Tax Type
Retail Sales and Use Tax
Description
Pharmaceutical Sales to Veterinarians;
Topic
Basis of Tax
Returns/Payments/Records
Date Issued
11-01-2001
November 1, 2001
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****
This will reply to your letter in which you seek correction of a retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period July 1996 through June 1999. I note that the entire assessment has been paid. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer is an out-of-state manufacturer and retailer of pharmaceutical products. The department's audit disclosed sales to customers where the Taxpayer had no certificate of exemption on file or the certificate was invalid for the items purchased. The primary contested issue concerns the taxable sale of prescription medicines and drugs to veterinarians. The auditor disallowed resale certificates of exemption on file for sales of controlled drugs to veterinarians and applied the tax to such sales.
Although credit was given for any tax self-assessed and paid by the Taxpayer's veterinarian customers, you contend that these sales should be removed from the audit exception list. In effect, doing this would include the credits in the error factor to be extrapolated over the audit period. You base this contention on Title 23 of the Virginia Administrative Code (VAC) 10-210-6050, which specifically provides that veterinarians must pay the tax directly to the department on their untaxed purchases.
DETERMINATION
Sales to Veterinarians
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 (P.D.) 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. In P.D. 87-251 (11/9/87), the department 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.
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- Further, the regulations set out in Title 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 ....
Notwithstanding the veterinarian's obligation to pay the tax on untaxed sales, it is the seller (i.e., the Taxpayer, in this case) that is legally obligated to collect the tax. This obligation is made clear in Code of Virginia § 58.1-603, which mandates that the Retail Sales and Use Tax is levied and imposed "upon every person who engages in the business of selling tangible personal property in this Commonwealth ...." Further, Code of Virginia § 58.1-625 provides that "[A]ny dealer who neglects, fails, or refuses to collect such tax upon every taxable sale... of tangible personal property made by him, his agents, or employees shall be liable for and pay the tax himself ...." (Emphasis added.)
Audit Sample
The use of the sampling technique to examine sales provides a view of the Taxpayer's compliance with its sales tax collection and reporting responsibilities. In general, the types of errors found in a sample would be typical of the types of errors that could be found in the audit period if a detailed audit were performed. However, in this case, a detailed audit, based on the size and scope of the Taxpayer's operations, would not prove beneficial either to the auditor or the Taxpayer.
There is always the possibility that isolated errors may occur that are not typical of a taxpayer's operations. However, for an item to be removed from an audit sample, a taxpayer must establish that the transaction was an isolated event and not a normal part of its operations. The courts have held that a tax assessment is prime facie correct, and the burden is upon the taxpayer to prove that the assessment is incorrect.
While the Virginia tax on the contested transactions may have been paid by the customer, there are likely similar transactions outside the sample period on which the Virginia tax has not been paid. Therefore, to remove the sales in question from the sample base would distort the sample and nullify its validity.
The issue of how to account for taxes that are self-accrued and paid by customers has been previously addressed. In P.D. 95-59 (3/27/95), for example, the sales audit techniques were upheld, and the Tax Commissioner found no basis for recalculating the error factor on the sale. However, as in the Taxpayer's case, credit was given against the assessment for the taxes paid by the customers.
Blanket Resale Certificates
Although you do not raise this issue in your appeal, it appears that the Taxpayer continues to use its own blanket certificates of exemption. The use of blanket retail certificates of exemption was an issue in the Taxpayer's prior audit. In a June 6, 1997 letter, the Tax Commissioner disallowed blanket certificates of exemption used by the Taxpayer for documenting sales for resale. Thus, sales in which the Taxpayer used blanket resale certificates of exemption were disallowed in the prior audit. As in the prior audit, these certificates of exemption were also disallowed in the current audit.
Based on all of the foregoing, and the longstanding position of the department, I do not find sufficient cause to allow for any adjustment to the audit's sample computations. Accordingly, there is no basis for a refund of the taxes paid.
If you should have any questions regarding this determination, you may contact *****
in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/29697T
Rulings of the Tax Commissioner