April 13, 2022
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 November 2011 through October 2017. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, an ambulatory and surgery center providing out-patient non-emergency services, was audited for the period at issue. As a result of the audit, an assessment was issued for untaxed purchases of certain durable medical equipment and prosthetic devices. The Taxpayer appeals, contending the durable medical equipment and prosthetic devices were provided on a consignment basis and should be exempt of the tax.
DETERMINATION
Virginia Code § 58.1-609.10 10 provides an exemption 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.” Prosthetic devices are defined in Title 23 of the Virginia Administrative Code (VAC) 10-210-940 to mean “devices which replace a missing part or function of the body and shall include any supplies physically connected to such devices.”
The tangible personal property at issue in this appeal qualifies as durable medical equipment under Virginia Code § 58.1-609.10 10. At issue, however, is whether the purchase of such equipment by the Taxpayer falls within the purview of Title 23 VAC 10-210-940 G. Under this regulation, purchases of such property only qualify for the exemption if the transaction is deemed to be a purchase on behalf of an individual and is required to be specifically bought for that individual. Durable medical equipment and devices purchased in bulk and then dispensed to individual patients are not eligible for the exemption even if the device is modified or fitted for a specific individual.
The only exception to the “bulk purchase” rule is set out in Virginia Code § 58.1-609.7 4, which authorizes the exempt sale of tangible personal property to nonprofit hospitals and licensed nonprofit nursing homes. In order for nonprofit hospitals to make exempt purchases, such nonprofit hospitals and nursing homes must be able to provide a Sales and Use Tax Certificate of Exception letter issued by the Department of Taxation, verifying the entity’s tax-exempt status. Here, it does appear the Taxpayer was not a nonprofit hospital or nursing home.
The Department has previously addressed this issue in Public Documents (P.D.) 00-215 (12/7/2000) and P.D. 01-137 (9/19/2001). While the discussion in P.D. 00-215 centers on the bulk purchase of braces and collars, and P.D. 01-137 deals with the bulk purchase of orthopedic implants, in both cases, the medical service provider purchased the items in bulk for use on an “as needed” basis. After the purchases, each service provider was able to trace the items to specific patients. Consistent with the regulation, however, the Department ruled that the purchase of the items did not qualify as exempt purchases on behalf of specific patients, regardless of the fact the taxpayers could trace the items to specific patients.
The Department has permitted the exemption to apply when purchases are made under a consignment agreement. In P.D. 16-85 (5/17/2016), the Department considered a scenario wherein a manufacturer of durable medical equipment shipped the equipment to a taxpayer, and stored it on the taxpayer’s premises. No consideration would be exchanged and therefore title to the equipment would remain with the manufacturer. A sale of the equipment 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 equipment is transferred and consideration exchanged. Under these circumstances, the Department determined that the transaction would qualify as an exempt sale 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.
The Taxpayer contends that it obtained the durable medical equipment and prosthetic devices that it provides to patients on consignment and only withdraws the durable medical equipment or prosthetic devices from its consignment inventory pursuant to a prescription or work order from a licensed physician or other licensed practitioner to be surgically implanted into a patient. The Taxpayer argues that, because they were withdrawing the items from its consignment inventory for a specific patient, the sale qualifies for the exemption under Virginia Code § 58.1-609.10 10.
The Department disagrees. Invoices examined during the audit show that the inventory was purchased in bulk, with consideration being paid at the time of billing and not based on a work-order as outlined in P.D. 16-85. The Taxpayer has not provided contracts with vendors to confirm that the items were provided on a consignment basis with no consideration prior to taking the items out of inventory.
Based on the information provided and the cited authorities, the assessment is upheld. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of this letter.
The Code of Virginia sections, regulation 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 response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/2028.A