Tax Type
Retail Sales and Use Tax
Description
Medical, dental, optical supplies and drugs
Topic
Taxability of Persons and Transactions
Date Issued
05-21-1996
May 21, 1996
Re: § 58.1-1821 Application: Retail Sales & Use Tax
Dear***************
This will reply to your letter of September 3, 1995 in which you seek correction of a retail sales and use tax assessment issued to your client, ***********(the "Taxpayer"), for the period February 1991 through September 1994.
FACTS
The Taxpayer is a medical supply retail business dealing in both durable medical equipment and disposable supplies. The Taxpayer is in disagreement with a portion of the department's sales tax assessment relating to reimbursements for sales of medical supplies to individuals, but billed through a third party payor. You maintain that the payor in question is a governmental body established by Code of Virginia § 32.1-323, and as a political subdivision of the Commonwealth is not subject to the application of the tax to such billings. You state that the department's assessment of tax on these sales is incorrect and request appropriate relief.
DETERMINATION
Code of Virginia § 58.1-609.1 provides an exemption for "[t]angible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States" (emphasis added). I cannot agree that this exemption applies, in the present instance, since the items sold by the Taxpayer are not in any sense used or consumed by a government entity or political subdivision.
Additionally, while the term "purchaser" may not be defined in the Retail Sales and Use Tax Act, the term "use" is defined in Code of Virginia § 58.1-602 and "[m]eans the exercise of any right or power over tangible personal property incident to the ownership thereof" (emphasis added). Consequently, the act of using or consuming the goods sold by the Taxpayer falls to the individuals for whom such goods were intended, and for which a right or power relative to ownership is exercised. Accordingly, the individuals benefitting from the medical products are the users and consumers of the goods and are also the purchasers of the property.
The department has traditionally held that the tax status of transactions in which an item is sold to an individual but billed to a third party payor (e.g., Medicaid or an insurance company) for payment is determined as of the time of sale to the individual and does not depend upon the availability or source of reimbursement for the item sold. See P.D. 91-43 (3/19/91), copy enclosed. If a reimbursement is available, the tax is due not on the total charge submitted for reimbursement, but instead is based upon the actual amount of the reimbursement. The amount to be reimbursed is allocated to the sales price, sales tax, and other nontaxable charges based on the percentages that those charges represent to the total charge originally submitted for reimbursement.
The department's audit assessed tax on the total sales price as of the time of sale to the individuals. If your client's records reflect that corresponding reimbursements have been received within the time frame of the audit, I will allow for an adjustment of the audit assessment.
The department is aware that durable medical equipment dealers are prohibited by their provider agreements with the third party payor from collecting or seeking to collect any additional amounts (including tax) from the purchasers. The department, however, is bound by the doctrine of strict construction in interpreting sales tax exemptions. Under this doctrine when a statute is subject to two interpretations, one granting the exemption and the other denying the exemption, the latter is chosen. Since no exemption is specifically provided for the medical supplies at issue, I must conclude that the assessment is correct.
Please note that legislation was passed by the 1995 General Assembly, effective April 6, 1995, which exempted from the sales and use tax, medical products and supplies such as bandages, gauze dressings, incontinence products and wound care products, when purchased by a Medicaid recipient through a Department of Medical Assistance (DMAS) provider agreement. Thus, an exemption now exists for sales of any type of medical product or supply, incontinence, or wound care product, provided payment for such is made by DMAS.
While the legislation, Code of Virginia § 58.1-609.7(20), (copy enclosed), is not helpful to you for purposes of the department's audit, it will rectify this situation for you retroactively to the effective date of April 6, 1995 and for the future. I am enclosing a copy of the legislative impact statement prepared by the department which explains both the exemption and the department's prior policy in more detail.
Please have your client make available, for review, any additional information regarding reimbursements, as provided above. Once the records are available, please contact ******* of the department's Office of Tax Policy at ******** . He will contact the department's auditor, who will in turn, contact your client to review the information. If the information is not made available within 30 days, the department's assessment will be presumed to be correct and an assessment inclusive of accrued interest will become due and payable.
Should you have any additional questions regarding this matter, please contact *******of the department's Office of Tax Policy at ******** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10241Q
Rulings of the Tax Commissioner