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Supreme Court Holds All Artificial Devices Prescribed by Physicians are Exempt from Sales Tax

06.05.2008

In Revenue Cabinet v. King Drugs, Inc. and King Home Care, Inc., No. 2005-SC-000789 (Ky. April 14, 2008), the Kentucky Supreme Court held that prosthetic devices and physical aids prescribed by a physician are exempt from sales and use tax pursuant to the prosthetic device and physical aids exemption set forth in KRS 139.472. The Court reversed the Court of Appeals and Circuit Court decisions holding that an artificial device was only exempt if it was prescribed by a physician “for the use of a crippled person so as to become a brace, support, supplement, correction or substitute for the bodily structure including the extremities of the individual.” In so doing, the Court affirmed the Order of the KBTA that such items were exempt from sales and use tax.

The Department audited King Drugs, Inc. and King Home Care, Inc. (collectively, “King”) and issued a sales and use tax assessment relating to the various medical supplies for which King claimed tax-exempt status under KRS 139.472. After the Department rendered a Final Ruling upholding its assessment, King appealed to the KBTA which overruled the Department’s Final Ruling and interpreted KRS 139.472 to encompass the various medical supplies and devices at issue. Challenging the KBTA’s interpretation of KRS 139.472(2), the Department thereafter appealed to the Franklin Circuit Court, which reversed the KBTA’s holding that the transactions were exempt and remanded the Summary Judgment Order with directions that the Department’s Final Ruling with respect to the application of KRS 139.472(2) be affirmed and that the Department’s sales and use tax assessments against King be reinstated. The Court of Appeals affirmed the Franklin Circuit Court.

The sole issue before the Court was the interpretation of KRS 139.472(2), which prior to its amendment effective July 1, 2004, allowed an exemption for:

“Prosthetic devices and physical aids” . . . include[ing] artificial devices prescribed by a licensed physician, or individually designed, constructed, or altered solely for the use of a particular crippled person so as to become a brace, support, supplement, correction, or substitute for the bodily structure including the extremities of the individual; artificial limbs, artificial eyes, hearing aids described by a licensed physician, or individually designed, constructed, or altered solely for the use of a particular disabled person; crutches, walkers, hospital beds, wheelchairs, wheelchair repair and replacement parts, and wheelchair lifting devices for the use of invalids and crippled persons; colostomy supplies, urostomy supplies, ileostomy supplies, insulin and diabetic supplies, such as hypodermic syringes and needles, and sugar (urine and blood) testing materials purchased for use by diabetics.

The Court reaffirmed its previous decision in Stephenson v. Woodward, 182 S.W.3d, (Ky. 2005) holding that the rule of statutory construction that tax exemption statutes are to be narrowly construed applies only if the statute in question is ambiguous or otherwise frustrates a plain meaning. The Court noted that if “[o]n the contrary, a plain reading of the statute yields a reasonable legislative intent, then that reading is decisive and must be given effect regardless of the canons of construction and regardless of the Court’s estimate of the statute’s wisdom.” The Court concluded “[w]e agree with the Board of Tax Appeals that the 1986 version of KRS 139.472 is neither ambiguous nor absurd and that it provides an exemption, parallel to the exemption for sales of prescription medicines, for all sales of ‘artificial devices prescribed by a licensed physician.’” The Court further stated that “it is reasonably clear, in sum, that the General Assembly intended an exemption for sales of ‘artificial devices prescribed by a licensed physician,’ and the courts below erred by reading into that exemption limitations not supported by the statutory language.” Accordingly, the Court reversed both the Court of Appeals and the Circuit Court’s Opinion, and remanded the matter to the Circuit Court for entry of an Order affirming the KBTA’s decision.

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