Tax Type
Retail Sales and Use Tax
Description
Medical, Dental, and Optical Supplies and Drugs; Durable medical equipment
Topic
Taxability of Persons and Transactions
Date Issued
03-05-1997
March 5, 1997
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 December 1990 through February 1996.
FACTS
The Taxpayer contracted with a federal government hospital to furnish medical equipment and services. As a result of the department's audit, the Taxpayer protests the assessment of use tax on a magnetic resonance imaging (MRI) machine leased by the Taxpayer and provided under the terms of the contract. The Taxpayer believes the assessed tax is erroneous for the following reasons:
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- The MRI machine qualifies for the government exemption provided under Code of Virginia § 58.1-609.1(4);
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- The lease of the MRI machine by the Taxpayer from its vendor qualifies as an exempt sale for resale; and
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- The MRI machine qualifies as exempt durable medical equipment under Code of Virginia § 58.1-609.7(2).
DETERMINATION
The department addressed an almost identical situation to the one presented in this case in Public Document (P.D.) 96-48 (4/15/96). The ruling dealt with a taxpayer who contracted with a federal government hospital to provide an MRI machine, a computerized tomography unit and additional equipment. In that case, the taxpayer leased or purchased medical equipment to be provided with operators to the hospital. The true object test, provided in 23 VAC 10-210-4040, was applied and it was determined that the true object of the contract was the provision of services. The taxpayer was deemed the user or consumer of all items purchased or leased in connection with its service contracts and held liable for the tax on such items.
According to the contract in this instance, the Taxpayer leased and subsequently provided an MRI unit with operators to a federal government hospital in connection with providing a full range of MRI medical services, including training of government employees in the operation of the MRI unit. Consistent with P.D. 96-48, I find the true object of the contract in this case, to be the provision of services. The Taxpayer is deemed the user and consumer of items purchased or leased in connection with the contract and liable for the tax on such items.
As in P.D. 96-48, my decision is further supported by 23 VAC 10-210-840(A), which sets out the department's general policy on leases and rentals. The tax generally applies to leases or rentals of tangible personal property when such property is provided without operators. A lease with an operator is considered a nontaxable service transaction. The service provider is deemed the user or consumer of all tangible personal property purchased or leased in connection with providing the service. See P.D. 89-139 (4/28/89), copy enclosed.
Government Exemption
Code of Virginia § 58.1-609.1 (4) provides an exemption from the sales and use tax for tangible personal property for use or consumption by the Commonwealth, any political subdivision of the Commonwealth, or the United States.
I cannot agree with the Taxpayer that the MRI machine is provided for use by the government and exempt under Code of Virginia § 58.1-609.1(4). The contract specifically requires the Taxpayer provide professional services to support the imaging department of the hospital. The Taxpayer furnishes and operates the MRI unit in connection with the provision of services to the government and is the taxable user and consumer of all property purchased or leased in connection with such services.
The U.S. Supreme Court has confirmed that the federal government's immunity from state taxation does not extend to contractors and others who do business with or provide services to the federal government. U.S. v. New Mexico, et al., 455 U.S. 720, 102 S. Ct. 1371 (1982).
Sale for Resale
Code of Virginia § 58.1-602 defines retail sale to mean "a sale to any person for any purpose other than r resale in the form of tangible personal property or services taxable under this chapter...." "Sale" is further defined to mean "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner whatsoever, of tangible personal property..."
Under the terms of the contract, possession of the MRI machine passes from the Taxpayer to the government in connection with the provision of services during the contract period. There is, however, no stipulation in the contract that constitutes a sale or lease of the MRI machine from the Taxpayer to the government. I cannot agree with the Taxpayer's assertion that the lease of the MRI machine by the Taxpayer for re-lease to the hospital constitutes a sale for resale. The Taxpayer is therefore liable for tax on its lease of the MRI machine from the vendor due to the fact that the property leased is used by the Taxpayer in connection with the provision of services.
This is consistent with 23 VAC 10-210-693, copy enclosed, which states that if a contract is for the provision of services, the contractor is deemed to be the taxable user and consumer of all tangible personal property used in performing its services, even though title to the property provided may pass to the government or the contractor may be fully and directly reimbursed by the government or both.
Durable Medical Equipment (DME)
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; and insulin and insulin syringes, and equipment, devices or chemical reagents which may be used by a diabetic to test or monitor blood or urine, when such items or parts are purchased by or on behalf of an individual for use by such individual. Durable medical equipment is equipment which (I) can withstand repeated use, (ii) is primarily and customarily used to serve a medical purpose, (iii) generally is not useful to a person in the absence of illness or injury, and (iv) is appropriate for use in the home."
The Taxpayer proposes that the MRI machine qualifies as exempt DME because the requirement that such equipment must be purchased by or on behalf of an individual for use by such individual applies only to the phrase following the semicolon after the word "products" in the above statute. The Taxpayer also asserts that the MRI machine qualifies for exemption under a general definition of DME despite the fact that the MRI machine does not meet the exemption requirement that such equipment must be appropriate for use in the home.
The DME exemption has undergone several legislative changes since enactment in 1966. The Taxpayer's reasoning in regards to the "purchased by or on behalf of an individual for use by such individual" requirement is not supported by the enclosed copies of legislative impact statements and the excerpt from the Virginia Retail Sales and Use Tax Expenditure Study, Volume 1, No. 4. These documents clearly set forth that the legislative intent of the requirement applies to all the equipment and devices specified in the exemption language.
The semicolon in a statute is used to separate consecutive phrases or clauses independent of each other grammatically but dependent alike on some word preceding or following. (Words and Phrases, Volume 38A). As evidenced by the enclosed documents, the semicolon appears merely to grammatically distinguish between amendments to the original exemption.
An MRI machine is generally used on a large scale basis by hospitals and other medical facilities for purposes of detecting disease or illness in the human body. While the MRI machine may constitute medical equipment, it is not of the same type and classification as the medical equipment specified in the DME exemption and does not meet the requirements of the exemption.
Based on P.D. 96-48 and all of the above, l do not find basis for correction of the assessment. The Taxpayer will receive an updated bill and payment should be made within 30 days to avoid the accrual of additional interest charges. If you need further assistance, please contact ********* in the Office of Tax Policy at***********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11443J
Rulings of the Tax Commissioner