P. D. 14-173
September 30, 2014
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 August 2009 through July 2012. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates a surgery center. In addition, the Taxpayer operates retail optical stores that sell prescription contact lens, eyeglasses, contact lens kits and accessories. As a result of the Department's audit, an assessment was issued for untaxed (i) training fees in connection with a service contract for the purchase of tangible personal property; (ii) bulk medical devices; (iii) non-sterile distilled water; (iv) medical supplies and (v) miscellaneous purchases.
The Taxpayer contests the audit assessment and claims that (i) the training fees are personal services and not subject to the tax; (ii) certain devices are exempt solutions used during surgery; (iii) certain devices are not bulk purchases and can be traced to a patient's name; (iv) distilled water is exempt of the tax and (v) the sales tax has been paid on miscellaneous purchases.
DETERMINATION
Training
To support the claim that the training fees at issue are exempt professional services, the Taxpayer provides a copy of the invoice for interface installation, set up and training fees and contends that no tangible personal property is included in the pricing. In addition, the Taxpayer provides Page 9 of the agreement contract and notes that the contested training fees are delineated in the contract under "Implementation and Training Services" to clearly mark these training per hour fees as instructor fees.
Virginia Code § 58.1-602 defines the term "sales price" to mean "the total amount for which tangible personal property or services are sold, including any services that are a part of the sale . . . ." Cost price is computed in the same manner as sales price.
Title 23 of the Virginia Administrative Code (VAC) 10-210-4040 D is used to determine the "true object" of a transaction that includes both the sale of tangible personal property and the provision of services:
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.
According to the Purchase Agreement, the contract requires the vendor to furnish training in connection with the purchase of hardware and software. The fees for the required training services are listed in the Purchase Schedule of the agreement. The training is listed in the Purchase Agreement and is a requirement of the sale in accordance with Section 1.13 of the agreement. For these reasons, I must conclude that this training is sold in connection with the sale of the Medflow Electronic Medical Records System. Thus, the total amount charged, including charges for training constitutes the cost price of the Medflow Electronic Medical Records System that is subject to tax. In the absence of any statutory exclusion for training services sold in connection with the purchase of the Medflow Electronic Medical Records System, these training charges are taxable and will remain in the audit. I would note that the installation labor and freight charges are not taxed because such services are specifically excluded from taxation by Va. Code § 58.1-609.5 2 and 3.
Classification of Drugs and Devices
The Food and Drug Administration (FDA) determines the classification of a product as a drug or a device based on the statutory definitions of these terms set forth in §§ 201(g) and 201(h) of the Federal Food, Drug, and Cosmetic Act, 21 USC §§ 321(g) and 321(h), as applied to the scientific data concerning the product that is available to the FDA at the time the classification determination is made. Drugs and other substances that are considered controlled substances under the Controlled Substances Act (CSA) are divided into five schedules in Title 21 Code of Federal Regulations §§ 1308.11 through 1308.15. Substances are placed in their respective schedules based on whether they have a currently accepted medical use in treatment in the United States, their relative abuse potential, and likelihood of causing dependence when abused.
The Virginia Board of Pharmacy regulates the practice of pharmacy and the manufacturing, dispensing, selling, distributing, processing, compounding, or disposal of drugs and devices in accordance with Va. Code § 54.1-3307 A. The Virginia Board of Pharmacy conforms to the federal classification of prescription drugs that are categorized into Schedules I through V. All prescription or legend drugs that contain a label "Caution: Federal Law Prohibits Dispensing Without a Prescription," devices, any compound, mixture, or preparation containing any stimulant or depressant drug not included in Schedules I through V are placed in Schedule VI and referred to as "controlled" drugs or substances by the Virginia Board of Pharmacy pursuant to Va. Code § 54.1-3455.
The Department relies on the FDA and the Virginia Board of Pharmacy for guidance in the classification of products in order to identify the purpose of such products and to determine the application of the Virginia retail sales and use tax.
Keeping the above in mind, I will address the contested items.
Devices
The Taxpayer contests the classification of DisCoVisc and Provice as devices in the audit and contends that each product is a solution that is used temporarily during a surgery and does not become a permanent part of the human body.
Virginia Code § 58.1-609.10 10 provides an exemption from the retail sales and use tax for "prosthetic devices and . . . other 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. [Emphasis added].
Title 23 VAC 10-210-940 G addresses purchases on behalf of an individual and states, "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." See Public Document (P.D.) 09-06 (2/4/09) and P.D. 03-01 (1/15/03).
In P.D. 00-215 (12/7/00), the Tax Commissioner ruled that the purchase of braces and collars in bulk consistent with the taxpayer's anticipated need did not qualify as exempt purchases on behalf of specific patients, regardless of the fact the taxpayer could trace the items to specific patients. As such, a taxpayer's purchase documentation must include patient identification information at the time of purchase in order for the purchase to be deemed made on behalf of an individual.
DisCoVisc: This is a single use disposable syringe filled with a solution of sodium hyaluronate and chondroitin sulfate. The product is for use during surgery in the anterior segment of the eye and is designed to create and maintain space to protect the corneal endothelium and other intraocular tissues and to manipulate tissues during surgery. This product is classified by the FDA as a device. The federal law requires this device to be sold by or on the order of a physician. The Virginia Board of Pharmacy concurs with the FDA and classifies this product as a Schedule VI device.
Provice: This is a single use disposable syringe containing sodium hyaluronate and is used in surgical procedures to maintain a deep anterior chamber during anterior segment surgery allowing reduced trauma to the corneal endothelium and surrounding ocular tissues. This product is also used to coat surgical instruments and the intraocular lens prior to implantation. The product is classified by the FDA as a device. The federal law requires this device to be sold by or on the order of a physician. The Virginia Board of Pharmacy concurs with the FDA and classifies this product as a Schedule VI device.
In this instance, the devices are not purchased on behalf of a specific individual as required by Va. Code § 58.1-609.10 10. Pursuant to P.D. 00-215, DisCoVisc and Provice are subject to the tax regardless of the fact that the Taxpayer can trace each device to an individual patient when used. Accordingly, the assessment of tax on DisCoVisc and Provice is correct.
Shunts and Valves: The shunt device is used to reduce intraocular pressure in patients with glaucoma. The valve device is a drainage implant designed to regulate intraocular pressure in eyes suffering from intractable glaucoma. These devices are classified by the FDA as Class II medical devices and the federal law requires such devices to be sold by or on the order of a physician. These devices are classified by the Virginia Board of Pharmacy as Schedule VI devices.
In this instance, the shunts and valves are not purchased on behalf of a specific individual at the time of purchase as required by the exemption but purchased three to five devices at a time for use on an "as needed" basis. Therefore, the shunts and valves do not qualify for the exemption in Va. Code § 58.1-609.10 10. Accordingly, assessment of tax on the shunts and valves is correct. This determination is consistent with the policy set forth in P.D. 00-215.
Distilled Water
The Taxpayer claims that distilled water is exempt from the sales tax pursuant to Va. Code § 58.1-609.10, Title 23 VAC 10-210-940, and Virginia Tax Bulletin (VTB) 98-4 (5/15/98). In addition, the Taxpayer cites P.D. 94-131 (4/26/94), 97-433 (10/29/97), 99-32 (3/18/99) to support its claim that distilled water qualifies for exemption from the sales tax.
Virginia Code § 58.1-609.10 9 provides an exemption from the retail sales and use tax for:
controlled drugs purchased for use by a licensed physician, optometrist, licensed nurse practitioner, or licensed physician assistant in his professional practice . . . or any other type of corporation in which the shareholders and operators are all licensed physicians, optometrists, licensed nurse practitioner, or licensed physician assistants engaged in the practice of medicine, optometry, or nursing. . . [and] medicines and drugs purchased for use or consumption by a licensed hospital, nursing home, clinic, or similar corporation not otherwise exempt under this section . . .
.
Title 23 VAC 10-210-940 A interprets the above statute and states, "[t]he tax does not apply to medicines, drugs, dispensed by or sold on prescriptions or work orders of licensed physicians,. . . and controlled drugs purchased by a licensed physician for use in his professional practice." The exemption applies to controlled drugs and proprietary medicines contained in Schedules I through VI of the Virginia Drug Control Act (Chapter 34 of the Code of Virginia § 54.1.) Section C1 of the regulation states, "Sales of medicines or drugs . . . on written prescriptions of physicians . . . are exempt from the tax."
In this instance, the distilled water does not carry the federal legend that prohibits dispensing without a prescription. As such, the contested distilled water is not a controlled drug and does not meet the criteria for the exemption in Va. Code § 58.1-609.10 9. Further, because the distilled water is not a controlled drug, P.D. 94-131 and 97-433 cited by the Taxpayer in support its contention that the contested distilled water constitutes a drug exempt from the tax are not applicable in this case.
With regard to VTB 98-4, VTB 13-5 (3/15/13) supersedes VTB 98-4 and addresses the application of the retail sales and use tax to nonprescription drugs and propriety medicines. Distilled water is specifically listed in the bulletin as an item that does not qualify for the nonprescription drug exemption. As such, the distilled water does not meet the criteria for the nonprescription drug exemption as set forth in VTB 13-5. Based on all the foregoing, the assessment of tax on the distilled water is correct.
Miscellaneous Purchases: Line Items 1-5
The Taxpayer provides documentation that the sales tax was paid on miscellaneous purchases. The auditor advised the Taxpayer that, since the miscellaneous purchases were assessed separately and not as part of the audit sample, credit for the tax paid can be taken on future consumer use tax returns upon verification. Thus, I will have the auditor contact the Taxpayer to verify that a credit has been taken on the Taxpayer's consumer use tax returns for the sales tax paid on the miscellaneous purchases.
CONCLUSION
The credit for sales tax paid matter will be referred to the audit staff to contact the Taxpayer and make the appropriate adjustments consistent with this determination. Based on this determination, the remaining portion of the contested assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges.
The Code of Virginia sections, regulations, tax bulletins and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, please contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5438111771.T