Carealliance Health Services v. South Carolina Department of Revenue , 416 S.C. 484 ( 2016 )

THE STATE OF SOUTH CAROLINA
In The Supreme Court
CareAlliance Health Services d/b/a Roper St. Francis
Healthcare, Respondent,
v.
South Carolina Department of Revenue, Appellant.
Appellate Case No. 2014-001457
Appeal from the Administrative Law Court
The Honorable Shirley C. Robinson, Administrative Law
Judge
Opinion No. 27627
Heard February 9, 2016 – Filed April 20, 2016
REVERSED
Milton G. Kimpson and Lauren Acquaviva, both of the
South Carolina Department of Revenue, of Columbia, for
Appellant.
John C. Von Lehe, Jr. and Bryson M. Geer, both of
Nelson Mullins Riley & Scarborough, LLP, of
Charleston, and Raymond P. Carpenter, of Roswell,
Georgia, for Respondent.
JUSTICE HEARN: The South Carolina Department of Revenue (DOR) appeals
the Administrative Law Court's (ALC) grant of summary judgment in favor of
CareAlliance Health Services (the Hospital) finding (1) orthopaedic prosthetic
devices purchased for specific patients are exempt from sales tax and (2) other
bone, muscle, and tissue implants replaced a missing part of the body. We reverse.
FACTUAL/PROCEDURAL HISTORY
The Hospital is a health corporation comprised of Roper Hospital and St.
Francis Hospital in Charleston, which render customary surgical and emergency
services to patients. The Hospital provides orthopaedic prosthetic devices1 and
other implants to patients through either a planned surgical procedure or in
response to trauma.
Generally during a scheduled surgery, a prosthetic device vendor is present
in the operating room with a portfolio of prosthetic devices from which a surgeon
can select the appropriate implant. Upon determining the appropriate device, the
surgeon communicates his selection to the vendor. The vendor then provides the
chosen device to a circulating nurse for implantation by the surgeon.
Subsequently, the vendor fills out a requisition sheet, in which a record of the
device is memorialized. The requisition sheet is initialed by the circulating nurse
as an acknowledgement the items were consumed. The form is then provided to
the Hospital's purchasing department, and a purchase order is generated and
submitted to the vendor based on prearranged pricing agreements with the
Hospital.
Believing the purchase of orthopaedic prosthetic devices and other implants
were eligible for a sales tax exemption, the Hospital sought a refund from DOR.2
Specifically, the Hospital asserted under Home Medical Systems, Inc. v. South
Carolina Department of Revenue, 382 S.C. 556, 564, 677 S.E.2d 582, 587 (2009),
the prosthetic devices were "sold by prescription" as required for the tax exemption
under section 12-36-2120(28) of the South Carolina Code (2014). Pursuant to
1
The orthopaedic prosthetic devices in question are Food and Drug Administration
(FDA) Class II and Class III prosthetic devices. 21 U.S.C. § 360(a)-(c) (2013).
2
The Hospital requested refunds for joint implants, pacemakers, bone, tissue,
blood products, plasma derivatives, and oncology medicines. The subject of this
appeal is strictly orthopaedic prosthetic devices and other bone, muscle, and tissue
implants. The question of exemption as to the remaining items have been stayed
pending a decision in this matter.
Home Medical, a device is sold by prescription if (1) the sale requires a
prescription; (2) the device is actually sold by prescription; and (3) the device
replaces a missing part of the body. 382 S.C. at 564, 677 S.E.2d at 587.
Following an audit, DOR denied the request as to orthopaedic prosthetic
devices on the grounds they do not require a prescription to be sold and a
prescription was not used in the purchase of the devices.3 DOR also held other
bone, muscle, and tissue implants were not exempt because they did not replace a
missing part of the body, as required for the exemption.
The Hospital filed for a contested case hearing. After discovery, both parties
filed motions for summary judgment. Following a hearing on the motions, the
ALC granted summary judgment in favor of the Hospital, finding orthopaedic
prosthetic devices qualified for the exemption and other bone, muscle, and tissue
implants replaced a missing part of the body.
DOR filed a motion for reconsideration, which was denied, and thereafter
filed a notice of appeal. This Court certified the case for review pursuant to Rule
204(b), SCACR.
ISSUES PRESENTED
I. Did the ALC err in finding the sales tax exemption applies to orthopaedic
prosthetic devices and granting summary judgment in favor of the Hospital?
II. Did the ALC err in finding other bone, muscle, and tissue implants replaced
a missing part of the body?
STANDARD OF REVIEW
In an appeal from an ALC decision, the Administrative Procedures Act
provides the appropriate standard of review. S.C. Code Ann. § 1-23-610(B) (Supp.
2015); Kiawah Dev. Partners, II v. S. C. Dep't of Health & Envtl. Control, 411
S.C. 16, 28, 766 S.E.2d 707, 715 (2014). While an appellate court will not
substitute its judgment for that of the ALC as to findings of fact, we may reverse or
3
The requested refund covered the Hospital's sales from August 1, 2007, through
November 30, 2010, and amounted to $5,014,576.76.
modify decisions that are controlled by an error of law or are clearly erroneous in
view of the substantial evidence on the record as a whole. S.C. Dep't of Corr. v.
Mitchell, 377 S.C. 256, 259, 659 S.E.2d 233, 235 (Ct. App. 2008). Substantial
evidence is evidence which, considering the record as a whole, would allow
reasonable minds to reach the conclusion that the administrative agency reached or
must have reached in order to justify its action. Lark v. Bi–Lo, Inc., 276 S.C. 130,
135, 276 S.E.2d 304, 306 (1981). Ordinarily, tax exemption statutes are strictly
construed against the claimed exemption. TNS Mills, Inc. v. S.C. Dep't of Revenue,
331 S.C. 611, 620, 503 S.E.2d 471, 476 (1998).
LAW/ANALYSIS
I. APPLICATION OF THE SALES AND USE TAX EXEMPTION
DOR challenges the ALC's holding the Hospital is entitled to the sales tax
exemption for orthopaedic prosthetic devices. Specifically, DOR contends the
ALC erred in finding a prescription is required for the sale of an orthopaedic
device between the Hospital and vendor because of federal regulations. We agree.
Generally, the retail sale of a prosthetic device to a hospital or doctor is a
taxable sale if the prosthetic device is furnished to a patient as part of a service
being rendered by a hospital. S.C. Code Ann. § 12-36-110(1)(i) (2014). As noted
above, the sales tax exemption enumerated in section 12-36-2120(28) is for
prosthetic devices sold by prescription. S.C. Code Ann. § 12-36-2120(28); see also
10 S.C. Reg. 117-308 (2012) (explaining when a prosthetic device is furnished to a
patient by a hospital as part of the services a patient is receiving, the hospital will
be deemed a user or consumer of the prosthetic and subject to the sales and use
tax); S.C. Rev. Ruling #98-9 (stating that once it is established that a sale to a
hospital is a retail sale, then one must determine whether the item in question
comes within an exemption). Although the tax code does not define the term sold
by prescription, this Court in Home Medical enunciated a three-part test to
determine whether an item is sold by prescription. 382 S.C. at 564, 677 S.E.2d at
587. A device is sold by prescription if (1) the sale requires a prescription; (2) the
device is actually sold by prescription; and (3) the device replaces a missing part of
the body. Id.
DOR applied Home Medical and found the exemption inapplicable for
orthopaedic prosthetic devices because a prescription is not required for the
transaction between the Hospital and vendor. Relying on Regulation 117-308.3
and Regulation 117-308.8, DOR argues the purchase of an orthopaedic prosthetic
device is equivalent to the purchase of traditional medical supplies like bandages.
Under 117-308.3, "[d]octors are the consumers of the supplies, medicines, office
furniture and fixtures and special tools and equipment they use in the practice of
their profession. Sales of such supplies and equipment to doctors are retail sales
and subject to the sales tax." 10 S.C. Reg. 117-308.3 (2011)(emphasis added).
Similarly, hospitals are considered the consumers "[w]here drugs, prosthetic
devices and other supplies are furnished to their patients as a part of the medical
service rendered." 10 S.C. Reg. 117-308.8 (2011). DOR accordingly asserted the
Hospital was not required to have a prescription to acquire supplies, be they
prosthetic devices or bandages. Moreover, DOR suggested the exemption was
intended for individual patients who purchase a prosthetic device with a
prescription from a brace and boot shop, not for a hospital or doctor rendering
services by implanting prosthetic devices.
However, the Hospital argued that because the devices are Class II and Class
III federal prescription prosthetics, inquiry into the nature of the transaction was
unnecessary—the implants are prescription devices by federal mandate. See 21
C.F.R. § 801.109(a) (2011) (exempting prescription devices from certain labeling
requirements, including when devices "[are] to be sold only to or on the
prescription or other order of such practitioner").4 Consequently, the Hospital
4
Section 801.109(a) states, in part, that a device is exempt from certain labeling
requirements if:
The device is:
(1)(i) In the possession of a person, or his agents or
employees, regularly and lawfully engaged in the
manufacture, transportation, storage, or wholesale or
retail distribution of such device; or
(ii) In the possession of a practitioner, such as physicians,
dentists, and veterinarians, licensed by law to use or
order the use of such device; and
(2) Is to be sold only to or on the prescription or other
order of such practitioner for use in the course of his
professional practice.
suggested these prosthetics will always satisfy Home Medical, and the Hospital
was therefore entitled to the exemption. DOR argued the federal regulation relied
on by the Hospital merely dictates labeling requirements for when the device is
allowed in the stream of commerce and therefore provided no insight into the
state's taxation of the devices. See 21 C.F.R. § 801.109(a). It therefore gave no
weight to the devices' classification as Class II or Class III in formulating its
position.
The ALC rejected DOR's construction of federal regulations, finding Home
Medical was satisfied because FDA regulation requires a prescription for
orthopaedic prosthetic devices. See 21 C.F.R § 801.109(a); see also 21 U.S.C. §
360j(e)(1)(A) (2006) (explaining the Secretary of the FDA sets forth the sale,
distribution, or use of restricted devices and requires restricted devices only be
available "upon the written or oral authorization of a practitioner licensed by law to
administer"). While the ALC acknowledged a prescription is not necessary for all
sales under section 801.109, it found DOR interpreted the regulation too strictly
and as a result defeated the statutory purpose to allow for an exemption as applied
by Home Medical. The ALC concluded "if a distinction is made between
'prescription' and 'order' in the federal regulation, then no device would ever
require a prescription for sale—an order could always suffice. Consequently the
first prong of Home Medical would never be satisfied and no devices would ever
be tax exempt." The ALC acknowledged Class II and Class III devices will always
require a prescription to be sold and as a result, the first prong of Home Medical
will always be satisfied.
At the outset, we agree with DOR that section 801.109(a) addresses the
labeling requirements for Class II and Class III devices and does not always
require a prescription. Federal regulation restricts the access of Class II and Class
III surgical devices because the FDA has determined such devices are unsafe for
public consumption without medical supervision. 21 C.F.R. § 801.109 (explaining
such devices are "not safe except under the supervision of a practitioner licensed
by law to direct the use of such device"). Due to the public's restricted access to
these devices, the FDA exempts these devices from standard warnings and labeling
requirements because they "[are] to be sold only to or on the prescription or other
21 C.F.R. § 801.109(a) (emphasis added).
order of such practitioner for use in the course of his professional practice."5
21 C.F.R. § 801.109(a)(2).
By its terms, this regulation allows Class II or Class III prescription
prosthetic devices to be sold directly to a practitioner, on the order of a
practitioner, or on the prescription of a practitioner. Id. Thus, it envisions a sale
can occur directly to a practitioner, with no prescription or order requirement. We
therefore reject the Hospital's assertion and the ALC's finding the devices at issue
can only be sold by prescription. Instead, the regulation allows for a sale directly
between a vendor and practitioner, as an agent of the Hospital.
The ALC's broad interpretation of the federal regulation is fundamentally at
odds with the plain reading of the regulation and the strict construction afforded a
tax exemption. Accordingly, we hold the ALC erred in finding section 801.109(a)
satisfies the first prong of Home Medical. The statute expressly allows a
practitioner to be in possession of a prosthetic device without a prescription or
order. We therefore reverse the ALC because these devices do not require a
prescription for the purpose of qualifying for a tax exemption. Because we find the
Hospital is unable to satisfy the first prong, we need not reach the second prong.
See Futch v. McAllister Towing of Georgetown, Inc., 335 S.C. 598, 613, 518
S.E.2d 591, 598 (1999) (stating that if an appellate court's ruling on a particular
issue is dispositive of an appeal, rulings on remaining issues are unnecessary).
II. OTHER BONE, MUSCLE, AND TISSUE IMPLANTS
DOR next argues the ALC erred in finding that the other bone, muscle, and
tissue implants replace a missing part of the body because the Hospital did not
present evidence to support this finding. We agree. The record is devoid of any
evidence to support the ALC's finding that other bone, muscle, and tissue implants
replaced missing parts of the body. No evidence provides any details regarding the
bone, muscle, and tissue implants that were being ruled on by the ALC; therefore
the record plainly does not contain the level of substantial evidence necessary to
uphold the finding.
5
The provision indicates that practitioners are individuals "such as physicians,
dentists, and veterinarians, licensed by law to use or order the use of such device."
21 C.F.R. § 801.109(a)(1)(ii).
CONCLUSION
Based on the foregoing, we reverse the ALC and find the Hospital is not
entitled to a tax exemption for the sale of orthopaedic prosthetic devices. Further,
we reverse the ALC's finding that other bone, muscle and tissue implants replace a
missing body part because it is not supported by substantial evidence in the record.
BEATTY, KITTREDGE, JJ., and Acting Justice Alison Renee Lee, concur.
PLEICONES, C.J., concurring in result only.