Medical Instruments Shipped with Tangible Personal Property Subject to Use Tax in Michigan

The Michigan Court of Appeals held that an out-of-state manufacturer of orthopedic implants (such as prosthetic joints) was subject to Michigan use tax on medical instruments that it provides in conjunction with sales of the implants. The manufacturer provides its customers with the medical instruments that are used to install the implants, usually on an indefinite basis, at no extra charge. The manufacturer retains ownership of the instruments, and its contracts require the customer to reimburse the manufacturer for any loss, damage, or destruction of the instruments. Michigan’s Use Tax Act imposes a tax on “the privilege of using, storing, or consuming tangible personal property” in Michigan. The manufacturer protested the tax assessment, arguing that it did not use the instruments because it did not exercise a right or power over them since it relinquished control of them to a common carrier. The Court stated that when a petitioner places requirements on the property when it is in Michigan, the petitioner has not ceded all control over the property. In order for use tax to be inapplicable, the owner must have relinquished “total control” over the property outside of the state. The manufacturer retained ownership of the instruments and required its customers to reimburse them for any loss or damage of the instruments. The manufacturer did not relinquish total control of the property because it imposed at least one requirement on the hospitals regarding the property. Accordingly, the medical instruments are subject to Michigan use tax. (Case No. 349358, State of Michigan Court of Appeals)

Posted on August 13, 2020