RenalWest L.C. v. Arizona Dept. of Revenue

Citation943 P.2d 769,189 Ariz. 409
Decision Date21 January 1997
Docket NumberCA-TX,No. 1,1
Parties, 234 Ariz. Adv. Rep. 32 RENALWEST L.C., an Arizona limited liability company and successor in interest to Chandler Community Dialysis Center, Ltd., an Arizona corporation, Plaintiff-Appellee, Cross-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, an agency of the State of Arizona, Defendant-Appellant, Cross-Appellee. 96-0003.
CourtCourt of Appeals of Arizona
OPINION

TOCI, Judge.

Arizona Department of Revenue ("DOR") appeals from a judgment of the Arizona Tax Court upholding a use tax exemption for RenalWest L.C.'s ("RenalWest") purchases of kidney dialysis machines and certain replacement parts as a "prosthetic appliance." RenalWest cross-appeals from the tax court's denial of the exemption for other items, claiming that such items fall within the definition of a prosthetic appliance because they are necessary to safe dialysis treatment.

Arizona Revised Statutes Annotated ("A.R.S.") section 42-1409(A)(17) (Supp.1996) provides a use tax exemption for "prosthetic appliances" prescribed or recommended by a physician, dentist or licensed health care professional. This appeal presents two issues: First, whether dialysis equipment qualifies as a prosthetic appliance pursuant to A.R.S. section 23-501(7)(1996); and, second, whether the exemption for prosthetic appliances granted by A.R.S. section 42-1409(A)(17) is available to a for profit corporation using dialysis equipment to treat patients with prescriptions for such treatment. We hold that dialysis equipment qualifies as a prosthetic appliance. Because the exemption requires only that the taxpayer use the prosthetic appliance pursuant to a doctor's prescription, RenalWest is entitled to the exemption. We therefore affirm in part and reverse in part.

I. FACTUAL AND PROCEDURAL BACKGROUND

RenalWest is an Arizona corporation that, for a fee, provides kidney dialysis treatment to patients whose doctors prescribe treatment. Dialysis is a mechanical and chemical process of removing accumulated metabolic waste from the human body. The process provides a substitute for human kidneys. In the dialysis process, the patient's blood is shunted from the body through a machine for diffusion and filtration and then returned to the patient's body. Dialysis is a complicated, integrated process that requires the use of machinery, parts, solutions, testing equipment and supplies.

From October 1, 1985 through December 31, 1989, RenalWest purchased dialysis equipment for use in its business. In 1990, DOR audited these purchases and assessed a $5,570.80 use tax on the untaxed purchases of $111,418.00. RenalWest protested the assessment and exhausted its administrative remedies.

The State Board of Tax Appeals held that purchases of dialysis machinery and replacement parts 1 were not subject to the use tax because they were exempt prosthetic appliances pursuant to A.R.S. section 42-1409(A)(17). It found, however, that other elements, equipment, solutions, and supplies used in the dialysis process, 2 were taxable. Both DOR and RenalWest appealed to the tax court.

The tax court upheld these findings. 3 It also awarded $20,000.00 in attorneys' fees, and $4,502.64 in costs to RenalWest. DOR now appeals to this court, claiming that because RenalWest itself did not have a prescription for dialysis treatment, the tax court erred in exempting RenalWest's dialysis equipment and replacement parts. RenalWest cross-appeals, asserting that the solutions, testing equipment, and supplies used in the dialysis process were also exempt.

II. DISCUSSION
A. Use Tax Exemption for Prosthetic Appliances

DOR argues that kidney dialysis machines are not exempt prosthetic appliances pursuant to A.R.S. section 42-1409(A)(17), unless the taxpayers claiming use tax exemptions have prescriptions for the prosthetic appliances. RenalWest contends that all dialysis treatment it provides is prescribed by a doctor. Therefore, when RenalWest buys and uses dialysis equipment, it is buying and using a prosthetic device prescribed by a doctor. RenalWest also asserts that all items essential to dialysis treatment are prosthetic appliances and are therefore exempt. We agree with RenalWest.

The use tax is "an excise tax on the ... use or consumption in this state of tangible personal property purchased from a retailer, as a percentage of the sales price." A.R.S. § 42-1408(A) (Supp.1996). Exemptions from the use tax are listed in A.R.S. section 42-1409. It provides:

A. The tax levied by this article does not apply to the storage, use or consumption in this state of the following described tangible personal property:

17. Prosthetic appliances, as defined in § 23-501, prescribed or recommended by a person who is licensed, registered or otherwise professionally credentialed as a physician....

The interpretation of a statute is a question of law that we review de novo. Libra Group v. State, 167 Ariz. 176, 179, 805 P.2d 409, 412 (App.1991). Although we strictly construe tax exemptions, we will not deny lawful exemptions. Maricopa County v. North Phoenix Baptist Church, 2 Ariz.App. 418, 423, 409 P.2d 577, 582 (1966). Therefore, RenalWest is entitled to an exemption for items it uses if the items are both "prescribed by a physician" and "prosthetic appliances." For the purpose of determining whether the language, "prescribed by a physician" in A.R.S. section 42-1409(A)(17) requires that RenalWest itself hold a prescription for dialysis, we assume that dialysis equipment is a prosthetic appliance. Our discussion of the latter issue appears in subparagraph 2.

1. "Prescribed by a Physician" in A.R.S. Section 42-1409(A)(17)

The tax court properly exempted RenalWest's purchases from the use tax even though it did not have a doctor's prescription or recommendation to purchase a prosthetic appliance. Generally, we give statutes their "obvious and natural meaning." Odle v. Shamrock Dairy of Phoenix, 7 Ariz.App. 515, 518, 441 P.2d 550, 553 (1968). Here, the statutory exemption requires that a taxpayer use prosthetic appliances prescribed or recommended by a physician. Nothing in the exemption requires the taxpayer to purchase the appliance pursuant to that prescription. RenalWest complied with the statute when it used a prosthetic appliance, the kidney dialysis machine, to treat only those patients whose doctors prescribed dialysis.

Moreover, the statutory language defines the type of appliances exempt from tax, rather than who receives the exemption. For example, it precludes exemptions for non-prescription prosthetic appliances such as hairpieces and certain hearing aids. The statute does not, however, deprive taxpayers like RenalWest of the exemption merely because a doctor has not issued a prescription to RenalWest. See State Tax Comm'n v. Anderson Dev. Corp., 117 Ariz. 555, 574 P.2d 43 (App.1977) (use tax exemption for mining allowed for contractor performing mining work for a mining operator).

As the record indicates, RenalWest patients, like most dialysis patients, do not individually purchase dialysis equipment, even if they receive treatment at home. Dialysis equipment costs over $20,000.00 and its use requires monitoring to avoid fatalities. To qualify for Medicare coverage patients must receive treatment in a dialysis facility. From a practical standpoint, because the ordinary patient does not purchase dialysis equipment, the only purchasers of dialysis equipment that could benefit from the prosthetic appliance exemption are treatment centers.

DOR argues that we must construe statutes adopted at the same time "as a whole." See Bank of Lowell v. Cox, 35 Ariz. 403, 413, 279 P. 257, 261 (1929). It claims that concurrently enacted exemptions, like A.R.S. section 42-1409(A)(18) (Supp.1996), that exempt prescription eyeglasses and contact lenses, illustrate the legislative intent that taxpayers who claim exemptions pursuant to A.R.S. section 42-1409(A)(17) must hold a prescription for the purchase of a prosthetic appliance. We disagree. The individuals holding those prescriptions routinely directly purchase such items for their own personal use. In contrast, dialysis centers, rather than individual patients, routinely purchase the prosthetic appliance at issue here. Furthermore, had the legislature so intended, it could have simply limited the exemption to "prosthetic appliances that a patient purchases pursuant to a doctor's prescription or recommendation." Instead, the legislature provided an exemption for the use of "prosthetic appliances ... prescribed or recommended by a ... physician." RenalWest's dialysis machine clearly meets this definition.

DOR also contends that the legislature did not intend to provide exemptions to "for-profit" institutions like RenalWest, because A.R.S. section 42-1409(A)(13)(c) (Supp.1996), enacted one year after A.R.S. section 42-1409(A)(17), exempts tangible personal property purchased by "not-for-profit" kidney dialysis centers. DOR argues that only A.R.S. section 42-1409(A)(13)(c) exempts dialysis equipment, reasoning that if A.R.S. section 42-1409(A)(17) provides an exemption for dialysis equipment, A.R.S. section 42-1409(A)(13)(c) would be redundant. See State v. Edwards, 103 Ariz. 487, 446 P.2d 1 (1968) (presumption is that legislature does not intend to enact redundant laws). We disagree.

Unlike A.R.S. section 42-1409(A)(17), A.R.S. section 42-1409(A)(13)(c) exempts all tangible personal property of a nonprofit licensed kidney dialysis center, not just prosthetic appliances. Furthermore, unlike the statute at issue here, A.R.S. section 42-1409(A)(13)(c) does not limit the exemption by requiring a prescription. Because A.R.S. section 42-1409(A)(17) only exempts...

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