07-15 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

The sale of the IV medications to patients is exempt of the tax

Topic

Durable Medical Equipment Exemption

Date Issued

03-26-2007

March 26, 2007

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *****:

This is in reply to the letter from your firm seeking correction of the retail sales and use tax assessments issued to ***** (the "Taxpayer"), for the periods July 2000 through April 2001 and May 2001 through June 2003. It is noted that the Taxpayer has made a partial payment on one assessment. I apologize for the delay in responding to the letter.

FACTS

The Taxpayer primarily is a provider of oxygen and related respiratory equipment and durable medical equipment (DME), but also provides home infusion therapy. The Taxpayer maintains a pharmacy that provides intravenous (IV) medications, nutritional formulations 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 for infusion therapy, the Taxpayer provides a number of support services.

As a result of the Department's audit, the auditor concluded that the Taxpayer is a service provider similar to home infusion companies 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 transferred to its patients in connection with the provision of its infusion therapy services, and assessed the tax on the Taxpayer's bulk purchases of IV medications and other medical products.

The Taxpayer disagrees with the auditor's conclusion and contends that it operates as a licensed Virginia pharmacy and that it is a seller of exempt medicines and DME. The Taxpayer further contends that it is entitled to purchase such items exempt of the tax for resale. To support its position, the Taxpayer cites a number of sales and use tax exemptions and prior rulings of the Tax Commissioner. The Taxpayer also disputes the assessment of the tax for periods in the prior audit period.

DETERMINATION

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 addresses 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

The Taxpayer contends that the auditor is attempting to circumvent the intent of the General Assembly in exempting medical-related items from the Virginia sales and use tax. Specifically, the Taxpayer cites the exemption for drugs sold on physicians' prescriptions in Va. Code § 58.1-609.10 9 (formerly § 58.1-609.7 1) and the DME exemption in § 58.1-609.10 10 (formerly § 58.1-609.7 2). Further, the Taxpayer cites the true object test and contends that the object of its infusion patients is to obtain medications that can be self-administered, along with the necessary DME to administer the medications. In addition to these arguments, the Taxpayer distinguishes itself from the taxpayers in the prior rulings and maintains that it does not contract with patients for nursing care and it is not in the business of providing home nursing care.

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 that 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 that 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 assessments as issued are not valid.

Prior Audit Period

The Taxpayer has been previously audited for the prior audit period and was not assessed the tax on purchases provided in connection with the provision of infusion therapy to patients. Because certain periods from the prior audit period were open to assessment under the statute of limitations, the auditor assessed the tax on purchases of IV medications, DME and other medical products provided in connection with the infusion therapy for those periods. The Taxpayer contends that the auditor essentially created a new error factor based on a new sample period and assessed the tax for the prior audit periods. According to the Taxpayer, this goes against the Department's longstanding policy of refusing to adjust a sample period once the auditor has conducted the audit.

On this issue, I disagree with the Taxpayer. In P.D. 96-65 (4/26/96), the Tax Commissioner cites the Virginia Supreme Court case American Tobacco Co. v. City of Richmond, 125 Va. 29 (1919), which defined "omitted taxes" to mean "taxes upon property which either because it has been concealed, overlooked or for some other insufficient reason, has escaped taxation." Citing Va. Code § 58.1-1812, the Tax Commissioner determined that the Department is not prohibited from making an assessment of omitted taxes on purchases or sales missed in a prior audit. Therefore, the auditor's reliance upon P.D. 96-65 to assess omitted taxes in the prior audit was proper. Notwithstanding, the assessed tax has been determined to be invalid in the earlier discussion.

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 assessments will be abated in full provided there is no tax due regarding uncontested purchases. If there are uncontested purchases that remain in the assessments, the Taxpayer will receive a revised and updated bill that includes accrued interest. No additional interest will accrue provided the Taxpayer pays the bill within 30 days of the date on the bill.

The Code of Virginia sections, regulation and the 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 concerning this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/49993J

Rulings of the Tax Commissioner