Tax Type
Retail Sales and Use Tax
Description
Nonprofit organizations, private schools, and churches; Medical, dental, and optical supplies and drugs; Tools used for surgical installation of implants
Topic
Taxability of Persons and Transactions
Date Issued
07-18-1996
July 18, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear************
This is in reply to your letter in which you seek correction of sales and use tax assessed to your client, ***** (the "Taxpayer"), for the period February 1990 through September 1992. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer was a distributor of orthopedic implant systems used in rehabilitative and reconstructive surgery. The orthopedic implant systems consisted of hip and knee implants ("implants") and the related instruments and trials ("tools") used for surgical installation of the implants.
The auditor did not apply tax to sales of the implants as they were sold to licensed physicians and hospitals for specific patients and qualified for exemption under Code of Virginia § 58.1-609.7(2). The auditor, however, assessed use tax on the tools because they were purchased by the Taxpayer and provided to the physicians and hospitals for use in the surgical installation of the implants.
The Taxpayer contends that the implants cannot be properly installed without the use of the tools and therefore, the tools qualify for exemption under the cited statute as related parts and supplies specifically designed for the implants. To further support its belief, the Taxpayer cites Public Document 89-56 (1/4/89).
Alternatively, the Taxpayer asserts that the tools qualify for exemption under Code of Virginia § 58.1-609.7(4) contending that they are tangible personal property used by nonprofit hospitals in the delivery of medical services.
DETERMINATION
Code of Virginia § 58.1-609.7(2) provides an exemption from the sales and use tax for "[w]heelchairs and parts therefor, braces, crutches, prosthetic devices, orthopedic appliances, catheters, urinary accessories, other durable medical equipment and devices, and related parts and supplies specifically designed for those products... when such items or parts are purchased by or on behalf of an individual for use by such individual..." Code of Virginia § 58.1-609.7(4) exempts from the sales and use tax "[t]angible personal property for use or consumption by a nonprofit hospital or a nonprofit licensed nursing home."
The disputed tools consist of pre-sized tools, jigs, and braces designed for use in the removal of damaged tissue or bone and models of implants used to determine the exact size of the required implant. The tools were sterilized after each surgery for reuse. The tools were not purchased for resale, but instead were held in inventory by the Taxpayer and recorded as fixed assets and capitalized for a period of two years. The tools remained under the ownership of the Taxpayer and a sale or rental of the tools did not occur. The tools do not qualify under the above statutes because the exemptions apply to the sale of exempt property or a sale to an exempt user.
Code of Virginia § 58.1-604, copy enclosed, imposes the use tax upon "the use or consumption of tangible personal property in this Commonwealth..." Use as defined in Code of Virginia § 58.1-602, copy enclosed, "means the exercise of any right or power over tangible personal property incident to the ownership thereof..." The Taxpayer exercised a taxable use over the tools when it engaged in the provision of such tools to licensed physicians and hospitals, without the benefit of a sale. This is supported by P.D. 92-107 (6/24/92), copy enclosed, which dealt with equipment carried on the books of a vendor and loaned to the vendor's customers. The Tax Commissioner upheld the assessment of the tax pursuant to Virginia Regulation (VR) 630-10-32 (Dealers withdrawals from inventory), copy enclosed. Consistent with the statutes and regulation, the auditor correctly assessed the use tax on the tools.
Notwithstanding the fact that the Taxpayer was not engaged in sales of the tools, I will address the Taxpayer's reference to a prior department ruling, P.D. 89-56. The ruling dealt with passive motion devices used for rehabilitation of the lower extremities and hands, and their related kits. The kits were attached to the devices on a patient's body. The Tax Commissioner deemed the devices exempt durable medical equipment. The Tax Commissioner determined that the kits qualified for exemption as related parts and supplies specifically designed for use with the devices and purchased by or on behalf of an individual. The kits were integral to the functioning of the devices and were used by only one individual. The tools in the Taxpayer's case differ from the kits because the tools were used to fit and install implants and were sterilized after each surgery for reuse on other patients. The tools do not satisfy the statutory requirement that the item be purchased by or on behalf of an individual for use by such individual.
In accordance with policy set forth in this letter, the assessment of the use tax on the tools is upheld. An updated bill including interest accrued through the date of the letter of appeal will be forwarded to you. If you have any questions concerning this matter, you may contact **** at*****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8937J
Rulings of the Tax Commissioner