Texas Court of Appeals Holds that Specialized Surgical Instruments are Exempt Orthopedic Devices

In a case developed and argued at the administrative level by Ryan, LLC, a Texas Court of Appeals (“Court”) has ruled that certain specialized surgical instruments are exempt from sales and use taxes. In Zimmer US, Inc. v. Combs, No. 03-11-00178-CV (Tex. App. – Austin, February 9, 2012), the Court considered whether cutting guides, reamers, provisional implants, and other surgical instruments qualify for exemption. The instruments were specially engineered for use in implanting Zimmer US, Inc.’s (“Zimmer”) reconstructive prosthetics. The instruments were designed solely for use with Zimmer implants and were not suited for general surgical or orthopedic purposes. Zimmer contended that the instruments were exempt either as “orthopedic devices” or as “supplies” for orthopedic or prosthetic devices.

Tex. Tax Code § 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 § 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.

The Comptroller argued that the surgical instruments were not implanted in the patients and did not perform a “continual” or “ongoing” function in the correction or prevention of human deformities. The Court noted that the requirement of “implantation” applies only to “prosthetic” devices. Furthermore, the Comptroller’s alleged requirement of ongoing correction or prevention is not found in the statute or the Comptroller’s rule. The Comptroller further urged the Court to defer to longstanding agency policy, reflected in letter rulings holding that surgical instruments are taxable. The Court responded that the letter rulings were inconsistent with the rule and, therefore, were simply incorrect. (Because the Court ruled that the surgical instruments were exempt orthopedic appliances, it did not address Zimmer’s alternative contention that they were exempt as “supplies.”)

It is not known at this time whether the Comptroller will seek a rehearing or further appeal of the decision.