In a pending precedential decision, the California Office of Tax Appeals (OTA) held that the true object of a taxpayer’s prenatal imaging business involving elective 3D and 4D ultrasound services is the sale of images captured on tangible medium such as photos, CDs and DVDs.  Thus, receipts from such sales are subject to sales tax as tangible personal property.

California imposes sales tax on retail sales of tangible personal property but does not impose sales tax on the provision of a service that is not part of a sale of taxable tangible personal property. When a transaction involves both the provision of a service and transfer of tangible personal property, the taxability is determined based on whether the true object of the transaction is the tangible personal property or whether the transfer of tangible personal property is incidental to the performance of a service.

The taxpayer argued that the sale of the photos, CDs, and DVDs was incidental to the primary objective of the clinical service of elective diagnostic imaging. The taxpayer stated that only a small percentage of its patients purchased additional CDs and DVDs separate from the ultrasound services. OTA disagreed, determining that the true object of the sales was the tangible personal property, noting that the packaging and marketing of the services focused on the photos, CDs and DVDs containing the imaging, and the quality thereof.  OTA also determined that taxpayer’s services were not a medical necessity because the customers were required to have already obtained diagnostic ultrasounds from their healthcare providers.