The New York State Tax Appeals Tribunal has reversed the decision of an Administrative Law Judge and found that oxygen cylinders purchased by a company engaged in providing oxygen systems to customers were exempt from sales tax as purchases for resale.  Matter of Lincare, Inc., DTA No. 823971 (N.Y.S. Tax App. Trib., Sept. 11, 2014).

Facts. Lincare, Inc. provided oxygen systems to customers for in-home use. These systems can be an oxygen concentrator system, a stationary liquid oxygen system, a high-pressure (gas) system, or a portable liquid oxygen delivery system, and can also include a backup unit for use if the primary unit fails. The oxygen cylinders at issue are part of all of these different systems. Lincare’s only customers were those who purchased using U.S. Department of Health and Human Services forms signed by their physicians, providing such information as name and address, diagnosis, narrative description of the items, accessories and options ordered; the charge and the Medicare allowance; and a statement of the prescribed oxygen flow rate. One way the oxygen was provided was with oxygen cylinders, which Lincare delivered full to customers and then retrieved when empty and replaced with full cylinders. Lincare retained ownership while its customers had possession of the cylinders.

Lincare entered into written, month-to-month agreements with customers, and it billed and was reimbursed for the rental of oxygen cylinders under Medicare, Medicaid, private insurance, or a private payment arrangement. Patients paid a monthly fee, which did not vary whether or not the patients used the cylinders for a whole month. The monthly fee included refilling the cylinders, and there were no separate charges for oxygen when cylinders were exchanged or refilled. The standard agreement between Lincare and its customers, referred to as the “Terms and Conditions of Rental,” obligated Lincare to “maintain and service the rented equipment” and referenced a “monthly rental fee for all equipment rented hereunder” for a “month-to-month rental.” It gave Lincare the right to repossess the equipment upon “failure to pay the rental fees. . . .”

If a cylinder was empty, Lincare replaced it with a full one without an additional charge above the regular monthly charge. On rare occasions, oxygen cylinders were sold to patients, and when that occurred, Lincare charged patients for oxygen separately.

A sample health insurance claim form, used by Lincare to request payment from insurers, referred to payment for two items of equipment – a “concentrator” and a “gaseous portable add-on” – that were rented. The Medicare website describes a “gaseous portable add-on” as “[p]ortable gaseous oxygen system, rental; includes portable container (cylinder). . . .”

Lincare did not pay sales tax when it purchased the oxygen cylinders. It depreciated the cost of the cylinders and carried that cost as part of its fixed assets, and it recognized rental revenue from the fees it received for the rental of oxygen cylinders to its customers.

Dispute and decision below. Under New York law, as in most states, sales of tangible personal property for resale are exempt from sales tax.  Tax Law § 1101(b)(4)(i)(A).  A “sale” of tangible personal property includes a “lease.” Tax Law § 1101(b)(5).  Therefore, if the cylinders were being rented or leased to patients, no sales tax would be due when they were purchased by Lincare. 

Lincare argued that its written agreement with customers treated the form of the transaction as a rental and that this structure was required by Medicare regulations. The Department argued, however, that rather than renting oxygen cylinders, Lincare was actually in the business of selling an oxygen service and that the provision of the cylinders was merely “incidental” to that service.

The parties had stipulated that reimbursement for oxygen equipment by Medicare was available only on a rental basis; that Lincare did not separately charge for oxygen or for any services related to the cylinders; and that Lincare “billed and was reimbursed for its rental of the oxygen cylinders” (emphasis in original). Lincare also conceded that it charged a fixed, monthly fee for the entire oxygen service, dictated by Medicare regulations, that included the cylinder rental and all other components.

Nonetheless, the ALJ concluded that the patients were seeking, and Lincare was providing, “a complete oxygen service paid for with one carefully regulated fee.” The ALJ also determined that the equipment rental structure of the transactions in accordance with Medicare requirements was insufficient to prove the cylinders were rented to customers. He concluded that the oxygen, not the equipment or accessories, was of primary importance to the patients, in large part because adjustment of the Medicare reimbursement rate was based on the prescribed oxygen flow rate per minute, without reference to the cylinders.

The ALJ found the “Terms and Conditions of Rental” to be lacking in probative value, since it did not expressly state that it was a part of a monthly agreement, did not identify Lincare, and did not refer to oxygen or cylinders. He found that the lack of detail distinguished the facts from those in Matter of EchoStar Satellite Corp. v. Tax Appeals Tribunal, 20 N.Y.3d 286 (2012), in which the Court of Appeals concluded that equipment provided along with a satellite TV service was rented to the customers and qualified as a nontaxable purchase for resale. The ALJ concluded that, based on the record before him, he could not determine that, as had been established in EchoStar, the cylinders had been “rented” for a specific charge separate from the charge for the service.

Tribunal decision. The Tribunal reversed the ALJ. It found, first, that the primary purpose of Lincare’s business was to provide oxygen systems, including cylinders, to its customers. While acknowledging that a customer’s medical need for oxygen was the “catalyst” for the transaction, that medical need could not be met without the equipment, including the cylinders, which was an essential part of the transactions. The Tribunal rejected the ALJ’s conclusion, and the Department’s argument on exception, that Lincare’s true business was an oxygen system service, concluding that the customer’s need for oxygen contents is not a basis for concluding that the provision of equipment, along with its contents, constitutes a service for sales tax purposes.

The Tribunal distinguished such cases as Matter of Upstate Farm Coops., Inc., DTA No. 816340 (N.Y.S. Tax App. Trib., May 2, 2002), involving a milk distributor’s use of milk crates to deliver milk; Matter of Genesee Brewing Co., DTA No. 817305 (N.Y.S. Tax App. Trib., May 9, 2002), involving wooden pallets used by a beer brewer to deliver beer; and Matter of Albany Calcium Light Co. v. State Tax Comm’n, 44 N.Y.2d 986 (1978), involving industrial gases contained in cylinders, for which no charge was imposed. In all three cases, the crates, pallets, or gas cylinders served no purpose other than delivery, while Lincare’s oxygen cylinders were used for more than delivery and were found to be part of a system necessary for administration of the oxygen.

The Tribunal also disagreed with the ALJ’s conclusion that the “Terms and Conditions of Rental” lacked probative value, since it was attached to the parties’ stipulation of facts and was described in the stipulation as a written agreement provided to customers. It also found that health insurance claim forms functioned as invoices for third-party payers, and that the form and the page from the Medicare website adequately demonstrated that Lincare billed a single monthly fee for the rental of oxygen cylinders. In fact, Medicare regulations and publications were found to consistently refer to the rental of oxygen equipment, and the Tribunal rejected the ALJ’s reliance on the lack of a separately stated fee for the cylinder, finding such lack was directly attributable to Medicare’s control over the form of the transaction. Finally, the Tribunal also disagreed with the ALJ’s conclusion that providing oxygen was the controlling factor, since actual oxygen use or consumption had a limited impact on the amount of the monthly fee, which did not vary based on usage. Since oxygen use was a limited factor in the fee, the rental value of the equipment “was necessarily a significant factor” in the fee. Therefore, the Tribunal concluded that the monthly rental fee supports the finding that the cylinders were rented and that such rental was a “‘significant part of the transaction’” rather than a trivial element.

Additional Insights

The Tribunal in this case conducted a detailed review of the stipulated facts and documents and, unlike the ALJ, relied on the language in the stipulation by both parties regarding “rental” of the cylinders, and the submission as a stipulated exhibit of a document titled “Terms and Conditions of Rental.” The Tribunal agreed with Lincare that the primary purpose of its business was providing oxygen systems, which clearly required the cylinders, and that the agreements with customers, plus the Medicare documentation and website, supported the fact that the cylinders also were rented. Although not discussed by the Tribunal, it seems clear that the oxygen itself could not be “rented” – it was consumed and not returned – so the many references to “rental” in the agreement and Medicare documentation could only reasonably be referring to the cylinders and other equipment.

The Department cannot appeal the Tribunal’s decision to the New York courts.