April 25, 2025
Re: § 58.1-1821 Refund Appeal: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you dispute the denial of a retail sales and use tax refund for the period February 2017 through December 2018.
FACTS
The Taxpayer, an operator of medical diagnostic laboratories in Virginia, timely submitted a refund request for the period at issue and received a refund for tax paid on several transactions because tax was either accrued or remitted on exempt transactions, or use tax was paid on transactions for which the vendor charged sales tax on the invoice. The auditor denied the Taxpayer a refund for tax accrued on reagents used in testing human blood, urine, and other bodily specimens because the auditor questioned whether the reagents qualified for the medicines and drugs exemption. The Taxpayer filed an application for correction contending the reagents meet the definitional requirements of the medicines and drugs exemption.
ANALYSIS
Strict Construction of Exemptions
The Department has the authority to interpret and enforce the laws of the Commonwealth governing taxes in accordance with Virginia Code § 58.1-203. With regard to such interpretations, court precedent requires strict construction of sales and use tax exemptions. Where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Community MotorBus, 214 Va. 155 (1973); Commonwealth v. Research Analysis Corporation, 214 Va. 161 (1973); and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973).
Medicines and Drugs Exemption
Virginia Code § 58.1-609.10 9 provides exemptions related to sales and purchases of medicines and drugs. At issue in this case is the exemption for “medicines and drugs purchased for use and consumption by a licensed hospital, nursing home, clinic or similar corporation not otherwise exempt under this section.” The Taxpayer believes its business operation was a “similar corporation” and, therefore, its purchases of reagents as drugs should qualify for the exemption. In addition to the exemption statute, the Taxpayer cites Public Document (P.D.) 15-242 (12/23/2015) in support of its claims.
The reagents in question are chemical compounds that consist of drugs and other substances. The reagents are used to react with other chemical or biological substances to promote a reaction that can help diagnose potential diseases or medical deficiencies.
Virginia Drug Control Act
The terms “medicines” and “drugs” are not defined for retail sales and use tax purposes. In order to consistently and equitably administer the medicine and drug exemption, the Department has relied on definitions included in the Virginia Drug Control Act (Chapter 34 of Title 54.1 of the Code of Virginia) and the federal Food Drug and Cosmetic Act (Title 21, Chapter 9 of the United States Code). See P.D. 89-254 (9/21/1989). Specifically, Virginia Code § 54.1-3401 defines “drug” to mean:
(i) articles or substances recognized in the official United States Pharmacopoeia National Formulary or official Homeopathic Pharmacopoeia of the United States, or any supplement to any of them; (ii) articles or substances intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or animals; (iii) articles or substances, other than food, intended to affect the structure or any function of the body of man or animals; (iv) articles or substances intended for use as a component of any article specified in clause (i), (ii), or (iii); or (v) a biological product.
This definition is consistent with the definition set forth in Title 23 of the Virginia Administrative Code (VAC) 10-210-940. The Taxpayer cites (ii) to support its claim that the reagents are drugs.
In P.D. 01-52 (4/30/2001), the Department determined that the biological and allergy products at issue qualified as drugs pursuant to the Virginia Drug Control Act based on the Virginia Pharmacy Board’s classification of the products as Schedule VI controlled drugs for use by licensed physicians and prescriber practitioners. As the products in P.D. 01-52 may be similar to the reagents in this case, the Department does not dispute that the reagents may be defined as controlled drugs. However, in order for the reagents to be purchased exempt (or to qualify for a refund credit of tax), the Taxpayer’s business operation must be similar to that of the qualifying entities stated in medicines and drugs exemption statute. See Virginia Code § 58.1-609.10 9.
Hospitals, Clinics, Nursing Homes, and Similar Corporations
The medical entities cited in Virginia Code § 58.1-609.10 9 qualify for the exemption because their purchases of medicines and drugs are consumed or administered in their roles as providers of (1) medical and surgical treatment to patients, (2) nursing home care for sick or injured persons, and (3) outpatient medical treatment and patient services, respectively. The Taxpayer, however, was engaged in providing diagnostic testing and analytical services in a laboratory setting for the purpose of testing human specimens to obtain information for medical providers (such as the stated entities) to use in the diagnosis, treatment, and care of their patients. The Taxpayer did not provide direct medical treatment and care to individuals on an inpatient and outpatient basis. In addition, the reagents were not consumed by or administered to individuals by the Taxpayer. Rather they were used by the Taxpayer to perform diagnostic and analytical services. Based on these differences, the Taxpayer was not a “similar corporation” to a licensed hospital, nursing home, or clinic.
Regarding P.D. 15-242, the Department determined that a for-profit family medical practice qualified for the medicines and drugs exemption regarding purchases of medicines and drugs for use in the medical practice. This decision was made in accordance with the 2006 statutory amendment that expanded the exemption to include purchases of medicines and drugs by nursing homes, clinics, and similar corporations. In this instance, the Taxpayer is not similar to a family medical practice engaged in providing medical care and treatment to patients. Therefore, P.D. 15-242 is not applicable to this case.
DETERMINATION
In accordance with Virginia Code § 58.1-609.10 9, the Taxpayer’s purchase of reagents used for diagnostic testing did not qualify for the medicines and drugs exemption. Accordingly, the auditor properly denied the refund of taxes requested by the Taxpayer on its purchases of biological and chemical reagents used in providing diagnostic testing and analytical services.
The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****@tax.virginia.gov.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR/5089.Z