Tax Type
Retail Sales and Use Tax
Description
Medical, dental, and optical supplies and drugs; Pharmacy sales exempt
Topic
Taxability of Persons and Transactions
Date Issued
07-29-1997
July 29, 1997
Re: Request for Ruling: Retail Sales and Use Tax
Dear**********
This is in reply to your letter of February 14, 1997, in which you request a ruling on behalf of ********** (the "Taxpayer") and its affiliates that medicines and drugs purchased under a specific arrangement are exempt from the Virginia retail sales and use tax.
FACTS
The Taxpayer owns and operates hospitals in Virginia on a for profit basis. Each of the hospitals is owned by a corporation, which is either a subsidiary of the Taxpayer or a second tier subsidiary (collectively, the "Hospital Subsidiaries").
Each of the Hospital Subsidiaries proposes to enter into agreements with another corporation, also a subsidiary of the Taxpayer but totally separate and distinct from any of the Hospital Subsidiaries, pursuant to which that other corporation (the "Pharmacy Corporation") will operate the pharmacy in each of the hospitals. The Pharmacy Corporation will lease the physical space from each of the Hospital Subsidiaries.
The Pharmacy Corporation will own and possess all medicines and drugs on the premises. All sales of medicines and drugs to individual hospital patients will be made by the Pharmacy Corporation and will be pursuant to prescriptions or work orders issued by licensed physicians or other professionals for those specific patients. The Pharmacy Corporation's charges for medicines and drugs will be included on the specific hospital patient's bill and all revenues associated with such sales will be remitted to the Pharmacy Corporation.
You request a ruling that sales of medicines and drugs to individual hospital patients by the Pharmacy Corporation qualify for exemption from the Virginia sales and use tax.
RULING
Generally: Code of Virginia § 58.1-603 imposes a tax upon every person who makes retail sales of tangible personal property in Virginia. Similarly, Code of Virginia § 58.1-604 imposes a tax upon the use or consumption of tangible personal property in Virginia.
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 other specified medical services personnel. The exemption is interpreted in Title 23 of the Virginia Administrative Code (VAC) 10-210-940, which states in relevant part:
-
- [s]ales of medicines and drugs to users or consumers, except when the sales are made pursuant to a prescription of a physician ... are subject to the tax. Sales of medicines and drugs to hospitals and nursing homes conducted for profit are subject to the tax unless the sales are made as a result of a written prescription of a licensed physician for a particular patient under the care of the hospital or nursing home.
The exemption for medicines and drugs has been interpreted by the Virginia Supreme Court in two cases. In Department of Taxation v. Bluefield Sanitarium, Inc., 216 Va. 686, 222 S.E.2d 526 (1976), a hospital maintained its own pharmacy which purchased bulk quantities of medicines and drugs. Medication was dispensed by the pharmacy to patients on an as needed basis. The Virginia Supreme Court held that the hospital was responsible for payment of the use tax on the wholesale purchase of medicines and drugs which were dispensed from the hospital pharmacy to patients on physicians' prescriptions and charged to patients. The Court found that the hospital exercised a taxable use over the medicines and drugs prior to their dispensation to patients on the prescription or work order of a licensed physician.
In Northern Virginia Doctors Hospital v. Department of Taxation, 213 Va. 504,193 S.E.2d 684 (1973), the hospital purchased drugs from an independent retail pharmacy. Each purchase was made on behalf of specific patients pursuant to work orders of hospital physicians. These purchases satisfied the exemption set out in Code of Virginia § 58.1-609.7(1) regardless that the drugs were administered by the hospital's nurses.
As recognized in Northern Virginia Doctors Hospital and numerous Public Documents (P.D.'s) issued by the department, a pharmacy must be truly independent of the medical service provider (e.g., hospital, nursing home) to qualify for the exemption under Code of Virginia § 58.1-609.7(1). The pharmacy must be a retail establishment, and not an extension of the service provided by the hospital. To satisfy the historical definition of pharmacy operations with regard to the application of the sales and use tax, a pharmacist must be on site and sales of drugs and supplies cannot be restricted to only patients of the hospital. See P.D. 92-97 (6/5/92), copy enclosed. See also P.D. 92-172 (9/10/92), copy enclosed, in which the department ruled that a Taxpayer's in-house pharmacy was not a true retail pharmacy.
In this case, it is not clear from the facts presented if the Pharmacy Corporation will be an independent pharmacy, as defined in prior department rulings. If the Pharmacy Corporation (1) is organized as a separate and distinct entity from the hospitals, (2) maintains a pharmacist on site, and (3) entertains retail traffic (patients other than those of the Taxpayer hospitals), it will be considered an independent pharmacy. Sales of medicines and drugs pursuant to a prescription or work order of a licensed physician may be made exempt of the tax. The Pharmacy Corporation would be required to collect tax on all other sales, unless otherwise exempt.
Similarly, medicines and drugs obtained by the Taxpayers from the Pharmacy Corporation (an independent pharmacy) and purchased pursuant to prescriptions or work orders of the Taxpayers' physicians for specific patients would qualify for exemption under Code of Virginia § 58.1-609.7(1). The fact that the Pharmacy Corporation and the hospitals share a common corporate parent will not negate the application of the exemption, provided that the Pharmacy Corporation is an independent entity, as outlined above, and the Pharmacy Corporation's operations fall within the exemption as recognized in Northern Virginia Doctors Hospital.
On the other hand, if the Pharmacy Corporation is not an independent entity or merely operates each hospital's pharmacy and is not a retail establishment, the exemption in Code of Virginia § 58.1-609.7(1) would not be applicable. In either instance, the hospital would be deemed to exercise a taxable use over the medicines and drugs prior to their dispensation to patients on the prescription or work order of a licensed physician. The purchases of medicines and drugs would be subject to tax in accordance with Bluefield Sanitarium.
If you have any questions regarding this matter, you may contact******of the department's Office of Tax Policy at*************.
Sincerely,
Janie E. Bowen
Assistant Tax Commissioner
Office of the Commissioner
OTP/12206F
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, I hereby delegate to Janie E. Bowen, Senior Executive Assistant, the authority to sign for me any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board, the Local Debt Commission, and the Treasury Board.
This authority will continue until revoked. The delegation of authority dated March 1, 1994, is hereby revoked and replaced.
Done at Richmond, Virginia third day of June, 1994.
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner