyeglasses,
corrective sunglasses, corrective reading glasses, or corrective contact
lenses.
The Tax
Bulletin discusses how the accessory must be for use with a medical device. For
example, the neck cord and screw driver would not be exempt accessories if
purchased for non-corrective sunglasses because those are not prosthetic
devices like prescription glasses.
I.
Are the tools functionally inseparable
from the exempt prosthetic devices so as to be exempt under Wis. Stat. §
77.54(22b)?
In the
absence of caselaw, Petitioner refers the Commission to Private Letter Ruling
No. W1009008 (12/7/2009) (Stip., Ex. III), which addresses the Wis. Stat. §
77.54(14) definition of “drugs” on or after October 1, 2009. That ruling
analyzes injectable drugs (tissue filler implants) which are packaged in
single-dose disposable syringes. Petitioner’s Motion asserts that the PLR
“confirmed that the exemption for ‘drugs’ under section 77.54(14) encompassed
both tissue filler implants and the syringes required for their implantation –
even though the syringes were not themselves ‘drugs’ within the meaning of that
statute.” Similarly, Petitioner reasons that the term “prosthetic device”
encompasses the tools in this case because they are “medically necessary for
safe implantation” and “functionally inseparable from the prosthetics
themselves.” The premise of the analogy is suspect; its conclusion is more so.
The PLR clarifies
that the gel filler is exempt as a “drug.” Petitioner argues that the PLR
declares that the definition of “drug” encompasses the drug’s delivery device
(a disposable syringe) and therefore the delivery device is exempt from
taxation. The language of this PLR makes no such declaration. The PLR does not
directly discuss the nature of the syringes, and it does not establish any
“functionally inseparable” standard. The Commission does not find the PLR
applicable to the facts of this case.
We
believe the syringes are more akin to packaging which may be otherwise exempt.[4] In any
case, even if there were a “functionally inseparable” standard, the tools in
this case fail. The tools are not physically connected to the prosthetic
devices. The parties stipulate that the tools are not disposable as waste left
over from implantation but can be reused for years. They are not even
necessarily supplied with the prosthetics if the hospital already has a set.
The
Department presses a compelling analogy of a hammer and nails. While a hammer
is needed to install the nail, the hammer can be used for many nails and it
stays behind once the nail is in place. The hammer is not a nail and does fall
within even a broad definition of a nail. Similarly, these specialized tools
can be used on additional devices and remain with the hospital or are returned
to the Petitioner. As noted above, the tools are better categorized as “durable
medical equipment.”
Petitioner
points out that the tools are specialized to be compatible only with the
specific prosthetics sold by Petitioner. However, the specialized tools are
simply tools, similar to other equipment used in the operating room during an
implant procedure. We cannot conclude that everything in the operating room
should be exempt as “functionally inseparable” from a prosthetic device simply
because it is used during the implantation procedure.
The tools
are physically and functionally separate from the prosthetic device. Therefore,
the tools do not fall within even a broad scope view of the term prosthetic
device.
II.
Are the specialized tools exempt
as “accessories” for the prosthetic devices under Wis. Stat. § 77.54(22b)?
Petitioner’s
primary assertion is that the tools are exempt as accessories of the prosthetic
devices. The absence of a statutory definition of the word “accessory” is not
helpful, but when there is no definitive answer to the meaning of a word or
phrase in a statute, Wis. Stat. § 990.01(1) provides that the word or phrase
“shall be construed according to common and approved usage.” Caselaw and this Commission have traditionally accepted
consultation of dictionary definitions to determine the meaning of terms left
undefined in the statutes. See, e.g., Madison Newspapers, Inc., v. Dep't of
Revenue, 228 Wis. 2d 745, 760, 599 N.W.2d 51 (Ct. App. 1999).
In their briefs, the parties point to numerous
possibly conflicting dictionary definitions of the term “accessory.”
Dictionaries, both online and traditional, describe accessories as
supplementary, subordinate, or adjunct. The definitions generally indicate that
an accessory is not the original item itself but something which supplements or
completes the item or enhances it by making it more attractive, convenient,
efficient, safe, or effective.[5]
Starting from the premise that these tools are
necessary for the implantation of the Zimmer devices, the parties turn to
various definitions of the word “accessories.” The Department points to
definitions which describe items, such as fashion accessories, which normally
would not be needed to use or enjoy the item itself, concluding that an
accessory is by definition non-essential. Petitioner relies more on the
supplemental enhancement idea contained in most definitions. Both parties cite
the Department’s guidance in Wis. Tax Bulletin 175 – April 2012, pp. 17-19, in
which the Department took the position that Wis. Stat. § 77.54(22b) exempts
neck cords and tiny screwdrivers for prosthetic devices (prescription eyeglasses)
as accessories to prosthetic devices.
While the parties argue over the aspect of
necessity, both sides miss the point that the tools in question are completely
unrelated to the patient’s use of the joint. While the specialized tools are
necessary for the safe and effective installation of the artificial joints,
they are not accessories to the joint because the patient, the user of the
joint, does not need, want, or have the ability to possess or purchase the
tools. The tools do not in any way enhance the patient’s everyday use of
prosthetic devices any more than a mechanic’s wrench, even a specialized
wrench, used to install a new muffler enhances the car owner’s use of the
muffler.
An accessory is something intended for use with the
item to enhance or supplement the item by making it more attractive, efficient,
or effective. The accessories described in the Bulletin, neck cords and tiny
screw drivers are not used to build the glasses; they are not part of the
glasses; they do not improve the user’s vision. They are used by the wearer of
the glasses to enhance the use of the glasses. In contrast, the tools at issue
assist in the installation of the artificial joints, but they are unrelated to
improving or enhancing any aspect of patient’s use of those prosthetic devices.
We have found that the tools in question fall
clearly within the definition of durable medical equipment. Although we are not
prepared to say that there can never be a time when durable medical equipment
is also an accessory, the tools in this case are not accessories to the
prosthetic devices sold by the Petitioner. They are
simply durable medical equipment. Because the tools are not used in a person’s
home, the specialized installation tool kits are not exempt under Wis. Stat. § 77.54(22b).
CONCLUSIONS
OF LAW
1.
No issues of material fact exist, so this matter is
ripe for summary judgment.
2.
The specialized installation tool kits are not
functionally inseparable from the prosthetic devices sold by Petitioner so as
to be considered part of the prosthetic devices themselves.
3.
The specialized installation tool kits are not
exempt as accessories under Wis. Stat. § 77.54(22b).
4.
The specialized installation tool kits are durable
medical equipment as defined in Wis. Stat. § 77.51(3pm). Because they are not
“for use in a person’s home,” they are not exempt under Wis. Stat. §
77.53(22b).
5.
There being no applicable exemption, the tools kits
are subject to Wisconsin use tax under Wis. Stat. § 77.53.
ORDER
1. Petitioner’s Motion for Summary Judgment is denied.
2. The Department’s Motion for Summary Judgment is granted.
Dated at Madison, Wisconsin, this 10th day of May, 2019.
WISCONSIN TAX APPEALS COMMISSION
Elizabeth Kessler, Chair
Lorna Hemp Boll
David L. Coon, Commissioner
ATTACHMENT: NOTICE OF APPEAL INFORMATION
June 4, 2019 Petition for Rehearing denied pursuant to s.227.49(3)
[1] The Department was initially
represented by Attorney Carley J.
Peich Kiesling, but the case was subsequently transferred to Attorney Zimmer.
[2] We will use the following terms
interchangeably to refer to the specialized instruments required to implant the
prosthetic devices at issue: specialized instruments, instrument kits,
specialized tools, or simply tools.
Similarly, to refer to the prosthetic devices, we may use artificial
joints, medical devices, prosthetic implants, or simply implants. The term “hospital”
will refer generically to the healthcare institutions and surgical facilities,
which are customers of the Petitioner.
[3] Petitioner’s Petition for Review and
Statement of the Case proffered several other arguments, but those arguments
have not been presented, briefed, or argued on summary judgment.
[4] For example, see Wis. Stat. § 77.54(6)(am) exempting
“The sales price from the sale of and the storage, use or other consumption of:
. . . 2. Containers, . . . or other
packaging and shipping materials for use in packing, packaging or shipping
tangible personal property…if the containers, . . . or other packaging and shipping materials are
used by the purchaser to transfer merchandise to customers.” The syringe is a
container used to transfer the merchandise to customers.
[5] For example, from Dictionary.com:
Accessory, noun, plural ac·ces·so·ries.
1) a subordinate or supplementary part,
object, or the like, used mainly for convenience, attractiveness, safety, etc.,
as a spotlight on an automobile or a lens cover on a camera.
Subordinate, adjective
1) placed in or belonging to a lower
order or rank.
2) of less importance; secondary.
3) subject to or under the authority of a
superior.
Supplementary, adjective
Also supplemental. of the nature of or forming a supplement;
additional.
Supplement, noun
1) something added to complete a thing,
supply a deficiency, or reinforce or extend a whole.
2) a part added to a book, document,
etc., to supply additional or later information, correct errors, or the like.
And
from Merriam-webster.com
Definition of accessory
1a
: an object or device that is
not essential in itself but adds to the beauty, convenience, or effectiveness
of something else. //auto accessories //clothing accessories;
b
: a thing of secondary or lesser
importance : adjunct.
Definition of adjunct
1
: something joined or added to
another thing but not essentially a part of it.