82-119 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Medical supply firm, sales and non-fixed asset purchases

Topic

Appropriateness of Audit Methodology

Basis of Tax

Date Issued

08-24-1982

August 24, 1982

Re: 58-1118 Application/Sales and Use Tax

Dear ********************

This letter will reply to your correspondence of June 8, 1982 in which you apply for correction of sales and use tax assessed against ************* as the result of a recent audit.

Facts

***********is a medical supply firm whose principal customers include hospitals, doctors and the general public. An audit for the period of January 1, 1979 through September 1, 1981 disclosed that had failed to collect sales tax on certain items sold or leased to its customers. A sample audit was conducted on sales and non-fixed asset purchases.

*************contests the assessment of sales tax on sales and leases of medtronic units, sales of supplies for these units, and sales of various other medical supplies, including bathtub lifts, commode arms and shower chairs, bedpans, diapers, urinals, air mattresses, safety chairs and elevated toilet seats. Medtronic units are mechanical devices used for persons experiencing chronic pain, and are prescribed in lieu of narcotics.

*********** further contests the use of a one-month sample period of sales for determining the audit deficiency.

Determination

*************** point of contest with respect to medtronics units and supplies therefore and the various other medical supplies apparently focuses on the sales and use tax exemptions under § 58-441.6(s) and 58-441.6(sl) of the Code of Virginia. § 58-441.6(s) exempts:

- medicines, drugs, hypodermic syringes...dispensed by or sold on prescriptions or work orders of licensed physicians, dentists, optometrists, ophthalmologists... and controlled drugs purchased by a licensed physician for use in his professional practice.

Thus, this exemption is limited to prescription medicines and drugs generally, and controlled drugs for use by physicians.

Virginia Code § 58-441.6(sl) addresses various medical supplies and appliances, exempting:

- Wheelchairs and parts therefore, braces, crutches, prosthetic devices, orthopedic appliances, catheters, urinary accessories,.insulin and insulin syringes, and equipment, devices, or chemical reagents which 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.

The medtronics units and supplies, while they may require a prescription for dispensation, are not medicines and drugs. The fact that these units serve essentially the same purpose as narcotics does not qualify these units for exemption. Exempting statutes must be strictly construed against the taxpayer, thus the terms medicines and drugs must be given their customary meanings and we cannot hold that medtronics units can be deemed medicines or drugs. Similarly, these devices are not controlled drugs as the term is defined in the Virginia Drug Control Act (Virginia Code § 54-524-84:1 et seq.), and are therefore taxable even when purchased by licensed physicians.

Similarly, the other items comprising your liability are clearly medical supplies although they are not of the types specifically set forth in Virginia Code § 58-441.6(sl). Again, the doctrine of strict construction requires that only those items specifically enumerated within the statute qualify for exemption.

The use of a sampling technique for determining tax liability has been established as an acceptable accounting procedure and is used in all types of audits within both the public and private sectors. The sample should be representative of the entire audit period; however, such sample cannot be expected to equal the exact sales or tax amount for each item covered over the course of the entire assessment period. The premise upon which the use of a sample is based is that the net deficiency will accurately reflect the tax deficiency for the audit period, despite the fact that the sample may overstate the deficiency on some specific items while understating the deficiency on others.

The courts have held that a tax assessment made by the proper assessing authorities is prima facie correct and valid, and the burden is upon the taxpayer to prove that the assessment is incorrect. With respect to the contention that a sample period was not a proper measure for the projection, a taxpayer must show sufficient change in circumstances to render the sample invalid. In the instant case, no such evidence has been presented.

Therefore, based upon the foregoing, I find no basis for granting relief from the amount assessed. If you desire a hearing on this matter, please inform us within thirty (30) days. Otherwise, this determination will be final.

Sincerely,

W. H. Forst
State Tax Commissioner

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