Last month I participated in an Interested Parties Meeting (IPM) with the California Department of Tax and Fee Administration (CDTFA) to discuss proposed revisions to California Code of Regulations, title 18 (Regulation), section 1503- Hospitals and other Medical Service Facilities, Institutions and Homes for the Care of Persons.  I want to share my thoughts on the proposed revisions because they will have a material impact on hospitals and other medical facilities’ ability to claim refunds of tax related to their Medicare Part A sales.

Currently, Regulation 1503, subdivision (b)(2), contemplates a transaction where title to the tangible personal property (TPP) in question passes to a patient via a term within the contract and/or invoice.  In such case, the institution is found to have made a sale of TPP to the patient and tax applies to the charge unless the sale is otherwise exempt from tax.  It follows that the institution’s purchase of the TPP in question is exempt from sales or use tax because the purchase is being made for resale.

The proposed revision to Regulation 1503, in pertinent part, renders medical institutions the “ultimate consumer” and prohibits them from contracting in a manner that would permit them to complete a retail sale with their patients. In short, it removes the portion of the Regulation that discusses the use of a title clause or cases when title to TPP is transferred to patients.

The concern with the proposed revision to Regulation 1503 that was expressed by various individuals at the meeting centered on the following example:

An institution contracts to sell TPP to its patient.  Title to the TPP in question is transferred to the patient and the institution receives consideration for the TPP from the US Government through the Medicare Part A program.

In further review of the contemplated transaction, there are two questions that need to be addressed: (1) does a sale occur when title to the TPP in question is transferred for consideration; (2) if the answer to the first question is yes, is that sale taxable?

  1. Does a Sale Occur in the Contemplated Transaction?

Revenue and Taxation Code (RTC) section 6006 defines a sale (in pertinent part) as follows:

“Sale” means and includes: (a) Any transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration. “Transfer of possession” includes only transactions found by the board to be in lieu of a transfer of title, exchange, or barter.

As provided for in the current language of Regulation 1503, subdivision (b)(2), because title to the TPP in question is being transferred for consideration, a sale has occurred pursuant to RTC section 6006. Since the sale involves the US Government, however, the next question that needs to be addressed is whether that sale is taxable.

  1. Is the Forgoing Sale Taxable?

RTC section 1614, subdivisions (a) & (f) discuss sales to the US Government, and they state in pertinent part:

  • Sales tax does not apply to sales to:

(f) MEDICARE PROGRAM. Tax does not apply to the sale of items to a person insured pursuant to Part A of the Medicare Act as such sales are considered exempt sales to the United States.

In summary, a plain reading and application of RTC sections 6006 and 1614 to a transaction that includes a title clause which results in the transfer of TPP to a patient that is insured by Medicare Part A clearly results in a sale, and that sale is clearly exempt from sales tax because it is to the US Government.  This is true regardless of what Regulation 1503 contains within its language in my opinion.

Other Relevant Examples

I note that the interpretation of RTC section 6006, and the title clause language found within Regulation 1503, are not unique.  Similar title clause language can be found in Regulation 1521 and Regulation 1628 (these examples are not meant to be exhaustive):

Retailer of Materials

1521 (b)(2)(A)(2)- Materials.When Contractor is Seller.A construction contractor may contract to sell materials and also to install the materials sold. If the contract explicitly provides for the transfer of title to the materials prior to the time the materials are installed, and separately states the sale price of the materials, exclusive of the charge for installation, the contractor will be deemed to be the retailer of the materials.

Construction contractors are generally the consumer of materials they furnish and install in the performance of a construction contract. RTC section 6006, as detailed in the forgoing subdivision of Regulation 1521, however, defines a construction contractor as a retailer of material if title to that material transfers prior to it being installed.

Delivery by Retailer’s Facilities

1628 (b)(3)(D)- Other Sales. Unless explicitly agreed that title is to pass at a prior time, the sale occurs at the time and place at which the retailer completes his performance with reference to the physical delivery of the property, even though a document of title is to be delivered at a different time or place.

A separately stated delivery charge that is related to the taxable sale of TPP and completed by the retailer’s facilities is generally subject to tax.  The title clause language in Regulation 1628, however, permits a retailer to contract for the sale of TPP in a separate, distinct transaction from the delivery service it is providing; thereby rendering the delivery service exempt from tax.

In summary, title clause language, similar to what is currently included in Regulation 1503, is not unique or an inappropriate interpretation of RTC section 6006.  On the contrary, a plain reading of RTC section 6006 supports the inclusion of the title clause language that is currently included in Regulation 1503 as it simplifies the law for both taxpayers and Staff.  Accordingly, I believe that Regulation 1503, as currently written, appropriately applies the law to the transactions in question. Therefore, there is no need for further revision to the regulation.

Again, if the proposed revision to Regulation 1503 is approved, hospitals and other medical facilities will lose their ability to claim a refund of overpaid tax.  I’ll be participating in the next IPM on December 17thand I’ll look to provide an update on this issue to my blog early next year.

If you have any thoughts or concerns on the forgoing, please feel free to contact me at 855-995-6789 or


James R. Dumler, CPA

James R. Dumler, CPA

James graduated with honors with a Bachelor’s degree in Business Management with a concentration in accounting, and has completed the California Board of Equalization’s training program. James currently specializes in California and multi-state sales and use tax matters including, but not limited to the hospitality, medical, high-tech, eCommerce, and automobile industries. James is the founder and manager of McClellan Davis’ vehicle, vessel and aircraft exemption program. Email James

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