The Michigan Court of Appeals recently ruled that medical instruments distributed to hospitals at no additional cost were subject to use tax. The taxpayer was a manufacturer of orthopedic implants. When the taxpayer sold implants, the surgical instruments necessary to install the implants were also provided to customers at no additional cost. Customers were required to reimburse the taxpayer for any loss, damage, or destruction to the instruments.
In Michigan, the free distribution of property to a customer is not a taxable use unless the party distributing the property retains control over it. The Court determined that the taxpayer was making a taxable use of the instruments because control was retained. Control was retained because customers were required to reimburse the taxpayer for loss, damage, or destruction. Since control of the property was retained in Michigan, there was a taxable use of the property in Michigan by the manufacturer.