Medical Equipment: Component Parts: What Are They?
One issue that has received a great deal of attention and seems to be ever changing is the identification of the “component parts of a building.” This designation is important primarily because of the distinction of component parts as immovable property as opposed to movable property and the resulting consequences of that designation, including tax issues, lien priority and lessor’s rights. When we think of immovable property, we usually think of land and buildings. All things that the law does not consider as immovable property is movable property - automobiles, jewelry, furniture, equipment. As Louisiana Civil Code Article 471 puts it, things that can normally be moved form one place to another are corporeal movables. For purposes of this article, we need not address incorporeal property.
Component parts of a building are, by definition, immovable property. Louisiana Civil Code Article 466 is titled “Component parts of a building or other construction” and provides for the ways in which an item may be considered a component part of a building:
- Things that are attached to a building and that, according to prevailing usages, serve to complete a building of the same general type, without regard to its specific use, are its component parts. Component parts of this kind may include doors, shutters, gutters, and cabinetry, as well as plumbing, heating, cooling, electrical, and similar systems.
- Other things are component parts of a building or other construction if they are attached to such a degree that they cannot be removed without substantial damage to themselves or to the building or other construction.
So why is this important to the healthcare industry? As major medical equipment and machinery (MRI machines, nuclear cameras, etc.) becomes more pervasive, more important and more expensive, it is important that healthcare providers understand all of the ramifications that accompany the equipment. The designation of that equipment as immovable or movable property is extremely important because it will dictate whether anyone has a lien or security interest in the equipment, who has the first priority security interest and how the equipment is taxed. In fact, pursuant to Act 44 of 2009, the Louisiana legislature has formed a special group to help determine what is immovable and movable property for tax purposes.
The official comments to La. C.C. art. 466 address the interpretation of the first paragraph and state that in the application of the first paragraph of the Article, the specific use of a building is not to be considered, nor is any specific industrial or commercial activity that may happen to be conducted within the building. In applying the Article to a building used as a hospital, the Louisiana Appeals Court for the 2nd Circuit in Willis-Knighton Medical Center v. Caddo-Shreveport Sales & Use Tax Commission, 862 So.2d 358 (La. App. 2 Cir. 2003) focused on commercial buildings in general, rather than hospitals. A lighting fixture that illuminates the interior of a commercial building, such as a hospital, serves to complete the building in its quality as a commercial building and is therefore its component part. By contrast, a nuclear camera located in a building used as a hospital, as in the Willis- Knighton cases, cannot be a component part of the building under the first paragraph of this Article, because the camera does not serve to complete the building itself, though it might be useful in the operation of a hospital within the building. The nuclear camera would nonetheless constitute a component part of the building under the third paragraph of the Article if it could not be removed without substantial damage to either itself or the building. The Louisiana Supreme Court disagreed with this analysis by the appellate court but the legislature made clear in Act 301 of 2005 that the societal expectations test rejected by the Supreme Court should be applied by the courts going forward. This test provides that things attached to an immovable may be component parts of the immovable or may remain movables depending on societal expectations, namely, prevailing notions in society and economy concerning the status of those things.
Assuming that the removal of the equipment at issue from the building would cause substantial damage to the equipment or the building, then the equipment is immovable property. However, if the equipment can be removed without substantial damage to the building or the equipment, then more analysis is required. It does not seem that most specialized medical equipment would be considered immovable under the Willis-Knighton analysis because it focuses on the use of the building as a general commercial building, rather than a specific purpose, i.e. a medical office, hospital, ambulatory surgery center, etc. The removal of specialized medical equipment from a hospital for instance (assuming no substantial damage occurred) would not render the building any less useful as a general commercial building. So, the equipment at issue there would be movable as opposed to immovable property. Each case must be analyzed on its own merits to determine if the particular equipment is movable or immovable property but this article will hopefully shed a little bit of light on an issue that has confounded lawyers and judges alike.