United States

California: Use Tax Not Owed When Taxpayer Made Conditional Gifts of Surgical Instruments

Jan 15, 2018
From KPMG TaxWatch

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In what is probably one of its last rulings, the California State Board of Equalization recently determined that a taxpayer was entitled to a refund of use tax paid on certain surgical instruments. The taxpayer, an Indiana-based seller of orthopedic implants, purchased surgical tools that were used at California medical facilities. Specifically, the instruments were used when medical personnel performed surgeries embedding the taxpayer’s orthopedic implants. The instruments were delivered by common carrier into California. At all times, the taxpayer maintained ownership of the instruments, took depreciation on the instruments, and had the right to request return of the instruments (which it rarely did). However, the medical facilities were also entitled to destroy the tools upon obsolescence, and the taxpayer maintained that the instruments were intended to remain at the medical facilities indefinitely. The California Department of Tax and Fee Administration determined that the taxpayer made a taxable use of the instruments by loaning them to the California facilities and denied the taxpayer’s use tax refund claims.

Before the Board, the taxpayer argued that while it retained ownership of the instruments, it made an out-of-state gift of the tools when it transferred them to a common carrier in Indiana for delivery into California. The Board agreed, holding that the taxpayer made a conditional gift of the instruments because the customers essentially received title when they received the instruments. Because the instruments were shipped from outside California, the gifts were completed outside of the state and use tax was not due. Please contact Jim Kuhl at 916-551-3168 with questions on Matter of Zimmer US, Inc.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.