Tax Type
Retail Sales and Use Tax
Description
Prescription drug samples; Out-of-state pharmaceutical manufacturer; Withdrawals from exempt inventory; tax paid to another state
Topic
Property Subject to Tax
Date Issued
03-21-1994
March 21. 1994
Re: §58.1-1821 Application: Retail Sales and Use Tax
Dear****************
This will reply to your letter of September 17, 1993 in which you seek correction of sales and use tax assessed to***************(the Taxpayer), as a result of an audit for the period November, 1986 through September, 1992.
FACTS
The Taxpayer is a pharmaceutical manufacturer domiciled in New Jersey. As a result of the department's audit the Taxpayer was assessed use tax on prescription drug samples and promotional materials distributed in Virginia. The Taxpayer argues that since sales of prescription drugs by licensed physicians are exempt from the tax under Va. Code §58.1-609.7(1), then prescription drug samples distributed to licensed physicians for use in their practice are also shielded from the imposition of the tax.
Further, the Taxpayer protests the application of the use tax upon promotional materials for which use tax was paid to New Jersey and requests a credit for such tax pursuant to Va. Code §58.1-611.
DETERMINATION
Prescription Drug Samples
The Taxpayer asserts that prescription drug samples should be exempt, consistent with the exemption under Va. Code §58.1-609.7(1) for drugs dispensed by or sold on prescriptions of licensed physicians and controlled drugs purchased for use by a licensed physician in his professional practice. The Taxpayer admits that its distribution of drug samples are not classified as sales, however, its sales of prescription drugs to licensed physicians are exempt from both sales and use tax, and therefore its distribution of samples should be treated in a like manner.
The focus here is not the free distribution of prescription drug samples to licensed physicians, but rather the Taxpayer's distribution of tangible personal property for purposes other than resale. Va. Code §58.1-604, copy enclosed, imposes the use tax on the use or consumption of tangible personal property in Virginia. The term "use" is defined in Va. Code §58.1-602, copy enclosed, as "the exercise of any right or power over tangible personal property incident to the ownership thereof, except that it does not include the sale at retail of that property in the regular course of business." By providing samples to its salesmen in Virginia, the Taxpayer exercises a taxable use, incident to ownership, over the samples prior to their distribution to licensed physicians. Since no tax was paid to New Jersey and a taxable use occurs in Virginia, the use tax is due to Virginia. The department has previously ruled on the tax treatment of drug samples in P.D. 89-254 (9/21/89), copy enclosed, which also discusses the application of the tax to sales of prescription drugs in Virginia.
Credit for Tax Paid to Another State
For the period November, 1986 through December, 1990, the Taxpayer paid use tax to New Jersey on promotional materials distributed in Virginia based on the 1983 New Jersey tax court case ruling in Hoffman-La Roche Inc. v. Taxation Division Director. New Jersey Tax Court, Docket No. ST 139A-80, February 1, 1983. The decision in that case held the taxpayer liable for use tax on promotional materials purchased from out-of-state vendors and delivered to direct mail houses in the state for distribution outside the state. The Taxpayer contends that it paid use tax to New Jersey based on its interpretation of the sales and use tax law and the outcome of this court case. Furthermore, the Taxpayer contends that a 1985 law change exempting advertising materials distributed out-of-state did not apply to it as the exemption was granted to direct mail and promotional firms. Having paid what it contends is the proper tax to New Jersey, the Taxpayer requests a credit against Virginia use tax liability for the tax paid to New Jersey pursuant to Va. Code §58.1-611. Effective January 1,1991 the Taxpayer ceased paying New Jersey tax and commenced paying use tax to Virginia.
Va. Code §58.1-611, copy enclosed, allows a credit for tax paid to another state on tangible personal property purchased in that state and used in the Commonwealth and provided that the other state imposes a similar tax. Virginia Regulation (VR) 630-10-29, copy enclosed, further provides that the credit does not apply to tax erroneously charged or incorrectly paid to another state.
Effective January 25, 1985, New Jersey provided an exemption from the sales and use tax for sales of advertising or promotional materials which are prepared within or outside of the state for distribution by an in-state direct-mail advertising or promotional firm to out-of-state recipients and sales of direct-mail advertising processing services in connection with distribution of advertising or promotional materials to out-of-state recipients. Further, in March 1986, New Jersey's taxing authority published information which provided that the exemption applied to any portion of such property ultimately delivered to other persons free of charge for use or consumption outside the state through either the services of a direct-mail house located in the state or otherwise. Where the purchaser of advertising material takes delivery of such printed property in New Jersey, he may issue the vendor an Exempt Use Certificate and is then liable for the use tax on that Portion of the advertising material delivered to recipients in New Jersey or otherwise used or consumed by him in New Jersey. Based on information received from the New Jersey Division of Taxation, the 1985 law change was broad and intended to apply not only to direct mail and promotional firms, but to any persons receiving advertising material for ultimate distribution outside the state. The 1986 publication simply clarified the application of the exemption.
It is my conclusion that the tax was incorrectly paid to New Jersey. Furthermore, it is my understanding that the Taxpayer properly remitted to other taxing jurisdictions the use tax on such property distributed in those states for the period November, 1986 through December, 1990. Therefore, the request for credit of the tax paid to another state is denied and the Taxpayer should apply to New Jersey for a refund.
Based on the foregoing, I find no basis for correction of the assessment. The balance of the assessments which reflect interest accrued to date is ******** and payment should be received within 30 days to avoid the accrual of additional interest charges and collection activity.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7375J
Rulings of the Tax Commissioner