Tax Type
Retail Sales and Use Tax
Description
Certain items are exempt from the retail sales and use tax
Topic
Appropriateness of Audit Methodology
Assessment
Exemptions
Taxpayers' Remedies
Date Issued
08-02-2005
August 2, 2005
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period July 2000 through June 2001. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, a healthcare provider, operates a for-profit hospital located in Virginia. An audit was conducted by the Department that resulted in the assessment of tax on various elements of the Taxpayer's operations.
The Taxpayer takes exception to the tax on items purchased from a biological supply vendor. The Taxpayer contends these items are exempt from the retail sales and use tax. Additionally, the Taxpayer contends that sales tax paid on the bulk purchase of drugs should be extrapolated to the entire audit period. The Taxpayer also contests penalties applied to the assessment.
DETERMINATION
Biological Supply Vendor
The Taxpayer made untaxed purchases of precision shaped allograft implants and paste from a biological supply vendor. The allograft implants and paste are designed to fill gaps in bony tissue. The devices are used for orthopedic, oral maxillofacial, urinary and cardiovascular surgeries. These devices are implanted in the cancellous and corticle bone regions as replacement bone until new natural bone growth occurs.
Virginia Code § 58.1-609.10 10 provides an exemption for "prosthetic devices [and] . . . other durable medical equipment and devices . . . when such items or parts are purchased by or on behalf of an individual." Title 23 of the Virginia Administrative Code (VAC) 10-210-940 defines prosthetic devices as devices "which replace a missing part or function of the body . . . ."
The allograft devices are used as bone replacement until the natural bone is able to grow or regenerate. As such, these devices are considered prosthetic devices as defined in Title 23 VAC 10-210-940. See also, Public Document 00-138 (07/31/2000). The Taxpayer may purchase such devices exempt of the tax when such devices are purchased by, or on behalf of an individual for use by such individual. In this case, the Taxpayer has provided documentation for each purchase that identifies the individual patient receiving the devices. Accordingly, I find basis for removing from the audit the contested purchases from the biological supply vendor.
Bulk Drug Purchases
Effective July 1, 2000, all purchases of nonprescription drugs became exempt from the sales and use tax, including purchases by for-profit hospitals. See Va. Code § 58.1-609.10 9.
The Taxpayer contends that sales tax paid on bulk purchases of drugs during the sample period, November 2000, should be extrapolated to all months included in the audit period. In order for the Department to verify that the sales tax was paid on bulk purchases of drugs, a copy of the general ledger for each month of the audit period is necessary. The auditor will contact you to obtain the general ledgers for each month of the audit period.
Penalty
Virginia Code § 58.1-635 mandates the application of penalties to tax deficiencies. Title 23 VAC 10-210-2032 further provides that the application of penalty is to be determined based on whether a satisfactory level of tax compliance has been achieved. For second generation audits, penalty will generally be applied unless the Taxpayer's compliance ratios meet or exceed 85% for sales tax and 60% for use tax. The Taxpayer's use tax compliance ratio for this second generation audit is 0%; therefore, the penalty was properly assessed. The use tax compliance ratio will be recomputed based on the removal of the contested purchases of allograft devices, as well as any revisions made as a result of the review of the general ledgers. If the recomputed use tax compliance ratio meets or exceeds 60%, the use tax compliance penalties will be eliminated.
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CONCLUSION
Based on all of the above, I am returning this matter to the auditor for revisions. Once the appropriate revisions have been made, the Taxpayer will receive a revised audit that will address the corrected measure and the use tax compliance ratio penalty. In the event the requested information is not furnished within the time allotted by the auditor or is found to be inadequate or otherwise unacceptable, the audit will be revised to remove only those products purchased from the biological supply vendor as noted above.
The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's website, located at www.policylibrary.tax.virginia.gov. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/53215.i
COMMONWEALTH of VIRGINIA
Department of Taxation
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TO WHOM IT MAY CONCERN:
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Under the authority of §§ 58.1-1 and 58.1-110 of the Code of Virginia, I hereby delegate to Gerald Gwaltney, Deputy Tax Commissioner, the authority to sign for me, in my absence, any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and Treasury Board.
This authority shall become effective January 10, 2003, and shall remain in effect until revoked.
Done at Richmond, Virginia, this 13th day of January 2003.
Kenneth W. Thorson
Tax Commissioner
Acknowledgement: Gerald H. Gwaltney Date:
Done this 13th day of January 2003 in the City of Richmond, State of Virginia. My Commission expires 9-30-2003.
Sylvia J. Wesson
Notary Public Notary Seal
Rulings of the Tax Commissioner