Tax Type
Retail Sales and Use Tax
Description
Clinic purchases of drugs
Topic
Taxability of Persons and Transactions
Date Issued
06-20-1988
June 20, 1988
Re: §58.1-1821 Application/Sales and Use Tax
Dear***************
This will reply to your letters of February 24 and April 1, 1988, in which you submit an application for correction of sales and use tax assessed *********** to as the result of a recent audit.
FACTS
***************** ("Clinic") is a group medical practice comprised of approximately 60 physicians. A recent audit of the clinic produced an assessment of sales and use tax on various untaxed purchases, including medicines and drugs purchased from an independent pharmacy for use by the clinic's physicians. The clinic contests this assessment of tax on medicines and drugs, contending that these were controlled drugs purchased by physicians for use in their professional practices.
DETERMINATION
§58.1-608.21 of the Code of Virginia exempts from the sales and use tax "controlled drugs purchased by a licensed physician for use in his professional practice." However, under Virginia Regulation 630-10-47.D, sales of tangible personal property to clinics, including sales of medicines and drugs, are subject to the tax.
Based upon the facts before me, the exemption does not apply in this instance as the medicines and drugs in question were not purchased by physicians, but by the clinic itself. It is my understanding that the physicians in question were employees of the clinic, that the patients treated by the clinic's physician were contractually deemed to be the patients of the clinic, and that the medications purchased were paid for by the clinic rather than the physicians. Based upon these circumstances, I cannot find basis for relief of the assessment issued to the clinic.
Further, I do not find basis for relief of the assessment under the exemption provided in Virginia Code §58.1-608.21 for "[m]edicines (and)...drugs... dispensed by or sold on prescriptions or work orders of licensed physicians."
This exemption has been interpreted by the Virginia Supreme Court in Northern Virginia Doctors Hospital v. Department, 213 Va. 504, 193 S.E.2d 684 (1973) and Commonwealth v. Bluefield Sanitarium, 216 Va. 686, 222 S.E.2d 526 (1976). of additional interest is the June 3, 1988 opinion of the Circuit Court of the City of Richmond in Biomedical Applications of Roanoke v. Commonwealth), which specifically dealt with purchases of medicines and drugs by a clinic. Copies of these opinions are enclosed for your review.
In Doctors Hospital, medicines and drugs were obtained from an independent pharmacy. When a specific patient required medication, a physician's order sheet was completed and the appropriate medication was dispensed by the pharmacy. The court concluded that this procedure constituted the exempt sale of medicines or drugs on the prescription or work order of a licensed physician.
This contrasts with Bluefield Sanitarium, in which the hospital maintained its own pharmacy, which purchased bulk quantities of medicines and drugs. Medication was in turn dispensed by the pharmacy to patients on an as needed basis. Based on this distinction, the court concluded that the hospital exercised a taxable use over the medicines and drugs prior to their dispensation to patients on the prescription or work order of a licensed physician.
While the medicines and drugs in this instance were obtained from an independent pharmacy, it is my understanding that these were not purchased pursuant to prescriptions or work orders of clinic physicians for dispensation to specific patients. Rather, these medications were purchased by the clinic in bulk for use in the practices of its employee physicians. It is my further understanding that purchases from the independent pharmacy made for a specific patient pursuant to a physician's prescription or work order (transactions of the type at issue in Doctors Hospital) were not included in the department's audit.
Based upon the foregoing, I do not find basis for the relief from the department's assessment. Further, I do not find basis for the refund of tax paid by the clinic since January 1, 1987 on its purchases of medicines and drugs. As such, the balance of the department's assessment remains due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner