California: Elective Prenatal Imaging Taxable as the Sale of Tangible Personal Property

The California Office of Tax Appeals recently addressed whether a taxpayer’s provision of elective prenatal imaging services, which included copies of the images captured on photographs and stored on CD’s and DVD’s, constituted the sale of tangible personal property.  The taxpayer operated prenatal imaging centers that provided three-dimensional and four-dimensional ultrasound services to customers. Prices for packages were based on the length of the ultrasound session and the number of photos and images produced for the customer. The taxpayer’s website and liability waiver forms stated that the elective ultrasound services were not a replacement for a diagnostic ultrasound performed by a medical provider, and a customer was required to have a diagnostic ultrasound prior to receiving the taxpayer’s services. Customers were offered a complimentary re-scan if their first visit didn’t result in high-quality photos. On audit, the California Department of Tax and Fee Administration determined that because customers were required to have a medical ultrasound prior to visiting the taxpayer, the true object of the taxpayer’s service was the sale of tangible personal property.

Under California law, when transactions involve the provision of a service along with the transfer of tangible personal property, the true object test is applied to determine whether the transaction is the taxable sale of tangible personal property, or the provision of a service.  The taxpayer argued that the primary purpose of its business was to offer supplemental patient care to diagnose complicated indications in prenatal care. In the taxpayer’s view, the true object sought by its patients was the service of prenatal ultrasound, not the incidental transfer of tangible personal property, such as photos, CDs and DVDs. The Administrative Law Judge (ALJ) concluded, however, that the tangible personal property at issue was more than incidental to the services provided, and the true object was to obtain images as captured in these mediums. In the ALJ’s view, the fact that the ultrasound was elective and not a medical necessity, and the taxpayer’s focus on the quality of resulting photos evidenced that the true object of the transaction was obtaining the tangible personal property. For more information on In re Thomas Conglomerate please contact Stacey Matthew at 949-431-7232.