July 14, 2020
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period September 2013 through April 2015. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a long-term acute care hospital. The Taxpayer was audited and assessed use tax on purchases of various items of tangible personal property that the Taxpayer made exempt of the sales tax. The Taxpayer filed an appeal with the Department and provided documentation that has been reviewed by the Department’s auditor. Based upon that review, the audit and the assessment were revised.
This determination letter addresses the contested purchases that remain at issue following the issuance of the revised audit report. The Taxpayer maintains that these purchases are not subject to the tax and should be removed from the audit. In instances where the Taxpayer contends that it erroneously paid the sales tax to its vendors on purchases made during the audit period, the Taxpayer requests that the amount of tax paid be used to set off the liability assessed in the audit.
DETERMINATION
Nonprescription Drugs and Proprietary Medicines Exemption
Virginia Code § 58.1-609.10 14 a provides that the retail sales and use tax does not apply to:
(i) Any nonprescription drugs and proprietary medicines purchased for the cure, mitigation, treatment, or prevention of disease in human beings and
(ii) any samples of nonprescription drugs and proprietary medicines distributed free of charge by the manufacturer, including packaging materials and constituent elements and ingredients.
Title 23 of the Virginia Administrative Code (VAC) 10-210-940 A defines a nonprescription drug to mean:
A substance or mixture of substances containing medicines or drugs for which no prescription is required and that is generally sold for internal or topical use in the cure, mitigation, treatment, or prevention of disease in human beings.
Proprietary medicine is also defined to mean:
Any nonprescription drug that is sold to the general public under the brand name or trade name of the manufacturer and that does not contain any controlled substance or marijuana.
Subsection D of the regulation specifically addresses nonprescription medicines or drugs and proprietary medicines and drugs and provides that such medicines and drugs may be purchased exempt of the retail sales and use tax regardless of the nature of the purchaser, and no certificate of exemption is necessary to utilize the exemption.
In addition, this subsection provides that in order to be deemed an exempt nonprescription drug, the item at issue must:
(i) contain a nonprescription drug or proprietary medicine;
(ii) be sold for internal or topical use;
(iii) be sold for the cure, mitigation, treatment, or prevention of disease in human beings; and
(iv) fall outside of the excluded categories set forth in subdivision 3 of this subsection. Products that require over-the-counter registration are deemed exempt nonprescription drugs or medicines if they meet these requirements.
Of equal importance, subsection D 3 sets forth categories of items that do not qualify for the exemption as follows:
- Cosmetics;
- Toilet articles;
- Food products and supplements – items classified as such by the Federal Food and Drug Administration (including herbal teas, drinks, pills or supplements, diet aids, and weight control preparations);
- Vitamins and mineral concentrates – sold as dietary supplements or adjuncts (except when sold pursuant to a written prescription by a licensed physician, nurse practitioner, or physician's assistant);
- Devices – including contraceptive items, birth control preparations, and testing kits;
- Products listing natural and herbal ingredients as the active components, where such products do not contain a nonprescription drug or proprietary medicine or do not treat, cure, or prevent disease in human beings; and
- Items containing nonprescription drugs or other medicinal ingredients, where the inclusion of such substances serves as a secondary function to the intended use of the product.
Title 23 VAC 10-210-940 D 4 and 5 and Virginia Tax Bulletin (VTB) 13-5 (3/15/2013) provide an extensive list of specific items that qualify as nonprescription drugs and proprietary medicines as well as those that do not.
In order to properly apply the nonprescription drugs and proprietary medicines exemption, and other medical-related exemptions, the Department relies on the federal Food and Drug Administration (the FDA) and the Virginia Board of Pharmacy (the Board) for guidance in the classification of medical products and to identify the purpose for such products.
In light of the above authorities, I will address the products and issues raised by the Taxpayer.
*****
Dakins Antiseptic Lotion and H-CHLOR – These products are antiseptics used to clean wounds. Accordingly, the exemption applies and these products will be removed from the audit.
Docusate Sodium 100mg – This product is described as a laxative. The Board classifies this product as an over-the-counter drug. Accordingly, the exemption applies and this transaction will be removed from the audit.
Floranex (Granule), Floranex (Chew), Florastor Capsule (20CT and 50CT) – The Taxpayer maintains that the exemption applies in this instance because these products are for antidiarrheal use. These products are labeled as supplements and the exemption does not apply to dietary supplements. Accordingly, these products were properly held taxable in the audit.
Hydrocerin Cream – The Taxpayer contends that the exemption applies in this instance because this product contains lanolin. This product is a moisturizer that does not contain any medication. Accordingly, the exemption does not apply, and this product was properly held taxable in the audit.
Liquitear – This product is an eye drop used to treat dry and itchy eyes. Pursuant to VTB 13-5, the exemption applies and this product will be removed from the audit.
Phos Nak – The Taxpayer contends that this product is eligible for exemption because it contains sodium phosphate. This product is labeled as a supplement and the exemption does not apply to dietary supplements. Accordingly, this product was properly held taxable in the audit.
Sea Soft Nasal Mist – The Taxpayer maintains that this product contains sodium chloride and is thus eligible for the exemption. This product contains a purified, gentle salt solution. Pursuant to VTB 13-5, saline solutions are not eligible for the exemption. Additionally, the product does not contain any medication. Accordingly, the exemption does not apply, and this product was properly held taxable in the audit.
Senna – The Taxpayer maintains that the exemption applies to this product because it contains senna and sennosides. This product is a natural laxative containing sennosides that are derived from the leaves of the senna plant. The product does not contain any medication. Accordingly, the exemption does not apply, and this product was properly held taxable in the audit.
*****
Bandage Kerlix AMD Dressing 11/RL and Dressing IV STR Guardiva Hemostatic
These products are filled with an antiseptic. VTB 13-5 provides that the exemption applies to bandages that contain an antiseptic. Accordingly, these products will be removed from the audit. Public Document (P.D.) 99-32 (3/18/1999) supports this ruling. Pursuant to that document, the Tax Commissioner ruled that bandages with antiseptic or bacterial control products in the bandages satisfy the criteria of the exemption as they contain a medicine, are for topical use, and intended for the prevention of disease in humans.
Barrier Film 1.0ML Wipes Cavilon and Sureprep No-Sting Prep 1ml Wipe – The Taxpayer maintains that these products are eligible to be purchased exempt of the sales tax because they are skin barrier wipes that leave a film on the skin in instances when adhesives are used to attach ostomy bags or wound drain pouches. The description provided states that the products protect from skin problems associated with output and adhesives. Based upon the description of these products, they do not contain a medicine and are not a type of bandage, gauze, swab or wipe that contains antiseptic or bacterial control products. Accordingly, the exemption does not apply to these products, and the products will not be removed from the audit.
Cream Secura Extra Protective – Based upon the information provided, this product is a skin protectant that contains zinc oxide. Zinc oxide is listed as a nonprescription drug in VTB 13-5 that qualifies for the exemption. The Taxpayer paid the sales tax to its vendor at the time of purchase. For the purposes of this audit only, the Taxpayer will be given a one-time credit in the audit for the sales tax paid to the vendor.
Cream Sween 24 2oz Tube, MSC094534 Remedy Nutrashield, and Wipe Personal Cream Comfort Shield - The Taxpayer maintains that these products contain dimethicone, and the exemption applies. The Board classifies these products as over-the-counter drugs. Accordingly, these products are eligible for the exemption. The Taxpayer paid the sales tax to its vendor when purchasing the Cream Sween and Remedy Nutrashield. Accordingly, a one-time credit for the sales tax will be given in the audit for these products. Further, the sales tax assessed in the audit with respect to the Wipe Personal Cream Comfort will be removed from the audit.
CUR253590 Gauze Xeroform Curad – The Taxpayer states that the purchase of the product is exempt because the gauze is filled with a medicating and deodorizing agent. Based upon the product description, it is filled with petrolatum/petroleum. VTB 13-5 provides that petroleum is a nonqualifying item regarding the exemption. Accordingly, the exemption does not apply and the product will not be removed from the audit.
Drawtex Hydroconductive Wound Dr. W – The Taxpayer contends that the exemption applies in this instance because the bandage/gauze contains bacterial control products in the pad. VTB 13-5 provides that the exemption applies to bandages that contain bacterial control products. Accordingly, this product will be removed from the audit. See, P.D. 99-32.
Dressing Antimicrobial 10in x 12ft and Mepilex Border AG 4x4 – The Taxpayer maintains that these products qualify for the exemption because they are filled with an antimicrobial silver complex. The Board classifies these products as over-the-counter drugs. Accordingly, these products are eligible for the exemption and will be removed from the audit.
Dressing Gel Fiber Opticell AG – The Taxpayer contends that the exemption applies because the product is filled with silver that inhibits the growth of bacterial and fungi. The Board classifies these products as over-the-counter drugs. Accordingly, this product is eligible for the exemption and will be removed from the audit.
MMK0015 Wound Gel Therahoney – The Taxpayer maintains that the exemption applies in this instance because this product is filled with honey and used to treat wounds. The Board classifies this product as an over-the-counter drug. Accordingly, this product is eligible for the exemption and will be removed from the audit.
Moisturizer Mouth .5oz – The Taxpayer maintains that this product is a medicated lip balm because it contains cetylpyridinium chloride and that the exemption applies in this instance. The Board classifies these products as over-the-counter drugs. Accordingly, this product is eligible for the exemption and will be removed from the audit.
Mouthwash Alcohol Free and Swabs Lemon Glycerine 3S – The Taxpayer asserts that these products are eligible for the exemption because they contain a glycerine product that is intended for medical use. Pursuant to VTB 13-5, the exemption applies to glycerine products intended for medical use. The mouthwash is deemed a toilet article sold for grooming purposes, does not contain an antiseptic, and is not for medical use. The swabs do not contain a medicine and are for use post operatively and whenever special oral healthcare is needed. The exemption does not apply in these instances because the products are not intended for medical use. Accordingly, these transactions were properly included in the audit and will not be removed. The mouthwash is also not eligible for the exemption because it does not contain an antiseptic. The ruling regarding the mouthwash is supported by P.D. 14-98 (7/2/2014), which provides that mouthwashes are products that are advertised or held out for sale for grooming purposes and will not qualify for the exemption. The public document further provides that mouthwash products that contain antiseptic ingredients are classified as nonprescription drugs in accordance with VTB 13-5.
MSC7044EP Dressing Alginate – The Taxpayer states that alginate dressings are antibacterial, thus making this product eligible for the exemption. The Board classifies this product as an over-the-counter drug. Accordingly, this product is eligible for the exemption, and will be removed from the audit.
MSC9301EP Gel Wound Silvasorb – The Taxpayer maintains that this product qualifies for the exemption because the gel is an antibacterial. The Board classifies this product as an over-the-counter drug. Accordingly, this product is eligible for the exemption. The Taxpayer paid the sales tax to its vendor at the time of purchases. The Taxpayer will receive a one-time credit in the audit for the sales tax paid to its vendor.
Remedy Calazime Protectant – The Taxpayer maintains that the exemption applies to this product because it contains calamine, menthol, white petrolatum and zinc oxide. The product description provides that the active ingredients are menthol and zinc oxide, and that the product nourishes skin and helps treat and prevent diaper rash, wet and cracked skin. Pursuant to VTB 13-5, the exemption applies to zinc oxide ointments. Accordingly, the exemption applies to this product. The Taxpayer paid the sales tax to its vendor at the time of the purchases. The Taxpayer will receive a one-time credit in the audit for the sales tax paid to its vendor.
Controlled Drugs and Durable Medical Equipment (DME) Exemptions
Virginia Code § 58.1-609.10 9 provides, in pertinent part, that the sales and use tax does not apply to:
[C]ontrolled drugs purchased for use by a licensed physician, optometrist, licensed nurse practitioner, or licensed physician assistant in his professional practice, regardless of whether such practice is organized as a sole proprietorship, partnership, or professional corporation, or any other type of corporation in which the shareholders and operators are all licensed physicians, optometrists, licensed nurse practitioners, or licensed physician assistants engaged in the practice of medicine, optometry, or nursing; medicines and drugs purchased for use or consumption by a licensed hospital, nursing home, clinic, or similar corporation not otherwise exempt under this section….
Virginia Code § 58.1-609.10 10 provides that the retail sales and use tax does not apply to:
Wheelchairs and parts therefor, braces, crutches, prosthetic devices, orthopedic appliances, catheters, urinary accessories, other durable medical equipment and devices, and related parts and supplies specifically designed for those products; and insulin and insulin syringes, and equipment, devices or chemical reagents that may be used by a diabetic to test or monitor blood or urine, 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 and customarily used to serve a medical purpose, (iii) generally is not useful to a person in the absence of illness or injury, and (iv) is appropriate for use in the home.
Title 23 VAC 10-210-940 A defines controlled drugs as:
[M]edicines or drugs for which the manufacture, distribution, and dispensation are strictly regulated by both state and federal laws due to the potential for abuse and physical and psychological dependence. Controlled drugs are separated into six schedules and itemized under et seq. Article 5 (§ 54.1-3443 et seq.) of Title 54.1 of the Code of Virginia. For purposes of this definition, "controlled drugs" does not include devices.
“Durable medical equipment" is defined to mean medical equipment that meets all of the following requirements: (i) can withstand repeated use; (ii) is primarily and customarily used to serve a medical purpose; (iii) generally is not useful to a person in the absence of illness or injury; and (iv) is appropriate for use in the home.
The Virginia Drug Control Act provides in Virginia Code § 54.1-3455 3 that the following classes of drugs and devices shall be controlled by Schedule VI:
Any drug, not included in Schedules I, II, III, IV or V, required by federal law to bear on its label prior to dispensing, at a minimum, the symbol "Rx only," or which bears the legend "Caution: Federal Law Prohibits Dispensing Without Prescription" or "Caution: Federal Law Restricts This Drug To Use By Or On The Order Of A Veterinarian" or any device which bears the legend "Caution: Federal Law Restricts This Device To Sales By Or On The Order Of A _______________." (The blank should be completed with the word "Physician," "Dentist," "Veterinarian," or with the professional designation of any other practitioner licensed to use or order such device.)
With respect to the following items, the Taxpayer maintains that the products are drugs that are subject to an exemption and should not have been included in the audit. I will address the Taxpayer’s products and issues in light of the aforementioned authorities.
*****
Ammonium Lactate 12% - The Taxpayer maintains that this product was properly purchased exempt of the sales tax. The product is classified as a prescription drug by the FDA. The Board concurs and classifies this product as a Schedule VI drug. The exemption for controlled drugs applies to controlled drugs purchased for use or consumption by a licensed hospital. Accordingly, this product was properly purchased exempt of the tax, and the transaction will be removed from the audit.
*****
Aquapak 1028 Sterile Water 1071ML and Aquapak 340 Sterile Water 340 ML - The Taxpayer contends that these products are Schedule VI drugs based upon the labeling showing that a prescription is required, and requests that the sales tax paid to its vendor be used to offset liabilities owed in the audit. The auditor found that these products are devices that are subject to the sales tax, and the Taxpayer’s vendor properly applied the sales tax at the time the purchases were made.
The exemption for controlled drugs does not apply in this instance because the products at issue are not considered drugs by the FDA, but instead are classified as medical devices. The Board concurs with the federal classification and deems the products as Schedule VI medical devices in accordance with Virginia Code § 54.1-3455 3.
I also find that the DME exemption does not apply because the products are purchased in bulk and not by or on behalf of an individual for use by that individual. Accordingly, the sales tax was properly charged by the vendor at the time of purchase.
Catheter External Male Med Nonlatex IV – The Taxpayer contends that this product was purchased on behalf of an individual, and that the sales tax was erroneously paid at the time the purchase occurred. The DME exemption applies to catheters. Title 23 VAC 10-210-940 F 1 provides that catheters are exempt when purchased by or on behalf of an individual for the individual's exclusive use. In this instance, the documentation provided does not indicate that the catheters were purchased by or on behalf of an individual. Bulk purchases of catheters are subject to the sales tax. Accordingly, the sales tax was properly charged by the vendor at the time of purchase.
Solution for Inhalation Flex – Relying on P.D. 94-131 (4/26/1994), the Taxpayer contends that the product is a Schedule VI drug because the labeling indicates that a prescription is required. The Taxpayer requests that the product be removed from the audit. The description provided states that the product is a single use device. It is further described as a sterile bottle used for the safe storage and easy handling of sterile solutions. While the labeling indicates that a prescription is required for use, the description does not identify the product as a drug.
The FDA classifies this product as a device. The Board concurs with this classification, and deems the product a Schedule VI device. Accordingly, the exemption for controlled drugs does not apply in this instance.
Further, the ruling in P.D. 94-131 is not applicable in this instance. Pursuant to the public document, sterile water and sodium chloride solutions were deemed to be eligible for an exemption from sales tax when they contained the legend “Caution: Federal Law Prohibits Dispensing Without A Prescription” and were deemed to be Schedule VI drugs in accordance with Virginia Code § 54.1-3455.3. As previously stated, the products at issue are devices and not drugs.
I further find that the DME exemption does not apply. This product is purchased in bulk, and not by or on behalf of an individual for use by that individual. Accordingly, sales tax was properly charged by the vendor at the time the purchase occurred.
Syringe Vanishpoint 1/2ML 30GX5/16 and 1CC 29GX1/2Inch – Based upon the description of these products, they are syringes used for insulin. The DME exemption applies to syringes used for insulin. Title 23 VAC 10-210-940 F 1 provides that such syringes are exempt when purchased by or on behalf of an individual for the individual's exclusive use. The information provided does not demonstrate that these syringes were purchased by or on behalf of an individual. Rather, the syringes were purchased in bulk. Accordingly, the exemption does not apply to these transactions and the sales tax was properly charged at the time the purchase occurred.
Syringes (prefilled and non-prefilled), IV Catheter Protective 22 x 1 (syringe for catheter care and maintenance) and Unit Dose .9 SOD CHL STRL 15 ML (prefilled syringe)
During the audit period, the Taxpayer purchased syringes prefilled and non-prefilled syringes. For some of the purchases at issue, the Taxpayer maintains that the transactions were improperly included in the audit. In other instances, the Taxpayer contends that it improperly paid sales tax at the time the purchases occurred.
The controlled drug exemption statute provides that hypodermic syringes can be purchased exempt of the sales tax when dispensed by or sold on prescriptions or work orders of licensed physicians. In P.D. 04-49 (8/13/2004), the taxpayer was a corporation that sold drugs and medical supplies to hospitals. The Tax Commissioner ruled that the taxpayer could sell hypodermic syringes to hospitals exempt of the sales tax, provided the hypodermic syringes were dispensed on prescriptions or work orders.
In this instance, an exemption applies to purchases of the syringes at issue, both prefilled and non-prefilled, provided the Taxpayer can demonstrate that the syringes were dispensed by or sold on prescriptions or work orders of licensed physicians. The documentation provided with the appeal does not demonstrate that the syringes were dispensed by or sold on prescriptions or work orders by licensed physicians at the Taxpayer’s hospital. The Taxpayer will be given the opportunity to provide such documentation for review by the Department. If the documentation provided supports this provision of the statute, the purchases that were included in the audit will be removed. A one-time credit will be given in the audit for the sales tax paid to the Taxpayer’s vendor on other purchases.
Other Contested Purchases
The following transactions were held taxable by the auditor. For the reasons stated below, the Taxpayer contends that these transactions should be removed from the audit.
*****
The transaction at issue is for the purchase of printed materials. The transaction was held taxable in the audit because the auditor could not determine, based upon the information provided, where the materials were delivered. The Taxpayer maintains that the materials at issue were purchased by the corporate office of ***** (1) and that the materials were shipped directly to the corporate office in *****. The Taxpayer further provides that the materials were distributed to the Taxpayer and that the corporate office charged the Taxpayer for the materials purchased by the corporate office on behalf of the Taxpayer. In accordance with Title 23 VAC 10-210-450 A, the Taxpayer requests a credit in the audit for sales tax paid to *****.
Virginia Code § 58.1-611 provides that:
A credit shall be granted against the taxes imposed by this chapter with respect to a person's use in this Commonwealth of tangible personal property purchased by him in another state. The amount of the credit shall be equal to the tax paid by him to another state or political subdivision thereof by reason of the imposition of a similar tax on his purchase or use of the property. The amount of the credit shall not exceed the tax imposed by this chapter.
Title 23 VAC 10-210-450 A provides that:
Any person who purchases tangible personal property in another state and who has paid a sales or use tax to such state or its political subdivision or both on the property, is granted a credit against the use tax imposed by Virginia on its use within this state for the amount of tax paid in the state of purchase. This credit does not require that the state of purchase grant a similar credit for tax paid to Virginia. This credit does not apply to tax erroneously charged or incorrectly paid to another state. For example, if a person purchases and takes delivery in Virginia of tangible personal property purchased from an out-of-state dealer who incorrectly charges out-of-state tax, no credit is available. The purchaser must apply to the out-of-state seller for refund.
Title 23 VAC 10-210-450 C provides that:
To obtain a credit for tax paid to another state or its political subdivision, a person must apply, by letter, to the department and include a copy of the appropriate invoice stating the amount of tax billed and the state or political subdivision or both to which it was paid. A person requesting credit may be required by the department to furnish an affidavit stating that the tax has been paid and has not been refunded.
With its appeal, the Taxpayer provided a copy of an invoice in which the corporate office purchased printed materials from its vendor. The invoice lists a charge for a six percent sales tax. The Taxpayer also provides a document labeled as “Hospital Intercompany Allocations of A/P” that shows the allocation of the costs of the printed materials purchased to each separate hospital/medical facility. A charge for the printed materials transferred to the Taxpayer is included on this document and includes a portion of the six percent sales tax charged on the invoice.
In order for a credit to be granted to the Taxpayer in this instance, the Taxpayer must have purchased the printed materials in another state and must have paid sales tax to such state on the property. In order to claim the credit, the Taxpayer must provide a copy of the appropriate invoice stating the amount of tax billed and the state to which it was paid.
Based upon the documentation provided, the Taxpayer did not purchase the printed materials at issue from the vendor located in *****. Rather, the corporate office purchased the printed materials from the vendor and made an intercompany transfer of the materials to the Taxpayer. Additionally, the Taxpayer did not remit sales tax to the vendor as required by the regulation. Based upon the invoice provided, the ***** sales tax was remitted to the vendor by the corporate office. Accordingly, the Taxpayer is not due a credit in this instance because the Taxpayer has not demonstrated that it paid the ***** sales tax to the vendor. The Taxpayer has also not demonstrated that it accrued and paid Virginia use tax with respect to the printed materials.
*****
The purchase at issue was held taxable in the audit because the auditor determined that disposable products were for use in providing meals for patients at the Taxpayer’s hospital. Relying on Title 23 VAC 10-210-930 F, the Taxpayer maintains that the disposable products are used only for meals sold to customers at the cafeteria located in the hospital, and were properly purchased exempt of the tax pursuant to a resale exemption certificate. The Taxpayer requests that the transaction be removed from the audit.
Title 23 VAC 10-210-930 F provides, in pertinent part:
Paper doilies, paper placemats, plastic silverware, bags and similar items furnished with meals and which are disposed of after use by only one customer are also considered a part of a meal and can be purchased exempt under a Resale Certificate of Exemption. Other items purchased by a restaurant for its own use in preparing and serving meals, such as kitchen equipment, plates, glasses, silverware, tablecloths, and similar items are taxable and may not be purchased under a Certificate of Exemption.
In accordance with Title 23 VAC 10-210-930 F, paper products that are disposed of after use by only one customer are considered a part of the meal and can be purchased exempt of the sales tax. Accordingly, if such products are purchased for use in the Taxpayer’s cafeteria, they can be purchased exempt of the sales tax pursuant to a resale exemption certificate.
Virginia Code § 58.1-633 A provides that:
Every dealer required to make a return and pay or collect any tax under this chapter shall keep and preserve suitable records of the sales, leases, or purchases, as the case may be, taxable under this chapter, and such other books of account as may be necessary to determine the amount of tax due hereunder, and such other pertinent information as may be required by the Tax Commissioner.
In this instance, the Taxpayer has not provided documentation to support its contention that the products at issue were in fact used in the cafeteria located at the hospital, and were properly purchased exempt of the sales tax. Accordingly, the purchase was properly included in the audit and will not be removed.
*****
The transactions at issue were for the purchase of repair and replacement parts and labor for medical equipment owned by the Taxpayer. The Taxpayer provided the ***** (the “Agreement”) to the auditor that was entered into by ***** (the “vendor”) and ***** (the “prior owner”). While the Agreement provided is between the prior owner and the vendor, the Taxpayer maintains that the Agreement provided is current and that the transactions were made pursuant to this Agreement. The Taxpayer states that the Agreement is a labor only contract and that the transactions are exempt from the sales tax pursuant to Virginia Code § 58.1-609.5 9 and VTB 95-8 (9/27/1995). The Taxpayer states that the Agreement is for the inspection and preventative maintenance of equipment to keep the equipment within compliance standards. The Taxpayer further states that if a repair or replacement part is required, those parts are billed separately and the tax would be charged on the parts invoices. The Taxpayer further provides that an agreement between the Taxpayer and the vendor has not been executed.
The transactions were held taxable in the audit because the auditor could not determine the cost for labor and the cost for parts. The auditor determined that the transactions at issue were not made pursuant to the Agreement provided by the Taxpayer because the Taxpayer is not a party to the contract between the vendor and the prior owner. The auditor requested that the Taxpayer provide an agreement between the Taxpayer and the vendor. However, the requested agreement was not provided.
Virginia Code § 58.1-609.5 9 provides that
maintenance contracts, the terms of which provide for both repair or replacement parts and repair labor, shall be subject to tax upon one-half of the total charge for such contracts only. Persons providing maintenance pursuant to such a contract may purchase repair or replacement parts under a resale certificate of exemption. Warranty plans issued by an insurance company, which constitute insurance transactions, are subject to the provisions of subdivision 1 above.
With its appeal, the Taxpayer provided the Agreement that was provided to the auditor during the performance of the audit. The Agreement states that the vendor will provide on-site biomedical maintenance services on customer-owned equipment. Section VIII of the Terms and Exhibit of the Agreement states that “Neither party may assign this Agreement or any of its rights or obligations under this Agreement without the prior written consent of the other party, except that [the vendor] may assign this Agreement to an affiliate or to a successor in interest to which the business relates.” The Taxpayer has not provided any evidence to demonstrate that the Agreement was assigned to the Taxpayer upon the purchase of the hospital. If the Agreement did not transfer to the Taxpayer at the time the hospital was purchased, the transactions between the Taxpayer and the vendor could not have been made pursuant to the Agreement.
Further, while the statute provides an exemption for charges for labor, the documentation provided does not support the Taxpayer’s contention that the purchases at issue were made pursuant to a labor only contract. The invoices provided do not tie the purchases to a labor only contract between the Taxpayer and its vendor. The information provided is also insufficient to prove that the prior contract transferred to the Taxpayer with the sale of the hospital. Additionally, the documentation provided by the Taxpayer is insufficient to determine the costs associated with the transactions, the nature of the sales and whether the sales tax was properly applied at the time the transactions occurred. Accordingly, the purchases were properly included in the audit and will not be removed.
CONCLUSION
The audit will be returned to the appropriate field audit staff to revise the audit in accordance with the determinations set forth in this letter. The Taxpayer must provide all additional documentation to the auditor within 60 days from the date of this letter. The Taxpayer will receive a revised audit report reflecting the adjustments. Because the assessment has been paid in full, the Taxpayer will receive a refund with refund interest accrued to date.
The Code of Virginia sections, regulations, public documents, and tax bulletins 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, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
(1) The Taxpayer is an affiliate of *****.
AR/1546p