Tax Type
Retail Sales and Use Tax
Description
Bulk purchase of controlled drugs by home health care organization
Topic
Exemptions
Date Issued
05-02-1994
May 2, 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This will reply to your letter of November 9, 1993 in which you seek correction of a retail sales and use tax assessment for *********** (the "Taxpayer") for the period July 1987 through March 1993.
FACTS
The Taxpayer is a home health care organization engaged in home intravenous therapy and related services, including enteral feeding, renting durable medical equipment, and providing private duty nursing. The Taxpayer also operates an in-house pharmacy.
The Taxpayer maintains that medicines and drugs are dispensed or sold by the pharmacy on prescriptions of licensed physicians to "retail customers." Therefore, its purchases of bulk quantities of drugs are exempt from the tax under Va. Code §58.1-609.7(1). The auditor assessed use tax on the bulk purchase of drugs as tangible personal property used in the provision of home health care services.
The Taxpayer also protests the assessment of the tax for a period exceeding three years.
DETERMINATION
Medicines and Drugs Purchased by Pharmacy: Va. Code §58.1-609.7(1) provides, in pertinent part, an exemption from sales and use tax for:
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- [m]edicines, drugs, hypodermic syringes, artificial eyes, contact lenses, eyeglasses and hearing aids dispensed by or sold on prescriptions or work orders of licensed physicians,
The "true object" test, as discussed in Virginia Regulation (VR) 630-10-97.1(B)(2) is used to determine whether a transaction involving both the provision of a service and tangible personal property constitutes an exempt service or a taxable retail sale. In this case, the "true object" desired by the Taxpayer's patients is the receipt of medical services enabling them to maintain a quality level of health care in their home.
The department has previously ruled on the application of the exemption under Va. Code §58.1-609.7(1) to home health care service organizations. See P.D. 92-172 (9/10/92), copy enclosed.
Based on the above ruling, the Taxpayer's in-house pharmacy is not a true retail pharmacy. A traditional retail pharmacy generally stores its controlled medicines and drugs utilizing an inventory method for sale to retail traffic. The Taxpayer's pharmacy serves only patients utilizing the Taxpayer's nursing services and patients employing nursing services of a company with which the Taxpayer has formed a joint venture. The fact that the pharmacy does not entertain retail traffic lends strong support to the conclusion that the Taxpayer is addressing the health care needs of its patients in providing its nursing services. Therefore, I must conclude that the Taxpayer's purpose in supplying certain medications is directly related to the provision of its home health care services, as opposed to serving the needs of the general public.
In a case on point with the Taxpayer's situation, Commonwealth of Virginia v. Bluefield Sanitarium, Inc., 216 Va. 686, 222 S.E.2d 526 (1976), a hospital maintained its own pharmacy, which purchased bulk quantities of medicines and drugs. Medication was dispensed by the pharmacy to patients on an as needed basis. The Virginia Supreme Court held that the hospital was responsible for the payment of use tax on its purchases of drugs that would be held in inventory to be administered to patients, as it 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. As the Court recognized, the exemption for prescription medicines and drugs "is designed to relieve patients of a tax, not to relieve persons 'engaged in essentially service businesses'." 216 Va. at 690 (emphasis in original). This ruling was followed by the Richmond Circuit Court in Bio-medical Applications of Roanoke, Inc. v. Department of Taxation (June 23, 1988 opinion).
Based on the above, the Taxpayer is deemed to provide a nontaxable service to its clients and thus is considered the user or consumer of all drugs purchased and provided in the rendition of its medical services. The Taxpayer's purchases of controlled medicines and drugs do not qualify as exempt purchases for resale for purposes of the sales and use tax. Therefore, the Taxpayer is required to pay the tax to its suppliers when making purchases of bulk quantities of controlled medicines and drugs or remit the use tax directly to the department based on the cost price of such items.
Period of Assessment: The Taxpayer protests the assessment of taxes for a period greater than three years, asserting that no evidence of fraud or of the failure to file a return exists. Contrary to the Taxpayer's argument, the Taxpayer failed to file a use tax return for the six year period in question. Under Va. Code §58.1-634, in the case of a failure to file a return, the tax may be assessed any time within six years from the date the taxes became due and payable. Furthermore, the Taxpayer signed a "waiver" to permit the examination of its records for a period of six years. The assessment was issued prior to the expiration of the waiver.
Accordingly, I find no basis upon which to revise the assessment. The Taxpayer will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7516F
Rulings of the Tax Commissioner