Matter of Strata Skin Sciences, Inc.; Judge Connolly; Division’s Rep.: Anita Luckina; Petitioner’s Rep.: Margaret Wilson; Articles 28 and 29

The issue in this case is whether the sale of laser technology used to treat dermatological ailments and related services constituted a taxable lease of tangible property or the provision of a nontaxable service. Petitioner provided to its dermatologist customers an ultraviolet light excimer laser system that generated and delivered targeted ultraviolet light to treat various skin conditions. Petitioner did not characterize the transactions as leases, nor did the customers receive the lasers for a set amount of time. Rather, Petitioner “consigned” the lasers to its customers and charged for “treatment codes,” which allowed the lasers to be used and treatments to be administered.

In connection with the provision of the laser, Petitioner also provided a host of services intended to facilitate the use of the technology, including the flow of patients. These services gave participating physicians access to the laser technology in a way that increased the doctors’ likelihood of achieving an adequate return on investment in relation to the practices’ expenses of providing the laser therapy. These services included most of the non-medical aspects of using the lasers to provide treatment, including helping to ensure proper patient flow through Petitioner’s advertising and patient screening programs, assisting with the insurance reimbursement process, maintaining the laser devices, and training the doctors’ staff in the use of them. And by retaining ownership of the devices, the financial risk to the dermatologist/customers was mitigated.

The Judge initially concluded that the transactions did not constitute leases for sales tax purposes. The Judge based this conclusion on: (1) the fact that the contracts were not denominated as “leases,” had no lease language in them, and were not structured as leases; (2) the contracts did not specify the model of laser the customer was to receive, and Petitioner had the right to remove the device at any time without the participating physician’s prior consent; and (3) Petitioner’s charges under its contracts were for “treatment codes” and were not explicitly for the rental of the laser.

Although Judge Connolly could have concluded the determination here, he decided to further support his reasoning by applying a “primary function” analysis and determining that it supported the conclusion that the nontaxable aspects of Petitioner’s activity predominated. According to the Judge, “a fair description of petitioner's primary function under the usage agreement is the nontaxable one of managing the nonmedical aspects of the business of providing . . . laser treatments.” The economics of the overall transaction also carried weight with the Judge: “The predominance of the value of the services provided under the usage agreement compared to the value of the  . . . laser itself is also consistent with the fact that participating physicians have been willing to pay petitioner between $30,000.00 and $40,000.00 per year under the usage agreement when they could have purchased outright a device, with its 5-year useful life, for $80,000.00.”

This is a bit of a unique determination because the “primary function” analysis is usually reserved for determining the taxability of pure service transactions. But here it is applied to a mixed tangible property/service transaction. I will be surprised if the Division decides not to appeal the determination both because of the use of the “primary function” analysis and because this case further opens the door to nontaxable transfers of tangible property when services are involved.

Comment