Rulings of the Tax Commissioner

April 28, 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 January 2014 through December 2018. I apologize for the delay in responding to your letter.  

FACTS

The Taxpayer operates a dental practice specializing in dental implants. As a result of an audit, the Taxpayer was assessed consumer use tax due to the purchase of prosthetic devices and implants without reference to a specific patient. The Taxpayer appeals, contending that the inclusion of patient identities would violate its patient’s right to privacy under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The Taxpayer also references a prior audit with the Department where similar items were removed from the audit exceptions as exempt.

DETERMINATION

Prosthetic Devices 

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, here, contends that orders of prosthetic devices and implants commonly include items for multiple patients and that inclusion of the patients name or other identifiers on the invoice would be a violation of HIPAA. 

The Department disagrees. HIPAA is a federal law that required the creation of national standards to protect sensitive patient health information from being disclosed without the patient’s consent or knowledge. While disclosure of a patient’s name or other identifying information may constitute a violation of protected health information, there are internal processes available to the Taxpayer that would allow for coordination of patient health records without the risk of disclosure, such as assignment of patient identification numbers. Many medical providers in the Commonwealth use such processes without issue. Because the Taxpayer is unable to show that the equipment was purchased for a specific patient, and not ordered in bulk, the transactions would not qualify for the exemption under Virginia Code § 58.1-609.10 10.

Prior Audit

The Taxpayer further contends that in the prior audit, similar durable medical devices lacking patient identifiers were ultimately not included in the assessment because they were exempt as durable medical equipment under Virginia Code § 58.1-609.10 10.  

Upon review of the Department’s records regarding the prior appeal, the referenced durable medical devices were removed from the audit exceptions because payment of the required tax was accounted for by other sources. In the prior audit, the Taxpayer’s vendor was undergoing a simultaneous audit and was assessed and paid the sales tax at issue. This is not the case in the current audit.  

CONCLUSION

Based on this determination, the assessment is correct. 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 of the date of the bill.

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/2159.A