Tax Type
Retail Sales and Use Tax
Description
Manufactures, Freight charges
Topic
Taxability of Persons and Transactions
Date Issued
03-05-2003
March 5, 2003
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This is in reply to your letter of October 24, 2002, in which you request a ruling on
the application of the retail sales and use tax to a number of ophthalmic products sold
by ***** (the "Taxpayer").
FACTS
The Taxpayer primarily manufactures and sells Intra-Ocular Lenses (IOLs) for use by ophthalmologists and other eye care professionals to improve or correct the vision of their patients. The Taxpayer sells the IOLs on a consignment basis primarily to hospitals and ambulatory surgical centers for use in surgery. The Taxpayer also sells other eye products to its customers that are not sold on consignment. The Taxpayer ships the IOLs and other products from its California warehouse to Virginia customers via common carrier freight on board shipping point.
The Taxpayer request rulings regarding the application of the tax to (1) the sale of its IOLs and certain other products, and (2) freight charges associated with the shipment of its products to customers in Virginia.
RULING
Va. Code § 58.1-609.7(1) provides an exemption from the sales and use tax for contact lenses dispensed by or sold on prescriptions or work orders of licensed physicians and other licensed practitioners. In addition, Va. Code § 58.1-609.7(2) provides an exemption from the sales and use tax for prosthetic devices and durable medical equipment and devices, and related parts and supplies specifically designed for those products when such items or parts are "purchased by or on behalf of an individual for use by such individual." Durable medical equipment is equipment that (i) can withstand repeated use, (ii) is primarily and customarily used to serve a medical purpose, (iii) generally is not useful to a person in the absence of illness or injury, and (iv) is appropriate for use in the home. Prosthetic devices are defined in Title 23 of the Virginia Administrative Code (VAC) 10-210-940 to mean "devices which replace a missing part or function of the body and shall include any supplies physically connected to such devices." Title 23 VAC 10-210-940(G) also emphasizes that these exemptions extend:
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- To items purchased "on behalf of an individual for his use. In order to be deemed a purchase on behalf of an individual, the item must be specifically bought for the individual. If items are purchased in bulk and then dispensed to individual patients, no exemption is applicable even if the item is modified or fitted for a specific individual.
This issue is further addressed in Public Documents (P.D.) 00-215 (12/7/00) and 01-137 (9/19/01). The discussion in P.D. 00-215 centers on the bulk purchase of braces and collars, and P.D. 01-137 deals with the bulk purchase of orthopedic implants. In both cases, the taxpayers purchased the items in bulk for use on an "as needed" basis. After the purchase, each taxpayer was able to trace the items to specific patients. The Tax Commissioner ruled that the purchase of the items did not qualify as exempt purchases on behalf of specific patients, regardless of the fact the taxpayers could trace the items to specific patients.
The only exception to the "bulk purchase" rule is set out in Va. Code § 58.1-609.7(4), which authorizes the exempt sale of tangible personal property to nonprofit hospitals and licensed nonprofit nursing homes. In order to make exempt sales to nonprofit hospitals, such nonprofit hospitals and nursing homes must provide to the Taxpayer a Sales and Use Tax Certificate of Exemption letter issued by the Department of Taxation. This letter verifies the entity's exempt status and includes the tax exempt number necessary for making tax exempt sales to such an entity.
In light of the above authorities, I will address sales of the Taxpayer's products.
Intra-Ocular Lenses (IOLs/Toric IOLs)
These are surgically implanted optical lenses used to replace the natural lens of the eye following cataract extraction. Considered a device by the United States Food and Drag Administration (the "FDA"), federal law requires that these devices be sold or used on the order of a physician or other licensed practitioner. The Virginia Board of Pharmacy conforms to the federal classification and deems these to be Schedule VI medical devices pursuant to the Virginia Drug Control Act found in Va. Code § 54.1, Chapter 34. The IOLs also meet the definition of "prosthetic devices" noted above.
The Taxpayer provides its IOLs to its customers on consignment. They are withdrawn from the consignment inventory by the customer pursuant to a prescription or work order of a licensed physician or other licensed practitioner. The Taxpayer is required by federal regulation to track the sale of its IOLs for recall purposes. As such, upon use, the customer provides written notification to the Taxpayer of the serial number of the IOL used and the name of the receiving patient. Once notified, the Taxpayer bills the customer for the sale of the IOL.
Va. Code § 58.1-602 defines a "sale" as "any transfer of title or possession, or both, ... of tangible personal property ... for a consideration." When tangible personal property (such as the IOLs in this case) are consigned by the Taxpayer to its customers, a "sale" has not yet occurred. This is because there is no consideration. The sale occurs when the customer withdraws the property from its consignment inventory to be surgically implanted. At that point, the customer is withdrawing the IOL for a specific patient and the sale would qualify for the exemption in Va. Code § 58.1-609.7(2). Accordingly, the Taxpayer would not charge the tax to its customers on the sale of the IOLs that are initially consigned to its customers.
As a precaution, if the Taxpayer sells the IOCs in bulk to its customers (other than to nonprofit hospitals and nonprofit nursing homes), it must charge the tax on such sales in accordance with 23 VAC 10-210-940(G).
Implantable Contact Lenses (ICLs)
These are contact lenses that are surgically implanted to correct vision. The Taxpayer is currently seeking FDA approval of this product. It is not known whether the Taxpayer will sell this product pursuant to prescription or work orders of licensed practitioners. If so, the sale would qualify for the exemption in Va. Code § 58.1-609.7(1). The sale of the ICLs by the Taxpayer in bulk quantity, however, would be taxable. Sales of the ICLs to nonprofit hospitals and nonprofit nursing homes would be exempt as discussed above.
Sodium Hyaluronate Device
This is a disposable glass syringe filled with a solution of sodium hyaluronate, a naturally occurring chemical found in all body tissues. The Taxpayer sells this product as a surgical aid to maintain eye pressure during various types of surgery. This product is classified as a device by the FDA, and by federal regulation is sold or used on the order of a physician or other licensed practitioner. The Virginia Board of Pharmacy concurs with the federal classification and deems this to be a Schedule VI medical device.
In this instance, the device is used on the order of a physician after it is sold in bulk to the customer by the Taxpayer. Therefore, the exemption in Va. Code § 58.1-609.7(2) does not apply in this instance. The Taxpayer must charge the tax on its sales of this device to its customers in Virginia, unless the customer is an exempt nonprofit hospital or nonprofit nursing home.
Collagen Glaucoma Drainage Device
This product is implanted in the eye to absorb excess fluid caused by glaucoma and is absorbed by the body over a period of six to nine months. It is classified as a device by the FDA and is sold or used on the order of a physician or other licensed practitioner. The Virginia Board of Pharmacy concurs with the federal classification and deems this to be a Schedule VI medical device. The tax would apply to this device in the same manner as discussed in regard to the sodium hyaluronate device.
Phacoemulsification Equipment
This equipment is sold by the Taxpayer for use by its customers in cataract surgery to drain fluid from the eye and to dissolve the natural lens that is extracted. This equipment is taxable unless the purchaser is an exempt nonprofit hospital or nonprofit nursing home.
Other Products
Other products sold by the Taxpayer may or may not qualify for exemption based on the cited authorities. If the Taxpayer questions the application of the tax to other products that it sells, it should request a ruling in regard to those products. As a general rule and as noted above, the sale of bulk supplies and medical equipment to other than nonprofit hospitals and nonprofit nursing homes is taxable.
Shipping Charges
Va. Code § 58.1-609.5(3) provides an exemption for “[t]transportation charges separately stated." The regulation in 23 VAC 10-210-6000 interprets the exemption and states that "[t]he tax does not apply to transportation or delivery charges added to a taxable sale provided such transportation charges are separately stated on the invoice to the customer. If the transportation or delivery charges are not separately stated on the invoice, they will become part of the sales price of the property and will be subject to the tax." The regulation goes on to define "transportation" and "delivery charges" to mean "charges for delivery from the seller to the purchaser, commonly known as "transportation-out," and include postage or common carrier charges." Transportation and delivery charges do not include handling charges.
The tax does not apply to the delivery charges when the Taxpayer ships its products to Virginia customers via U.S. mail or common carrier (including, for example, UPS and Fed Ex) and such charges are separately stated on the customer's invoice.
The Code of Virginia sections cited, along with other reference documents, are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have additional questions, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
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- Tax Commissioner
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- Kenneth W. Thorson
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AR/43440J
Rulings of the Tax Commissioner