Tax Type
Retail Sales and Use Tax
Description
Medical, Dental, and Optical Supplies and Drugs; Purchases by a Clinic
Topic
Taxability of Persons and Transactions
Date Issued
06-05-1992
June 5, 1992
Dear*******:
This will reply to your letter of June 1, 1991 in which you seek the correction of sales and use tax assessed your clients, * * * (Taxpayer 1) * * * (Taxpayer 2) as a result of department audits for various periods between January, 1986 and August, 1990.
FACTS
Taxpayers 1 and 2 are a group of emergency medical centers located in the Commonwealth. Taxpayer 1 consists of the corporate offices and a centralized pharmacy which employes only one pharmacist. Taxpayer 2 is a professional corporation made up of 7 separate entities which operate as clinics staffed by licensed physicians. Taxpayer 1 purchases medicines and drugs, as well as supplies for resale to Taxpayer 2. The drugs and supplies are resold to patients of Taxpayer 2 on a physician's prescription order. Taxpayer 2 contests the application of use tax to purchases of the drugs and supplies and contends that these purchases are for resale through its pharmacy operations.
DETERMINATION
Va. Code § 58.1-608(A)(7)(a) provides an exemption from the sales and use tax for controlled drugs purchased by a physician for use in his professional practice. Consistent with the settlement of cases involving physician's practices that are organized as professional corporations, partnerships or sole proprietorships and the passage of the appropriate legislation by the 1992 General Assembly, the audits will be revised to remove controlled drugs that are purchased by Taxpayer 2. Additionally, purchases of controlled drugs by other entities remain subject to the tax, unless otherwise exempt.
However, the "pharmacy operations' of Taxpayer 2 are not retail establishments, but rather an extension of the service provided by the physicians. The fact that there is no pharmacist on site and sales of drugs and supplies are restricted to patients of the clinics only, does not satisfy the historical definition of pharmacy operations with regard to the application of the sales and use tax. Although the Taxpayers have a unique operation, the exemption provided in Va. Code § 58.1-608(A)(7)(a), which 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), does not apply in this instance. Of significant importance is the June 3, 1988 opinion of the Circuit Court of 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 drugs in this case were obtained from an independent pharmacy (separate corporation), it is my understanding that they were not purchased pursuant to prescriptions or work orders of the clinics' physicians. Rather, the drugs were purchased by the clinics in dosage size packages for stock purposes for future use in the practices of the staff physicians. Likewise, the medical supplies and related items were purchased in bulk and then dispensed to individual patients. Generally, there is no exemption for medical supplies purchased by a clinic. The medical supplies in this case are neither controlled drugs nor medicines dispensed by prescription. Furthermore, the medical supplies do not qualify for exemption under the definition of durable medical equipment as described in Va. Code § 58.1-608(A)(7)(b). Therefore, the nonprescription drugs and supplies were purchased by Taxpayer 2 are not exempt from the tax and were properly assessed.
Additionally, Taxpayer 1 is required to register and collect the tax on sales to Taxpayer 2. If Taxpayer 1 has not registered with the department, it should do so immediately.
Accordingly, the assessments will be revised in accordance with the determination reached in this letter and revised Notices of Assessment will be sent to the Taxpayers under separate cover.
Please note that effective July 1, 1992, the tax on nonprescription drugs and proprietary medicines purchased for the cure, mitigation, treatment, or prevention of disease in human beings would no longer apply. However, the 1992 General Assembly passed legislation to delay the repeal of the tax. The amended effective date is July 1, 1994.
If you have any further questions, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner