07-16 | Virginia Tax

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

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 letters in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer"), for the period April 1999 through March 2002. I apologize for the delay in responding to your letters.

FACTS

The Taxpayer is a home infusion therapy company. The Taxpayer maintains a pharmacy that provides intravenous (IV) medications, 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 nursing staff 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 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 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 retail pharmacy and is entitled to make all of its purchases exempt of the tax for resale. As such, the Taxpayer disputes the tax assessed on purchases of IV medications and other medical products provided to patients in its home IV transactions. The Taxpayer also contests the tax assessed on purchases of other controlled drugs that are sold independent of the home IV transactions.

DETERMINATION

Home IV Transactions

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

To refute the auditor's position, the Taxpayer draws two distinctions to distinguish itself from traditional health care service providers and the home infusion therapy companies addressed in the prior rulings.

First, the Taxpayer points out that it is licensed by the Virginia Board of Pharmacy as a retail pharmacy and that it is not licensed by the Virginia Department of Health as a home health care provider of services. Because of this, the Taxpayer contends that it does not operate in the role of a primary caregiver, which is typical of home health care providers. To support this, the Taxpayer explains that its nursing staff does not administer drugs or provide wound care or personal care services to its patients. Further, the Taxpayer contends that its provision of medical products is not an extension of or secondary to a caregiver role as was concluded in the prior rulings, but that it is a retail pharmacy making retail sales of medical products, and any services provided are incidental to the sale of such medical products.

The second distinction drawn by the Taxpayer is that the limited nursing services it provides are not regular or continuous, which is also typical of home health care providers. To illustrate this point, the Taxpayer applies the true object test and explains that its nursing staff simply demonstrates to its patients or the patient's caregiver how to self-administer and self-operate the IV medications and other medical products provided. As such, the Taxpayer contends that the object of its home IV transactions is the provision of the IV medications and that the limited services provided are incidental to the transaction.

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 assessment as issued is not valid.

Other Sales Transactions

You contend that the Taxpayer makes sales of other controlled drugs independent of the home IV transactions. You state that these drugs are sold on a walk-in or mail order basis. These sales include the drug Synagis®, which is sold to physicians who then dispense the drug to their patients in the course of treatment.

A review of the sample invoices for sales of Synagis® indicates that this drug is sold to physicians. Therefore, the Synagis® drug may be purchased by the Taxpayer exempt of the tax for resale. The sale of this drug is an exempt sale to a physician for use in his professional practice in accordance with Va. Code § 58.1-609.10 9. If the other drug sales are made pursuant to a physician's prescription, then these sales are also exempt in accordance with the cited exemption.

In regard to the walk-in and mail order sales, I am not clear as to what type of drugs are sold in these transactions. Notwithstanding, the Taxpayer is deemed a retailer and may purchase these drugs exempt of the tax for resale.

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 because 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 assessment will be revised in accordance with the determination in this letter. It is my understanding that there are uncontested purchases that remain in the assessment. As such, 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/44960J

Rulings of the Tax Commissioner