The California Office of Tax Appeals (OTA) held a California Department of Tax and Fee Administration (CDTFA) decision that the true object of a California taxpayer’s prenatal imaging business was the images provided after the ultrasound service, captured on photographs, or stored on CDs and DVDs, not the ultrasound service itself. Therefore, the taxpayer’s elective ultrasounds services were deemed taxable as tangible personal property (TPP).
The taxpayer sold various bundled packages; each included, at a minimum, an ultrasound session and photos of the images taken during the ultrasound. To determine the taxability of a bundled transaction that involves a service and a transfer of TPP, it must be determined whether the TPP is only incidental to the service provided or whether the TPP is the true object of the transaction – the real reason the consumer purchased the service.
The taxpayer contended the sale of the photos, CDs, and DVDs were strictly incidental and argued that the true object sought by patients was the prenatal ultrasound service. However, in their audit, the CDTFA found that the taxpayer’s marketing materials emphasized the keepsake images customers would receive and that the cost of the various package depended primarily on the extent of TPP provided. The CDFTA also found that the taxpayer’s services were not a medical necessity because customers were required to have already obtained diagnostic ultrasounds from their healthcare providers.
Accordingly, the OTA determined the transactions at issue were not sales of services, but taxable sales of TPP. (California Office of Tax Appeals Case No. 18063254, 2021)