Overview of the Decision
The Tax Appeals Tribunal has reversed an administrative law judge’s (ALJ’s) ruling that the taxpayer’s usage agreement sales were not subject to sales tax.
The taxpayer manufactures dermatological disorder treatment products, including a laser used by physicians to treat psoriasis and other skin disorders. While the taxpayer collected sales tax on the laser equipment, it did not collect tax on its usage agreements with physicians where the physicians paid for each time they used the laser using a specific treatment coding system.
Key Findings of the Tribunal
- License to Use Equipment:
The Tribunal found that the ALJ overlooked specific language in the agreement that the taxpayer’s customers were given a license to use the equipment. - Taxable Sales:
As such, the Tribunal concluded that the taxpayer made taxable sales of laser equipment, also noting that the consideration in the transaction was the purchase of the treatment codes. - Rejection of Primary Function Test:
The Tribunal rejected the taxpayer’s argument that the primary function test applies, finding that the taxpayer sells the laser equipment as a standalone product.
Additionally, the Tribunal clarified that the primary function test is not applied to bundled sales of tangible personal property and services but is applied to bundled sales of taxable and nontaxable services.
Case Reference
In the Matter of the Petition of Strata Skin Sciences, Inc., N.Y. Tax Appeals Tribunal, Dkt. No. 828704, 05/05/2022.
Frequently Asked Questions
What was the main issue in the Strata Skin Sciences case?
The central issue was whether the taxpayer’s “usage agreements” for laser equipment constituted taxable sales. While sales tax was collected on the equipment itself, the taxpayer argued that the pay-per-use model via treatment codes was exempt.
Why did the Tribunal consider the usage agreements taxable?
The Tribunal found that the agreements granted a license to use tangible personal property (the laser), making them taxable. The consideration, the purchase of usage codes, was seen as part of the taxable transaction.
What argument did the taxpayer make regarding the primary function test?
The taxpayer claimed that the primary function of the agreement was not the sale of tangible property but rather the provision of a service, thus exempt from sales tax. This argument was rejected.
How did the Tribunal interpret the primary function test?
The Tribunal clarified that the primary function test only applies to bundled services that combine taxable and nontaxable services, not to sales involving tangible personal property and services.
What is the significance of this decision?
This decision underscores that licensing the use of tangible equipment can be considered a taxable sale, especially when a separate consideration (like a usage code) is involved, reshaping how such agreements may be taxed in New York.