Tax Type
Retail Sales and Use Tax
Description
Resales; Medicine
Topic
Taxability of Persons and Transactions
Date Issued
09-26-1996
September 26, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This is in response to your correspondence in which you seek correction of sales and use tax assessments issued to affiliated corporations of*********(the "Parent") for the period January 1992 through December 1994.
The Parent provides health care and related services delivered through a number of subsidiary corporations. You protest the tax on untaxed purchases made as follows: (1) certain tangible personal property purchased by*****************("Taxpayer A"); (2) medicines and drugs purchased by**** ("Taxpayer B"); and (3) dietary purchases made by****************(collectively, "Taxpayer C").
Each of the issues under protest will be addressed separately below.
Taxpayer A
FACTS
Taxpayer A, a subsidiary of the Parent, is a nonprofit corporation which exclusively consists of and which does business as two nonprofit hospitals. Most purchases by Taxpayer A are for tangible personal property used exclusively by the hospitals. The auditors found, however, three accounts which represented shared property. In effect, equipment purchased under these accounts was used internally by Taxpayer A, but was also used to provide services to other organizations under the Parent's ownership. These other organizations are not part of Taxpayer A's corporate structure. Further, while these other organizations provide health care and related services, they may or may not operate as nonprofit corporations.
You indicate that the contested equipment was used exclusively by Taxpayer A's employees and that any usage to provide services to other organizations was minimal. You therefore maintain that the contested purchases are not taxable under the exemption available to nonprofit hospitals under Code of Virginia § 58.1-609.7(4).
DETERMINATION
Code of Virginia § 58.1-609.7(4) provides an exemption from the tax for "[t]angible personal property for use or consumption by a nonprofit hospital or a nonprofit licensed nursing home." It has been shown that Taxpayer A is a nonprofit hospital. Accordingly, the contested equipment purchased by Taxpayer A and subsequently used by employees of Taxpayer A is deemed to be used or consumed by a nonprofit hospital. These purchases will be removed from the assessment.
As a reminder, this exemption does not extend to any items purchased by Taxpayer A and subsequently transferred to other organizations for their own use or consumption. For example, medical supplies, housekeeping supplies and other items which Taxpayer A purchases in bulk to be distributed to other organizations remain taxable. I understand, however, that the other organizations in this case have properly accrued the tax on such items.
Taxpayer B
FACTS
Taxpayer B, a subsidiary of the Parent, is a nonprofit corporation which conducts business through a variety of unincorporated health care entities. These entities include neighborhood health care centers and home health care units. Taxpayer B also operates medical clinics under contract with an agency of the federal government. In addition, Taxpayer B operates a pharmacy. I understand that the pharmacy is not licensed by the Virginia Board of Pharmacy to operate a retail pharmacy which dispenses drugs to the general public on a walk-in basis. The pharmacy is licensed, however, to dispense drugs to its own patients through the neighborhood health care centers, home health care units, and other Taxpayer B entities.
At issue in this case is the tax assessed on drugs purchased by Taxpayer B and used to fill patients' prescriptions. In some instances, these purchases are initiated by the health care centers and clinics. In other instances, bulk purchases are initiated by the pharmacy, and the drugs are then distributed to other Taxpayer B entities.
Patients may purchase prescription drugs from Taxpayer B, or, at their option, make those purchases from unrelated retail pharmacies. In this regard, you maintain that the sale of the medicines and drugs to the patient is separate and apart from the provision of medical services. Based on this scenario, Taxpayer B maintains that the contested drugs may be purchased exempt for resale in the same way that a traditional retail pharmacy may purchase drugs under the resale exemption.
DETERMINATION
Medical exemptions: Code of Virginia § 58.1-609.7(1) exempts from the tax:
-
- Medicines [and] drugs dispensed by or sold on prescriptions or work orders of licensed physicians; [and] controlled drugs purchased for use by a licensed physician in his professional practice, regardless of whether such practice is organized as a sole proprietorship, partnership or professional corporation, ... but excluding hospitals, nursing homes, clinics, and similar corporations not otherwise exempt under this section....
I note first that Taxpayer B is not a "licensed physician" as set out above. Accordingly, sales made to Taxpayer B are taxable unless the purchases are made pursuant to a prescription or work order of a licensed physician. In this case, however, Taxpayer B makes bulk purchases of medicines and drugs. The subsequent sales of medicines and drugs to individual patients, sold under prescriptions of Taxpayer B's physicians, are exempt. These exempt sales were not assessed.
Resale exemption: The application of the resale exemption in this case is governed on the decision of the Virginia Supreme Court in Commonwealth of Virginia v. Bluefield Sanitarium, Inc., 216 Va. 686, 222 S.E.2d 526 (1976). In Bluefield, the Court concluded that the hospital is liable for sales tax on the wholesale purchase of medicines and drugs which are dispensed from the hospital pharmacy to patients on physicians' prescriptions and charged to patients. The Court held that the sale from a drug wholesaler to the hospital "was not a sale for resale, but a sale to a user or consumer.
I appreciate the distinction in your case that patients may opt to make their prescription purchases either from Taxpayer B or from traditional retail pharmacies. The analogies between Bluefield and your case, however, are convincing. Like the Bluefield hospital, Taxpayer B is engaged primarily in rendering services. And like that hospital, Taxpayer B operates its own pharmacy. Accordingly, I must reject your argument that the pharmacy, clinics and other medical facilities operated by Taxpayer B can purchase medicines and drugs for resale.
Nor am I convinced by your other arguments. You make reference, for example, to the Supreme Court's decision in Northern Virginia Doctor's Hospital v. Department, 213 Va. 504, 193 S.E.2d (1973). In that case, the hospital purchased drugs from an independent retail pharmacy. Each purchase, however, was made on behalf of specific patients pursuant to work orders of hospital physicians. These purchases satisfied the exemption set out in § 58.1-609.7(1) regardless that the drugs were administered by the hospital's nurses.
Also, you reference Public Document 84-63 (5/24/84) in which a rural physician was permitted to buy and sell drugs for resale, in effect acting as pharmacist. The department's determination in that case did not authorize or allow the physician to act as a retail pharmacy, but merely recognized this activity as permitted by the Virginia Board of Pharmacy which issued a special certificate to the physician.
Government clinics: Taxpayer B has entered into a contract with the federal government to provide medical services to government personnel. Pursuant to this contract, Taxpayer B is required to dispense medicines and drugs to its patients, and these medicines and drugs are subsequently paid for by the government.
The issue in this case is identical to that discussed above: The bulk purchase of medicines and drugs by Taxpayer B. Accordingly, regardless that these medicines and drugs may subsequently be sold to or dispensed to patients on physicians' prescriptions, the initial purchase of the drugs is taxable. Furthermore, this application of the tax conforms to purchases made by government contractors generally in that government service contractors are deemed to be the users and consumers of tangible personal property used to provide their services.
Based on the above, I cannot agree to revise the tax assessed to Taxpayer B. I understand, however, that this issue was not examined in prior audits. I will therefore agree to waive the assessed penalty charges associated with this issue.
Taxpayer C
FACTS
Taxpayer C, a subsidiary of the Parent, is a nonprofit hospital. The assessment made to Taxpayer C relates to food purchases. In this case, the food was purchased exempt of the tax and served without charge to hospital staff and other non-patients at meetings, luncheons, and other internal activities.
DETERMINATION
The application of the tax to food purchased by nonprofit hospitals has been set out by the department in a number of prior rulings. In each case, the department has consistently determined that food purchased for non-patients is not used or consumed by the hospital as envisioned by Code of Virginia § 58.1-609.7(4). A hospital is not entitled to exemption from the tax on purchases of food consumed by individuals (other than its patients) because the hospital exercises no control over the consumption of such food. The exemption does apply to patient meals because the meals are consumed in connection with the hospital's medical services.
As you indicate, an analogous situation is addressed in Public Document 95-70 (4/3/95). In that case, the department found that the assessment was correct. Because of unusual circumstances in that case, however, the department revised the assessment and instructed the taxpayer to apply the tax on a prospective basis. There is no indication that the exceptional circumstances which led to my decision in Public Document 95-70 are present in your case, and I cannot agree to revise the assessment to Taxpayer C.
Summary
Based on this determination, the assessment issued to Taxpayer A will be abated entirely. The assessment to Taxpayer B will be revised to remove the penalty charges associated with the contested issues. The assessment to Taxpayer C is upheld. Assessments to Taxpayer B and Taxpayer C, with interest accrued to date, will immediately be issued. No additional interest will accrue provided these assessments are paid within 30 days.
Please contact ******* in my Office of Tax Policy at ***** if you have any questions regarding this letter.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10405I
Rulings of the Tax Commissioner