Tax Type
Retail Sales and Use Tax
Description
No tax on purchases of IV medications and other medical products sold to patients
Topic
Medicine and Drugs
Taxable Transactions
Date Issued
03-26-2007
March 26, 2007
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in reply to your letter and the letter from ***** in which you contest the retail sales and use tax assessment issued to ***** (the Taxpayer), for the period July 1999 through December 2002. I note that the assessment is paid in full. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a home infusion therapy company. The Taxpayer maintains a number of pharmacies that dispense intravenous (IV) medications, oral and enteral formulations, durable medical equipment and other medical products pursuant to physicians' prescriptions. The IV medications and other medical products are sold to patients for administration in the home. In conjunction with providing the IV medications and other medical products, the Taxpayer employs a staff of nurses and certified dieticians and provides a number of support services that include patient assessment, care coordination, patient education on self-administration, patient counseling, clinical monitoring, delivery of medications and products, insurance verification, billing and help line assistance.
As a result of the Department's audit, the auditor concluded that the Taxpayer is a service provider similar to home infusion therapy providers addressed in prior rulings of the Tax Commissioner. Based on this finding, the auditor deemed the Taxpayer the user and consumer of all tangible personal property provided to its patients in connection with the provision of infusion therapy, and assessed the tax on the Taxpayer's bulk purchases of IV medications and other medical products.
The Taxpayer disputes the tax and contends that its primary business is that of a retail pharmacy and that the "true object" of its transactions is the IV medications and other medical products. To support its position, the Taxpayer cites a ruling it received from the Tax Commissioner in Public Document (P.D.) 97-196 (4/21/97), in which the Taxpayer is treated as a retailer regarding the application of the sales and use tax. Based on the ruling, the Taxpayer requests refunds of the assessed tax and interest, and the tax accrued and paid to the Department since the conclusion of the audit.
DETERMINATION
The Taxpayer believes its activities are consistent with those of a traditional retail pharmacy and explains that it is licensed as a retail pharmacy by the Virginia Board of Pharmacy and the United States Drug Enforcement Agency. The Taxpayer goes on to explain that because of its licensure, it is subject to the same federal regulatory requirements imposed on traditional retail pharmacies and should be treated in the same manner for sales and use tax purposes. Further, the Taxpayer contends that it is not a certified home health agency and does not provide nursing services for cleaning and changing dressings for wounds and blood pressure checks. The Taxpayer asserts that a majority of its patients receive traditional nursing care services from a third party provider.
Prior Rulings
The auditor relied upon P.D. 92-172 (9/10/92) and P.D. 94-145 (5/2/94), in which the Tax Commissioner addressed the application of the tax to providers of home infusion therapy services. In P.D. 92-172, the taxpayer operated an in-house pharmacy and was assessed the tax on drugs purchased through its pharmacy and provided to patients. In addition to the drugs, the taxpayer maintained a nursing staff and provided supporting nursing services. The Tax Commissioner applied the "true object" test and concluded that the object sought by the taxpayer's patients was the receipt of medical services.
In P.D. 94-145, the taxpayer provided drugs and services to patients similar to those provided by the taxpayer in P.D. 92-172. The Tax Commissioner, in applying the "true object" test, determined that the object of the taxpayer's transaction was the provision of home health care services. Applying the same rationale as in P.D. 92-172, the Tax Commissioner upheld the tax assessed on the taxpayer's purchases of drugs.
Services versus Sale of Tangible Personal Property
Title 23 of the Virginia Administrative Code 10-210-4040 discusses the application of the sales and use tax to the provision of services and in Section D instructs that where a transaction involves both the provision of tangible personal property and services, the true object of the transaction must be examined in order to determine the application of the sales tax and use tax. If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.
Upon extensive review of the Taxpayer's operations and the home infusion therapy industry, I am persuaded by the Taxpayer's position and agree that the true object sought by its patients is to secure the IV medications. These medications are critical to the provision of infusion therapy (or drug therapy) because they constitute the therapy. The services provided are supportive of the delivery of the infusion therapy, and are incidental to the provision of the IV medications. This is evidenced by the fact that without the IV medications and the related medical products, there would be no need for the services to be provided. Therefore, the Taxpayer is not a provider of services and the assessment as issued is not valid.
Taxpayer's Prior Ruling
In P.D. 97-196, the Taxpayer, upon entering into business, submitted a ruling request questioning the application of the tax to its business operation. The incoming letter described the Taxpayer as a pharmacy that provides pharmaceutical products pursuant to valid physician prescriptions. Further, the letter explained that the Taxpayer provided supplies related to intravenous medications and rented certain medical equipment. The letter did not mention that the Taxpayer provided services of any type. Based on the information provided, the Tax Commissioner concluded that the Taxpayer was engaged in making retail sales and set out a number of exemptions that may apply to the Taxpayer's transactions.
The fact pattern of the prior ruling is not accurate with regard to the Taxpayer's activities. As such, the Taxpayer should rely upon the guidance set out in this letter regarding the application of the tax to its transactions involving infusion therapy.
CONCLUSION
Based on the above discussion, the Taxpayer is not required to pay the tax on its purchases of IV medications and other medical products sold to patients as these items are purchased for resale. The Taxpayer is required to charge the tax on its retail sales of such items unless an exemption from the sales and use tax applies. The sale of the IV medications to patients is exempt of the tax pursuant to Va. Code § 58.1-609.10 9.
The sale of certain durable medical equipment and other medical products and supplies may also qualify for exemption pursuant to other exemptions found in Va. Code § 58.1-609.10. The Taxpayer, however, is subject to the tax on any item that it uses or consumes in its business operation when providing infusion therapy.
The Taxpayer is due a refund of the tax and interest paid on the assessment. In addition, the Taxpayer is due a refund of the tax paid since the audit on purchases of IV drugs and medical products that qualify for an exemption when sold at retail. Further, the Taxpayer is entitled to receive refund interest on the amount paid on the assessment and the amount remitted since the audit.
The Taxpayer will be contacted shortly by the auditor to begin processing the refund claims. The Taxpayer should have the appropriate documentation available for the auditor to verify the amounts that are subject to the refund claims.
The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have questions regarding 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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Janie E. Bowen
Tax Commissioner
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AR/46032J
Rulings of the Tax Commissioner