Exemption to use tax applied to prosthetic devices etc. prescribed by licensed physician: KING DRUGS, INC. V. REVENUE CABINET

REVENUE AND TAXATION:  Sales and use tax re: medical devices prescribed by licensed physician
2005-SC-000789-DG.pdf – NO. 82
DATE RENDERED: 5/22/2008

The Revenue Cabinet sought judicial review of decision of Board of Tax Appeals that granted taxpayer’s request for relief concerning assessment of sales tax regarding medical items.  A 1986 amendment to former KRS 139.472, a statute exempting “prosthetic devices and physical aids” from Kentucky sales and use tax, is the focal point of the case before this Court.

KRS 139.200 imposes a sales tax on gross receipts derived from “[r]etail sales, regardless of the method of delivery, made within this Commonwealth.” Pursuant to that statute, in early 2001, the Revenue Cabinet assessed sales taxes against King Drugs, Inc., and King Home Care, Inc., (collectively “King”) of $75,342.09 and $13,253.86, respectively, for sales between April 1997 and January 2001 of medical items such as C-Pap supplies, TENS units, heating pads, humidifiers, ventilators, catheters, and bandages.

Maintaining that these sales were exempt from sales tax under KRS 139.472, which at the time provided an exemption for “prosthetic devices and physical aids,” King sought review of the Cabinet’s assessments before the Board of Tax Appeals. The Board agreed with King that the statute exempted the sales of all such items when prescribed by a physician, and, because it was undisputed that virtually all the sales at issue involved items that had been prescribed, the Board granted King’s request for relief.

The Cabinet then sought judicial review, and both the Franklin Circuit Court and the Court of Appeals rejected the Board’s reading of KRS 139.472. Those courts ruled instead that the statutory exemption applied only to sales of prosthetic devices and physical aids “prescribed … solely for the use of a particular crippled person so as to become a brace, support, supplement, correction or substitute for the bodily structure including the extremities of the individual.” Because King’s sales had not been limited to the identified items to be used by “crippled persons,” the court below held that King was not entitled to the exemption and so ordered that the Cabinet’s sales-tax assessments be reinstated.

The Supreme Court granted King’s petition for discretionary review and held that statute governing sales and use tax exemptions for certain medical items provided exemptions for all sales of artificial devices prescribed by licensed physician.

Digested by Michael Stevens

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