Tax Type
Retail Sales and Use Tax
Description
Agriculture; Medical, dental, and optical supplies and drugs; Veterinary supplies
Topic
Taxability of Persons and Transactions
Date Issued
03-21-1997
March 21, 1997
Re: Request for Ruling: Retail Sales and Use Tax
Dear*****************
This is in response to your letter regarding the application of the sales and use tax to certain transactions conducted by************* (the "Taxpayer").
FACTS
The Taxpayer is primarily a large animal veterinary clinic which provides services predominantly to agricultural customers. In addition to using medicines and drugs in its professional practice, the Taxpayer also makes retail sales of nonprescription, or over-the-counter (OTC), drugs. You have set out a number of transactions which involve the purchase, use, or retail sale of prescription and OTC drugs I and request confirmation that your proposals comply with the sales and use tax laws.
RULING
Code of Virginia § 58.1-609.7(1) provides that "any veterinarian dispensing or selling medicines or drugs on prescription shall be deemed to be the user or consumer of all such medicines and drugs." (Emphasis added.) In this regard, see the enclosed Public Document 89-125 (4/24/89) in which the Tax Commissioner determined that a veterinarian may not purchase prescription medicines and drugs exempt of the tax under any circumstances.
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- Further, the regulations set out in 23 VAC 10-210-6050 provide that:
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- Veterinarians are engaged in rendering professional services and are the users or consumers of medicines, drugs, medical supplies, equipment and all other tangible personal property purchased for use in their operation. They must pay the tax to their suppliers on purchases of this property. If the purchases are made from instate or out-of-state suppliers who do not collect the Virginia sales or use tax, the veterinarian must pay the use tax directly to the Department of Taxation....
The regulations also indicate that veterinarians who maintain a resale inventory of medicines, drugs, and other items may purchase these items exempt of the tax for resale. Upon the sale of these items to customers, the veterinarian must either charge and collect the tax or take from its tax exempt customers a fully completed certificate of exemption. Public Document 87-251 (11/9/87) addresses this issue and indicates that nonprescription medicines and drugs that will be sold at retail may be purchased by the veterinarian exempt of the tax for resale. That determination, however, reiterates that the veterinarian must pay the tax on the purchase of all prescription medicines and drugs that are dispensed or sold.
With these provisions in mind, each of your specific transactions will be addressed as follows:
1. Prescription drugs: The Taxpayer indicates that it will pay the sales tax to vendors on purchases of its prescription drugs.
Your proposal to pay the tax to vendors on your purchase of prescription medicines and drugs is correct. If the vendor does not collect the tax, the Taxpayer is required to report and pay the tax directly to the department on its monthly sales and use tax return.
2. OTC drugs predominantly used to provide veterinary services: The Taxpayer indicates that it will pay the sales tax to vendors.
As discussed above, veterinarians are deemed to be the taxable users or consumers of all tangible personal property used to provide their professional services. Accordingly, the Taxpayer is correct in paying the tax to vendors on the purchase of these items. If any of these OTC drugs are subsequently sold at retail, the Taxpayer may claim a credit for the tax which was paid to vendors on the Taxpayer's purchase of the item. Of course, the Taxpayer is required to charge an collect the tax on the retail sale of these items or take a certificate of exemption from it tax exempt agricultural customers.
As an alternative, the Taxpayer may purchase these OTP drugs exempt for resale. In this scenario, the Taxpayer would be required to remit the tax directly to the department when it uses the drug in connection with providing professional services.
3. OTC drugs normally sold to exempt agricultural customers: The Taxpayer proposes to purchase these items exempt of the tax.
The Taxpayer is correct in proposing that these items may be purchased exempt of the tax for resale. The subsequent retail sale of these items to exempt agricultural customers is also exempt, provided the Taxpayer has taken a fully completed certificate of exemption.
4. OTC drugs occasionally taken from inventory for veterinary use: The Taxpayer proposes to pay the sales tax directly to the department on its monthly sales and use tax return.
The Taxpayer is correct in proposing that it may purchase these items exempt of the tax for resale. As proposed, the Taxpayer is required to pay the tax directly to the department on the cost price of these items when they are withdrawn from resale inventory and used by the Taxpayer in providing its services.
5. OTC drugs sold to nonexempt customers: The Taxpayer proposes to collect the tax on these retail sales.
This proposal is also correct. These items may be purchased by the Taxpayer exempt of the tax for resale. The subsequent sale of these items to nonexempt customers is taxable. The tax must be charged to and collected from these customers collected from these customers and then remitted to the department with the Taxpayers monthly sales and use tax return.
A final issue to be addressed is the application of the tax to the extra-label use of drugs. Extra-label use means the administration or application of an OTC drug in a manner that is not in accordance with the drug's labeling. I understand that for such usage, the federal Food and Drug Administration specifies that certain criteria be met. These criteria include (1) that a clinical diagnosis is made by an attending veterinarian, and (2) that procedures are instituted to assure that the identities of the treated animals are carefully maintained. I further understand that guidelines issued by the American Veterinary Medical Association recommend that when OTC drugs are used for extra-label purposes, 'they should be afforded the same precautions that apply to ... a veterinary prescription drug."
Accordingly, it appears that when the Taxpayer uses an OTC drug for extra-label purposes, it is using that drug in providing its professional services - and not making a retail sale of that drug. As such, the Taxpayer must pay the tax on the cost price of the OTC drug used for extra-label purposes.
I appreciate the help your staff provided to the department regarding the technical issues surrounding this case. Please contact ********* in my Office of Policy at ********** if you have additional questions.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11836I
Rulings of the Tax Commissioner