    TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN


                                    NO. 03-11-00178-CV



                                Zimmer US, Inc., Appellant

                                               v.

        Susan Combs, Comptroller of Public Accounts of the State of Texas; and
            Greg Abbott, Attorney General of the State of Texas, Appellees


   FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT
   NO. D-1-GN-09-002096, HONORABLE STEPHEN YELENOSKY, JUDGE PRESIDING



                                        OPINION


               In this suit for a refund of use taxes paid on out-of-state purchases of certain

surgical instruments, appellant Zimmer US, Inc. appeals from the trial court’s order denying

its motion for summary judgment and granting summary judgment in favor of appellees,

Susan Combs, Comptroller of Public Accounts, and Greg Abbott, Attorney General of the

State of Texas (collectively, “the Comptroller”). See Tex. Tax Code Ann. § 112.151 (West

2008); see also id. § 112.154 (West 2008). Zimmer asserts that the instruments are orthopedic

devices or, alternatively, supplies for orthopedic devices and are therefore exempt from use tax

under section 151.313(a)(5) of the Texas Tax Code and section 3.284(a) of the Texas

Administrative Code (“rule 3.284”). See Tex. Tax Code Ann. § 151.313(a)(5) (West 2008);

34 Tex. Admin. Code § 3.284(a)(1) (2011) (Tex. Comptroller of Pub. Accounts, Drugs,

Medicines, Medical Equipment, & Devices (Tax Code § 151.313)). Because we have determined
 that the instruments are exempt under section 151.313(a)(5) and rule 3.284(a), we reverse the trial

 court’s judgment and render summary judgment in favor of Zimmer.


                                         BACKGROUND

                Zimmer markets and sells reconstructive implants to hospitals and healthcare

 providers in Texas.1 Zimmer also develops techniques for surgical procedures to implant these

 prosthetics. From its parent company outside Texas, Zimmer purchases surgical instruments and

 lends them to healthcare providers for use in each procedure. It is these instruments that are the

 subject of the present tax-refund dispute. According to Zimmer, the instruments are specially

 designed by product engineers within its parent company for use in each of Zimmer’s different

 surgical procedures. Zimmer asserts that the instruments at issue do not include tools for general

 surgical or orthopedic purposes. Rather, they are specialized and intended for use in specific

 orthopedic surgical procedures. For example, the instruments include cutting guides that ensure

 proper cuts to bone surfaces, “reamers” that prepare bones to accept prostheses, and “provisional”

 instruments that serve as trial implants by replicating aspects of the eventual prostheses.

                After Zimmer learned that the Comptroller considered these instruments taxable,

 it made a payment to the Comptroller representing the use taxes on the instruments provided in

 Texas between July 2003 and February 2007. Zimmer then submitted a refund claim to the

 Comptroller for the portion of the tax that was not barred by limitations, a total of $947,827, plus

 interest. Specifically, Zimmer claimed that the instruments are exempt from taxation. After


       1
         It is undisputed that these items are prosthetic devices exempt from the use tax. Also
undisputed is the amount of tax Zimmer paid on the instruments at issue in this case.

                                                  2
holding an administrative hearing on the matter, the Comptroller denied Zimmer’s claim. See

Tex. Tax Code Ann. § 111.105 (West 2008) (providing for administrative hearings on tax refund

claims). Zimmer then sued the Comptroller for the refund in district court. After the parties filed

cross motions for summary judgment, the trial court granted summary judgment in favor of the

Comptroller. In this appeal, Zimmer claims that the instruments are exempt from taxation under

section 151.313(a)(5) and rule 3.284(a) as either “orthopedic devices” or, alternatively, “supplies

. . . for the listed items.”


                                  STANDARD OF REVIEW

                 Summary judgments are reviewed de novo. Valence Operating Co. v. Dorsett,

164 S.W.3d 656, 661 (Tex. 2005). When, as here, both parties move for summary judgment on

the same issues and the trial court grants one motion and denies the other, the appellate court

considers the summary-judgment evidence presented by both sides, determines all questions

presented, and if it finds the trial court erred, renders the judgment the trial court should have

rendered. Id.

                 Zimmer’s arguments are based primarily on the construction of the tax code and

the Comptroller’s rules, which are legal questions we review de novo. 7-Eleven, Inc. v. Combs,

311 S.W.3d 676, 683 (Tex. App.—Austin 2010, pet. denied). When resolving an issue of statutory

construction, we must first and foremost follow the plain language of the statute. General Motors

Corp. v. Bray, 243 S.W.3d 678, 685 (Tex. App.—Austin 2007, no pet.). Where statutory language

is ambiguous, its construction by an agency charged with its enforcement is entitled to serious

consideration so long as it is reasonable and does not contradict the statute’s plain language. See

                                                3
Feiss v. State Farm Lloyds, 202 S.W.3d 744, 747 (Tex. 2006) (explaining that deference is owed

to agency regulation interpreting statute only when statute is ambiguous and agency’s

construction reasonable); Tarrant Appraisal Dist. v. Moore, 845 S.W.2d 820, 823 (Tex. 1993).

In addition, statutory exemptions from taxation are strictly construed against the taxpayer.

North Alamo Water Supply Corp. v. Willacy County Appraisal Dist., 804 S.W.2d 894, 899 (Tex.

1991); DuPont Photomasks, Inc. v. Strayhorn, 219 S.W.3d 414, 421 (Tex. App.—Austin 2006,

pet. denied).

                Administrative rules are ordinarily construed in the same manner as statutes.

Rodriguez v. Service Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex. 1999); 7-Eleven, 311 S.W.3d

at 683. Unless a rule is ambiguous, we follow the rule’s clear language; when there is vagueness,

ambiguity, or room for policy determinations in a rule, we defer to the agency’s interpretation

unless it is plainly inconsistent with the language of the rule. BFI Waste Sys. of N. Am., Inc. v.

Martinez Envtl. Group, 93 S.W.3d 570, 575 (Tex. App.—Austin 2002, pet. denied).


                                         DISCUSSION

                The use tax, imposed on the consumption of goods purchased out of state and

brought into Texas, is designed “to more evenly distribute the tax burden among all consumers

by imposing a tax on the fruits of an interstate purchase as well as on the sale of property in the

State.” Bullock v. Lone Star Gas Co., 567 S.W.2d 493, 497 (Tex. 1978). The tax serves “to

prevent avoidance of a state’s sales tax by the purchase of goods in another state, and to place

retailers in the state upon equal footing with out-of-state competitors, who are not obligated to




                                                4
collect and remit sales tax.” Bullock v. Foley Bros. Dry Goods Corp., 802 S.W.2d 835, 838

(Tex. App.—Austin 1990, writ denied).

               Texas Tax Code section 151.313(a)(5) exempts from the use tax “a brace;

hearing aid or audio loop; orthopedic, dental, or prosthetic device; ileostomy, colostomy, or ileal

bladder appliance; or supplies or replacement parts for the listed items.” Tex. Tax Code Ann.

§ 151.313(a)(5). Charged under section 111.002 of the tax code with adopting rules for the

enforcement of the code, the Comptroller has interpreted this exemption in rule 3.284.

Subsection (a) of that rule defines various terms from the tax code as follows:


       Appliance or device—An instrument, apparatus, implement, machine, contrivance,
       implant, chemical, or other similar or related product that does not achieve its
       primary intended purposes through chemical action within or on the body, and that
       is not dependent upon being metabolized for the achievement of its primary
       intended purposes.

       ...

       Orthopedic appliance—Any appliance or device designed specifically for use in
       the correction or prevention of human deformities, defects, or chronic diseases of
       the skeleton, joints, or spine.

       ...

       Prosthetic device—An item that is artificial and replaces a missing part of the
       body, performs the function of a vital organ or appendage of the human body, or
       is permanently implanted in the body. Examples of prosthetic devices are heart-
       lung pumps, nasal gastric and gastrointestinal devices, ureteral stents, urethral
       stents, and artificial kidney machines, and related components and supplies.


34 Tex. Admin. Code § 3.284(a)(1), (12), (13) (2011).

               The sole issue in the present case is whether, in light of this rule, the instruments

Zimmer loans to healthcare providers are subject to the exemption in section 151.313(a)(5) of

                                                5
 the tax code. Zimmer claims that the instruments are exempt for two alternate reasons: first,

 because they are orthopedic devices as the Comptroller has defined that term in rule 3.284, or

 second, because they are “related components and supplies” for Zimmer’s undisputedly exempt

 prosthetics.2 Accordingly, Zimmer asks that we reverse the trial court’s order denying its motion

 for summary judgment and granting the Comptroller’s.

                We first turn to whether the instruments at issue are exempt as orthopedic devices.

 Zimmer argues that the instruments are exempt under the plain, unambiguous language of rule

 3.284(a)(12), which defines “orthopedic appliance.” Zimmer states that the instruments are

 “designed specifically for use in” orthopedic surgeries, which are a part of “the correction or

 prevention of human deformities, defects, or chronic diseases of the skeleton, joints, or spine.”

 Id. Zimmer argues that the instruments are designed specifically for use in particular orthopedic

 surgical procedures, and because the implantation of prosthetics would be impossible without

 these procedures, they are part of the “correction” of orthopedic conditions.

                Zimmer also argues that the language of rule 3.284(a)(13), defining “prosthetic

 device,” supports its argument. In the rule, the Comptroller expressly defines a “prosthetic device”

 to be “an item that is artificial and replaces a missing part of the body, performs the function of




       2
          Section 151.313(a)(5) uses only the language “orthopedic . . . or prosthetic devices” in
regard to the exemption at issue in this case, while the defined terms in rule 3.284(a)(12) and (13)
are “orthopedic appliance” and “prosthetic device” respectively. However, the words “device” and
“appliance” are defined together in rule 3.284(a)(1), and the Comptroller acknowledges that she
uses these words interchangeably. For clarity, unless specifically referring to the content of rule
3.284(a)(12), we will use the statutory language of “orthopedic device.” See Tex. Tax Code Ann.
§ 151.313(a)(5) (West 2008); 34 Tex. Admin. Code § 3.284(a)(1) (2011) (Tex. Comptroller of Pub.
Accounts, Drugs, Medicines, Medical Equipment, & Devices (Tax Code § 151.313)).

                                                  6
a vital organ or appendage of the human body, or is permanently implanted in the body.” Zimmer

notes that the Comptroller could have included such additional requirements in the definition

of “orthopedic appliance” in rule 3.284(a)(12), but did not do so. According to Zimmer, that

omission should be considered intentional, and this Court should not second-guess it by reading

into “orthopedic appliance” any requirements expressly stated only as to “prosthetic device.”

See Smith v. Baldwin, 611 S.W.2d 611, 616 (Tex. 1980) (“When the Legislature has carefully

employed a term in one section of a statute, and has excluded it in another, it should not be

implied where excluded.”); Lewis v. Jacksonville Bldg. & Loan Ass’n, 540 S.W.2d 307, 310 (Tex.

1976) (agency rules generally construed in same manner as statutes).

               The Comptroller, however, claims that the instruments are not exempt and that

the court therefore correctly granted summary judgment in its favor for three reasons. First, the

Comptroller argues that the instruments would only be subject to the exemption if they were

implanted into the body and supported, corrected, or replaced parts of the body on an ongoing

basis, which they do not. These traits are required under section 151.313(a)(5), the Comptroller

claims, because they are common to all of the items listed—braces, hearing aids, colostomies,

and so forth—and must therefore be read into all of the rules interpreting that section.

               Second, the Comptroller notes that this requirement is reflected in years of letter

rulings issued to taxpayers. For example, the Comptroller has ruled that bone wire is exempt

when it is implanted in the body and non-exempt when it is not. See, e.g., Tex. Comptroller of Pub.

Accounts, STAR Document No. 200201747L (issued Jan. 29, 2002); Tex. Comptroller of Pub.

Accounts, STAR Document No. 200508245L (issued Sept. 8, 2005). Similarly, the Comptroller



                                                7
has ruled that coronary stents are exempt, while coronary guide wires, catheters, and catheter

supplies used during surgery are not. See Tex. Comptroller of Pub. Accounts, STAR Document

No. 9710965L (issued Oct. 15, 1997); see also Tex. Comptroller of Pub. Accounts, STAR

Document No. 9008L1038B01 (issued Aug. 24, 1990); Tex. Comptroller of Pub. Accounts,

STAR Document No. 9510L1378D11 (issued Oct. 31, 1995) (ruling that kidney dialysis

machines are exempt, while accessories for dialysis such as reclining chairs and scales are not).

The Comptroller urges that such a longstanding interpretation warrants deferential treatment

by this Court. See USA Waste Servs. of Houston, Inc. v. Strayhorn, 150 S.W.3d 491, 495 (Tex.

App.—Austin 2004, pet. denied) (“We bear in mind that an administrative agency has the power

to interpret its own rules, and its interpretation is entitled to great weight and deference.”).

                Third, the Comptroller claims that its reading of the exemption comports with the

plain language of the rule’s definition of “appliance or device.” The Comptroller reasons that

under this definition, a qualifying item would have to “take effect as a result of, or be affected by,

the actions of the human body,” which items used exclusively during surgery do not do.

                Zimmer contends that we must not defer to the Comptroller’s interpretation of

rule 3.284(a). Unless a rule is ambiguous, Zimmer stresses, we must follow the plain language

of that rule. See BFI Waste Sys. of N. Am., Inc., 93 S.W.3d at 575–76. Zimmer alleges that the

interpretation urged by the Comptroller is inconsistent with the plain language of rule 3.284

and therefore, by giving it deference, we would sanction the Comptroller’s attempt to amend

its rulemaking without adhering to the Texas Administrative Procedure Act (APA). See Tex.

Gov’t Code Ann. §§ 2001.001–.041 (West 2008); Myers v. State, 169 S.W.3d 731, 734 (Tex.



                                                  8
App.—Austin 2005, no pet.) (“Allowing an agency to create broad amendments to its rules

through adjudication, rather than through its rule making authority, effectively undercuts the

Administrative Procedures Act.”).

               We agree that the Comptroller’s interpretation of rule 3.284 must be rejected if it

contradicts the plain language of a rule that reasonably interprets the tax code. See Rodriguez,

997 S.W.2d at 254–55 (“[W]e cannot defer to an administrative interpretation that is ‘plainly

erroneous or inconsistent with the regulation’ . . . . If the [agency] does not follow the clear,

unambiguous language of its own regulation, we reverse its action as arbitrary and capricious.”).

To determine if this is the case, we first determine whether rule 3.284 reasonably interprets

section 151.313 of the tax code. See Feiss, 202 S.W.3d at 747 (before courts give deference to

regulation, statutory language “must be ambiguous” and “agency’s construction must be

reasonable”). Our first duty is to follow the plain language of the statute. General Motors Corp.,

243 S.W.3d at 685. If we find the language to be ambiguous, however, we must give serious

consideration to the agency’s construction if it is reasonable and does not conflict with that

language. Railroad Comm’n v. Texas Citizens for a Safe Future & Clean Water, 336 S.W.3d 619,

624 (Tex. 2011).

               In this case, the plain language of the statute includes “a brace; hearing aid or audio

loop; orthopedic, dental, or prosthetic device; ileostomy, colostomy, or ileal bladder appliance;

or supplies or replacement parts for the listed items,” without defining any of those terms. The

statute is therefore ambiguous to the extent that it leaves undefined terms that may be needed for

the Comptroller’s administration of the statute. See generally Office of Pub. Util. Counsel v.



                                                 9
Public Util. Comm’n, 131 S.W.3d 314, 321 (Tex. App.—Austin 2004, pet. denied) (“[T]he

legislature does not need to include every specific detail or anticipate all unforeseen

circumstances.”). By adopting rule 3.284(a)(12), the Comptroller has administratively defined

the statutory term “orthopedic device” to mean “any appliance or device designed specifically

for use in the correction or prevention of human deformities, defects, or chronic diseases of

the skeleton, joints, or spine.” There is nothing in the tax code that suggests this definition is

unreasonable, nor does the Comptroller argue that it is. Accordingly, we hold that rule 3.284 is

a reasonable interpretation that does not contradict the tax code’s plain language.

               Because the interpretation of “orthopedic device” in rule 3.284 is reasonable, the

Comptroller is obliged to follow that interpretation. Myers, 169 S.W.3d at 734 (“If an agency

does not follow the unambiguous language of its own rules, we must consider its actions arbitrary

and capricious.”); BFI Waste Sys. of N. Am., Inc., 93 S.W.3d at 575 (“Valid agency rules have the

same force and effect as statutes.”). We must therefore determine whether the requirements now

urged by the Comptroller—that exempt items must be implanted or continually used to support

or replace a body part—are consistent with the rule. Specifically, we examine (1) whether rule

3.284 is ambiguous, and (2) if so, whether the interpretation now urged by the Comptroller

contradicts the plain language of that rule. BFI Waste Sys. of N. Am., Inc., 93 S.W.3d at 575–76.

We hold that the rule is not ambiguous, but even if it were, the Comptroller’s position that “an

orthopedic appliance or device must perform some function in the actual ongoing correction or

prevention of human deformities” would contradict its plain language.

               The rule at issue leaves no major terms undefined, and it includes very specific

lists such as “human deformities, defects, or chronic diseases of the skeleton, joints, or spine.”

                                                10
The inclusion of the phrase “artificial and replaces a missing part of the body, performs the

function of a vital organ or appendage of the human body, or is permanently implanted in the

body” in only the definition of “prosthetic device” makes clear that those requirements were not

meant to apply to “orthopedic appliances.” See Cameron v. Terrell & Garrett, Inc., 618 S.W.2d 535,

540 (Tex. 1981) (“[E]very word excluded from a statute must . . . be presumed to have been

excluded for a purpose. Only when it is necessary to give effect to the clear legislative intent

can we insert additional words or requirements into a statutory provision.”); Lewis, 540 S.W.2d

at 310 (agency rules generally construed in same manner as statutes). Rule 3.284 is therefore

unambiguous, and we do not defer to the Comptroller’s interpretation but instead follow the

plain language of the rule. See 7-Eleven, 311 S.W.3d at 683 (“‘Unless the rule is ambiguous, we

follow the rule’s clear language.’ We defer to an agency’s interpretation of its own rule when

the rule is vague or ambiguous, unless the administrative interpretation is ‘plainly erroneous or

inconsistent with the regulation.’” (quoting Rodriguez, 997 S.W.2d at 254–55)); see also Myers,

169 S.W.3d at 734–35.

                In any event, the Comptroller’s interpretation is contradictory to the plain language

of the rule for three reasons. First, it tries to import into “orthopedic appliance” almost precisely

the same language that the Comptroller expressly used only for “prosthetic device.” Second, it

tacks on the requirement that a “correction” of an orthopedic condition be “continual” or

“ongoing” when there is no language in the rule to suggest this is the case. Third, although the

interpretation is reflected in rulings that the Comptroller has issued to taxpayers over many

years, these rulings do not bind us to accept an erroneous interpretation simply because it is

longstanding. See Myers, 169 S.W.3d at 734. Consequently, we disregard the Comptroller’s

                                                 11
 interpretation and consider whether Zimmer’s instruments are exempt under the plain language

 of rule 3.284.

                  In order to receive summary judgment, Zimmer was required to prove that there

 was no genuine issue of material fact concerning its instruments and that it was entitled to a

 judgment that they are exempt as a matter of law. See Tex. R. Civ. P. 166a(c). Zimmer presented

 undisputed summary-judgment evidence that the instruments at issue are “designed specifically

 for use in the correction or prevention of human deformities, defects, or chronic diseases of

 the skeleton, joints, or spine,” including the affidavit of Kevin Cook, a director and former

 development engineer with Zimmer’s parent company. Based on his personal knowledge of the

 design of Zimmer’s instruments, Cook stated that each one is designed by product-development

 engineers to facilitate a specific step in a specific procedure to implant one of Zimmer’s

 prostheses. Cook also described in detail the step-by-step performance of one of Zimmer’s

 surgical techniques, emphasizing the specialized role of each instrument used in that technique

 to correct a defective knee joint. Attached as exhibits were video excerpts from two corrective

 surgeries using Zimmer’s instruments, diagrams of Zimmer’s instrument kits, and copies of

 pamphlets instructing healthcare providers in the execution of Zimmer’s techniques using its

 instruments. In the affidavit, Cook explained that these demonstrated the specialized purpose of

 each instrument and the fact that the surgeries are part of the correction of defective joints.

                  The Comptroller does not dispute any material fact in Zimmer’s motion for

 summary judgment.3 Nor does the Comptroller dispute that the instruments are exempt under


       3
         The Comptroller cites conflicting evidence as to whether Zimmer’s prosthetic devices
might be successfully implanted without the use of the instruments at issue. However, there is no

                                                 12
 the reading of the statute urged by Zimmer. Because Zimmer’s summary-judgment evidence is

 uncontroverted and conclusively demonstrates that the instruments satisfy the definition of

 “orthopedic device” under tax code section 151.313(a)(5) and rule 3.284(a)(12), we hold that

 Zimmer is entitled to summary judgment. See City of Keller v. Wilson, 168 S.W.3d 802, 806

 (Tex. 2005) (noting that evidence is conclusive when reasonable people could not differ in

 their conclusions).

                 The instruments at issue are exempt from use tax under the plain language of rule

 3.284(a)(12) as it interprets tax code section 151.313(a)(5). Consequently, the trial court erred

 in granting the Comptroller’s motion for summary judgment and denying Zimmer’s.


                                         CONCLUSION

                 We reverse the trial court’s order and render summary judgment in favor of Zimmer.




                                                __________________________________________

                                                Diane M. Henson, Justice

 Before Chief Justice Jones, Justices Pemberton and Henson;
   Concurring Opinion by Justice Pemberton

 Reversed and Rendered

 Filed: February 9, 2012




indication that an item “designed specifically for use” in corrective procedures, as required by rule
3.284, must be strictly necessary for such procedures. This discrepancy therefore raises no “genuine
issue as to any material fact.” Tex. R. Civ. P. 166a(c) (emphasis added).

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