May 17, 2016
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****:
This will reply to your letter in which ***** (the “Taxpayer”) requests a ruling on the application of the retail sales and use tax to a product produced and sold by the Taxpayer.
FACTS
The Taxpayer is the manufacturer of the ***** (the “Product”), which is an implantable transprostatic tissue retractor system designed to replace the urinary function of the body in patients who have a physical deformity in the male urinary tract. The Product is permanently implanted during a cystourethroscopy procedure performed by a licensed health care provider. Each implant is sold in its own sterile, individual housing that is designed to be couples with a urethroscope used in the implanting process. The housing containing the implant is designed for a single use and is not reloadable or reusable. The Product is sold to hospitals and medical practitioners in one of the following four scenarios:
Scenario One — Direct Delivery:
This transaction involves a direct sale of the Product by the Taxpayer that is hand delivered to a doctor or medical provider pursuant to a prescription or work-order for a specific patient on the procedure date. The Taxpayer would retain in its files a copy of the prescription or work-order to support each purchase.
Scenario Two — Direct Shipment:
This scenario involves a direct sale of multiple Products ordered by the doctor and shipped directly to the hospital in advance of a procedure date for a specific patient. All of the Products would be individually billed to the doctor in the quantity corresponding to the written prescription or work-order for the specific patient. The Taxpayer would retain in its files a copy of the prescription or work-order for the specific patient to support each purchase.
Scenario Three — Consignment:
In this scenario, the Taxpayer ships and stores the product at a medical facility and the title is retained with the Taxpayer with no consideration exchanged. A sale of the Product takes place when a purchase order is issued by the doctor on the prescription or work-order for a specific patient. At this point, the Product is transferred and consideration is exchanged. The Taxpayer would retain in its files a copy of the prescription or work-order for the specific patient to support each purchase.
Scenario Four — Bulk Purchases:
This scenario includes sales of Products from the Taxpayer to medical facilities, including bulk sales of the Product to be held in inventory by the medical provider. The Taxpayer is seeking confirmation that the Product meets the definition of a prosthetic device as provided Title 23 Virginia Administrative Code (VAC) 10-210-940(E), and the sale of such product would qualify for the exemption found in Va. Code § 58.1-609.10.10. As explained in more detail below, the sales in Scenarios One, Two and Three qualify for the sales tax exemption, while the sales in Scenario Four are taxable.
RULING
Virginia Code § 58.1-609.10.10 provides, in pertinent part, that the retail sales and use tax does not apply to:
Wheelchairs and parts therefor, braces, crutches, prosthetic devices . . . other durable medical equipment and devices, and related part 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. Durable medical equipment is equipment that (i) can withstand repeated use, (ii) is primarily or customarily used to serve a medical purpose, (iii) generally is not useful to a person in the absence of illness orinjury, and (iv) is appropriate for use in the home. [Emphasis added.]
In interpreting this exemption statute, Title 23 VAC 10-210-940 provides that “prosthetic devices shall mean devices which replace a missing part or function of the body and shall include any supplies physically connected to such device.” Subsection E of the regulation goes on further to address prosthetic devices and provides thefollowing:
The tax does not apply to . . . prosthetic devices . . .urinary accessories . . . when such items are purchased by or on behalf of an individual using these items . . . However, purchases of these items by a profit hospital, licensed nursing home, home for adults or by a licensed physician for use in his professional practice are deemed to be purchases on behalf of an individual only if purchased for a specific individual. Items withdrawn from an inventory of items purchased in bulk are not deemed to be purchased on behalf of an individual. [Emphasis added.]
The Product is classified by the Food and Drug Administration as a class II medical device. Based on all of the above, the Product qualifies as a prosthetic device for sales and use tax purposes. Based on the information provided in your letter and outlined in the scenarios above, Scenarios One, Two, and Three would qualify as exempt sales based on the fact that the Product is purchased on the prescription or work-order of a licensed physician or medical practitioner for a specific patient. Scenario Four includes bulk sales of the Product to be held in inventory by the medical provider. According to Title 23 VAC 10-210-940 E, the Product purchased in bulk is not deemed to be purchased on behalf of an individual and would be subject to the Virginia sales tax.
This response is based on the facts provided as summarized above. Any change in the facts or the introduction of new facts may lead to a different result.
The Code of Virginia and regulation sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any additional questions about this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-6158525357.T