A California Appeals Court has released an opinion upholding a lower court’s ruling that insertable cardiac monitors did not qualify as “medicine” for purposes of the California sales and use tax exemption for medicine. Medtronic Inc, the taxpayer in the case, manufactures insertable cardiac monitors called RICMs, which it describes as “… heart monitoring devices that are implanted subcutaneously in a patient’s chest that captures EKG (Electrocardiogram) needed by a physician to diagnose and make informed decisions about syncope patients and those who experience transient symptoms that may suggest cardiac arrhythmia. The RICMs automatically record the patient’s EKG upon detecting cardiac arrhythmias.” The California Department of Tax and Fee Administration (CDTFA) had collected over $3.3 million in sales tax fees on the RICMs which the taxpayer believed was incorrect, claiming these devices should be considered exempt because they are medicines.
Medicines are exempt from sales and use tax in California under a law which describes “medicines” as the commonly accepted understanding – pharmaceuticals – but which also includes “any substance or preparation intended for use by external or internal application to the human body in the diagnosis, cure, mitigation, treatment, or prevention of disease and commonly recognized as a substance or preparation intended for that use.” (§6369, subd. (b)). It is this broader definition which Medtronic wished to apply, claiming that its permanently implanted cardiac monitors assisted the functioning of the heart and in that way met the statutory requirement for exemption.
However, the CDTFA insists since RICMs are there to monitor the heart rhythms and collect information, they are not assisting in the function of the organ as required in Section 6369. Citing the dictionary, the CDTFA adds that ‘device’ refers to a piece of equipment or a mechanism designed to serve a special purpose or perform a special function, a definition which would be difficult to dispute as the taxpayers themselves describe the devices as heart rhythm monitors. This bolsters the CDTFA’s claim further, as the code itself goes on to clarify “medicines” specifically doesn’t include prosthetic devices.
The Court, in the end, was not convinced by Medtronic’s claims. Since the statute requires the device to assist with organ function, and Medtronic’s RICMs are merely serving an informational function and requires human intervention to assist with heart function, the claims the RICMs are a medicine fall short. The Court admitted Medtronic is in an unenviable situation where their devices are close to meeting the definition, but the final arguments are too tenuous to hold, citing the State’s freedom to not grant exemptions. In California, like many states, exemptions are not required of the state, and thus the attempt to prove one will be construed against the taxpayer, which would prove an insurmountable hurdle in this case, even if Medtronic’s claims had not been countered elsewhere.
This case highlights why it’s critical to ensure tax is being collected (or not) based on the correct definition used by the state. Even though the taxpayer felt they were correctly interpreting California codes, and exempt, the taxpayer did remit tax on the items while appealing the findings, which is a smart decision in states where the Court will construe arguments for exemptions against taxpayers, so there is no surprise bill with penalty and interest attached at the resolution of the case. Other taxpayers should review tax law concerning their products from time to time to ensure ongoing compliance with local regulations to ensure they are charging or exempting sales tax correctly. (The Court of Appeal of the State of California, First Appellate District, Division Two. Medtronic USA, Inc. v. California Department of Tax and Fee Administration, Case A169290. Opinion by Richman, J., Stewart, P.J. and Desautels, J. Concurring, 16 Apr. 2025.)