Tax Type
Retail Sales and Use Tax
Description
Penalties and Interest; Audit penalty; Effect of merger
Topic
Collection of Delinquent Tax
Date Issued
06-06-1997
June 6,1997
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*******(the "Taxpayer"), for the period May 1992 through December 1995.
FACTS
The Taxpayer is an out-of-state manufacturer and retailer of pharmaceutical products and maintains a sales office in Virginia. As a result of the department's audit, the Taxpayer disputes a number of issues. I will address the issues as presented.
DETERMINATION
Sales to Physicians
The Taxpayer made sales of medicines and drugs to physicians in Virginia pursuant to blanket certificates of exemption. The auditor disallowed the certificates and assessed the tax on these sales. The Taxpayer disputes the tax believing the sales qualify for exemption under Code of Virginia § 58.1-609.7(1). The Taxpayer asserts that because a statutory exemption exists, a certificate is not required for the exemption to apply.
Code of Virginia § 58.1-623 provides that "[a]ll sales and leases are subject to the tax until the contrary is established. The burden of proving that a sale...of tangible personal property is not taxable is upon the dealer unless he takes from the taxpayer a certificate to the effect that the property is exempt under this chapter." Title 23 of the Virginia Administrative Code (VAC) 10-210-280 explains that a certificate that is incomplete, invalid, infirm or inconsistent on its face is never acceptable, either before or after notice.
The department accepts blanket exemption certificates in limited situations, specifically, property purchased for resale. The department does not accept blanket certificates when specific exemption forms are available for the various exemptions allowed under Virginia law. See Public Documents (P.D.) 95-303 (12/5/95) and 95-316 (12/15/95), with attachments.
The Taxpayer maintained on file blanket certificates containing information inconsistent with the exemption provided under Code of Virginia § 58.1-609.7(1) for controlled drugs purchased by a licensed physician for use in his professional practice. The department has prescribed Form ST-13 to be used in such cases which assures the department that the purchases are not made for personal use by the physician or other purposes not covered by the exemption. The auditor was correct in denying the Taxpayer's blanket certificates and the tax applies to the sales. In the future, the Taxpayer must maintain a properly completed Form ST-13 for each sale to a licensed physician in Virginia in order for the sale to qualify under the applicable exemption.
A review of the audit exceptions indicates sales of over the counter (OTC) drugs. The exemption provided in Code of Virginia § 58.1-609.7(1) applies to controlled drugs and proprietary medicines described under the Virginia Drug Control Act (Chapter 34 of the Code of Virginia § 54.1). Because there is no exemption under current law for OTC drugs, the tax was properly assessed by the auditor.
Drug Samples
The Taxpayer was assessed tax on samples of pharmaceutical products distributed free of charge in Virginia. The Taxpayer asserts that the samples qualify for the exemption that became effective July 1, 1996.
The 1996 Virginia General Assembly enacted legislation that provided an exemption under Code of Virginia § 58.1-609.7(1) for samples of prescription drugs and medicines and their packaging distributed free of charge to authorized recipients in accordance with the Federal Food, Drug and Cosmetic Act. The legislation represented a law change effective July 1, 1996 and does not apply to samples distributed by the Taxpayer prior to the effective date. The department's position on this issue was recently upheld by the Richmond Circuit Court in Boehringer Ingelheim Pharmaceuticals. Inc. v. Virginia Department of Taxation.
Sales to Veterinarians
The Taxpayer made sales for resale of medicines and drugs to veterinarians, also under blanket exemption certificates. These certificates were disallowed by the auditor. The Taxpayer disputes the tax and asserts the tax was paid directly to the department by the veterinarians.
Code of Virginia § 58.1-609.7(1) also provides, along with VAC 10-210-6050, that veterinarians are deemed to be the users or consumers of medicines and drugs. The regulation goes on to state that veterinarians must pay the tax to their suppliers on purchases of such property. Subsection B of the regulation, however, provides that veterinarians who maintain an inventory and sell medicines, drugs, and other items must register with the department and collect and pay the tax on such sales.
The blanket exemption certificates maintained by the Taxpayer for use in resale situations is inconsistent with the information required on the department's resale exemption certificate, Form ST-10. Because of this, it is not evident whether the sales to veterinarians were for their use or for resale. Further, the auditor was unable to verify the payment of tax directly to the department by any of the veterinarians in question. The Taxpayer has not provided documentation to support its assertion that the tax was paid directly to the department. Based on the above, the auditor was correct in disallowing the certificates and applying the tax.
Fixed Assets
Fixed asset purchase information was not available for 1995. The auditor estimated fixed asset purchases based on such purchases for the prior years of the audit period. The Taxpayer provides a listing of 1995 fixed asset purchases and asserts that tax was properly paid on fixed asset purchases used in Virginia.
The information provided is not sufficient in determining total fixed asset purchases for 1995. The Taxpayer should provide the depreciation schedule from the Taxpayer's 1995 Corporate Income Tax return and copies of the supporting invoices. The information should be submitted within 30 days from the date of this letter to***** , Office of Tax Policy, P. O. Box 1880, Richmond, Virginia 23218-1880. Upon receipt of the information, the department will make any adjustments if warranted. Shortly thereafter, the Taxpayer will receive an updated assessment including accrued interest.
Future Compliance
The audit revealed that the Taxpayer has merged with another company previously audited by the department. For purposes of the application of audit penalty, the next audit of the Taxpayer will be considered a third generation audit, as the two companies which combined to form the Taxpayer have been audited twice by the department. See VAC 10-210-2032. As required by the regulation, penalty will be applied to the Taxpayer's third and subsequent audits unless the Taxpayer's compliance ratios meet or exceed 85% for sales tax and 85% for use tax.
I have enclosed copies of the cited statutes, regulations, exemption certificates, and P.D. 95-303 and 95-316 for your review. If you have additional questions, you may contact*****at ****** .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12059J
Rulings of the Tax Commissioner