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Leases of Mobile Medical Imaging Equipment - May Provide Tax Refund Options

author photo of James R. Dumler

I’ve been assisting a taxpayer with multistate sales and use tax issues pertaining to their subleases of mobile medical imaging equipment. Since similar problems can arise in connection with multistate leasing in general, some details of the case are worth noting.

The taxpayer leases imaging equipment such as MRI and PET scanners from prime lessors and then subleases it to various hospitals throughout the nation. The hospitals, in turn, use the equipment to enhance and/or supplement their ability to diagnose ailments and injuries. (Subleasing these units is generally cheaper than buying them outright.) The units may remain at a specific hospital for days, weeks, months or even years. The equipment is typically housed on a trailer that is parked on the hospital’s grounds and is operated by the hospital’s in-house staff.

The prime lessors generally charge sales or use tax on each of their monthly billings to the taxpayer. The tax charged is that of the state that the prime lessor has recorded as the unit’s home location. Since the unit may be moved from location to location (sometimes as frequently as daily), the state in which it is actually used may differ from the recorded home location.

For example:

The taxpayer leases a unit from a prime lessor who designates Maryland as the equipment’s home location. The taxpayer then subleases the unit to a hospital in Minnesota for a period of two years. The prime lessor is not notified that the unit has been moved to Minnesota, so it continues to charge and remit Maryland tax. At the end of the two year sublease, a Minnesota auditor determines that Minnesota tax applies to the taxpayer’s lease receipts and bills the taxpayer accordingly. Besides owing the Minnesota tax, the taxpayer must file a Maryland claim for refund to recoup the tax mistakenly paid to that state by the prime lessor while the unit was in Minnesota.

Now, imagine this scenario multiplied 100 times over in virtually every state. That is the task we have been addressing for our client these last few years. In addition, some states (commonly referred to as seller states, like California, Arizona, and Illinois) require the taxpayer to go through the prime lessor to obtain a refund. Many prime lessors are reluctant to cooperate, either out of fear of getting audited themselves or simply due to a lack of resources on their end to address the matter. To further complicate the process, the taxpayer sometimes moved the same equipment among multiple states within a single month, or leased the units to tax-exempt organizations during part of each review period.

The good news is that we have been able to work through these issues and obtain refunds for the taxpayer from more than 15 different states. Our client had operated as described for several years before our review, however, so some otherwise refundable tax was lost due to state statutes of limitations.

Do you have questions or concerns regarding taxation on mobile equipment leases?

While this particular fact pattern may be unusual, similar issues often arise as businesses expand into multiple states. If your business has mobile equipment leases in the medical industry (or other) - and you have questions or concerns about possible tax implications (or potential refund opportunities), please feel free to contact me directly with questions or to request a consultation. I can be reached via e-mail at James R. Dumler - or by calling toll-free 855-995-6789.

About the Author: James R. Dumler is a Senior Tax Specialist / Equity Partner at McClellan Davis, a full-service sales and use tax firm. Learn more about him by visiting his author bio page. See FIRM PROFILE to learn more about McClellan Davis

Other recent “Medical Industry Tax” posts by James R. Dumler:

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