Tax Type
Retail Sales and Use Tax
Description
Exemptions; Medical, dental, and optical supplies and drugs
Topic
Taxability of Persons and Transactions
Date Issued
04-07-2000
April 7, 2000
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letters in which you seek correction of the sales and use tax assessed to ***** (the "Taxpayer"), for the period September 1995 through April 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a hospital and was formerly operated by a hospital authority as a nonprofit entity. The Taxpayer was sold in September 1995 to a hospital corporation. As a result of the sale, the Taxpayer's status changed from a nonprofit entity to a for-profit entity.
Prior to the sale of the Taxpayer, the previous owner (the hospital authority) entered into a pharmaceutical services agreement with a third-party pharmacy company to set up a pharmacy ("Pharmacy") on-site and supply pharmacy services to the Taxpayer and its patients. The obligations of the pharmaceutical services agreement transferred in the sale of the Taxpayer to the for-profit hospital corporation.
The department conducted an audit of the Taxpayer, and assessed the use tax on the charges from the Pharmacy to the Taxpayer for drugs provided to patients. The basis of the assessment was the auditors' conclusion that the Pharmacy does not meet the historical definition of a retail pharmacy and, therefore, is not independent of the Taxpayer. The auditors cite Department of Taxation v. Bluefield Sanitarium, Inc., 216 Va. 686, 222 S.E.2d 526 (1976) (hereinafter"Bluefield Sanitarium") and P.D. 97-322 (7/29/97) in support of their position.
The Taxpayer disagrees with the assessment and asserts that the Pharmacy makes sales of drugs to the Taxpayer on prescription orders of licensed physicians sufficient to qualify for exemption under Code of Virginia § 58.1-609.7(1). The Taxpayer believes the Pharmacy in this case operates in a manner consistent with the pharmacy operation in Northern Virginia Doctors Hospital v. Department of Taxation, 213 Va. 504, 193 S.E. 2d 684 (1973) (hereinafter "Northern Virginia Doctors Hospital"). The Taxpayer distinguishes the facts in this case from those in Bluefield Sanitarium and cites Bio-Medical Applications of Roanoke, Inc. v. Virginia Department of Taxation, 201 S.E. 2d 604 Va. Cir. (1988) (hereinafter "Bio-Medical Applications") to further support its position.
DETERMINATION
Code of Virginia §58.1-609.7(1) exempts from the sales and use tax, medicines and drugs dispensed by or sold on prescriptions or work orders of licensed physicians and other specified medical services personnel.
The above exemption has been interpreted by the Virginia Supreme Court ("Court") in the cited cases. In Northern Virginia Doctors Hospital, the hospital purchased drugs from an independent retail pharmacy. The purchases were made on behalf of specific patients pursuant to work orders of hospital physicians. These purchases satisfied the exemption in Code of Virginia § 58.1-609.7(1), regardless that the drugs were administered by the hospital's nurses.
In Bluefield Sanitarium, 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 Court held that the hospital was responsible for payment of the use tax on the purchase of medicines and drugs which were dispensed from the hospital pharmacy to patients on physicians' prescriptions and charged to Patients.
A similar set of facts was addressed in Bio-Medical Applications. This case involved a dialysis clinic that purchased and maintained an inventory of medicines and drugs for use in the treatment of its patients. The medicines and drugs were dispensed on prescription orders of licensed physicians. The clinic was held taxable on its purchases of the medicines and drugs dispensed to patients.
The department has set forth criteria in P.D. 97-322, copy enclosed, for determining when a pharmacy is independent of a hospital. The ruling provides that in order for the pharmacy to qualify as truly independent of the hospital, the pharmacy must (1) be organized as a separate and distinct entity from the hospital, (2) maintain a pharmacist on site, and (3) entertain retail traffic (patients other than those of the hospital).
The Taxpayer takes exception to the criteria set out in P.D. 97-322 and contends that the department has no basis for its interpretation that a pharmacy must make retail sales to the general public in order to be considered an independent pharmacy operation. I must disagree with the Taxpayer on this point. It cannot be ignored that the pharmacy in Northern Virginia Doctors Hospital operated as a retail establishment. This is evidenced by the Court's reference in two instances in Bluefield Sanitarium to the pharmacy operation in Northern Virginia Doctors Hospital as that of a "retail pharmacy" and a "conventional one." Based on this, it is reasonable to conclude that the pharmacy in Northern Virginia Doctors Hospital met the historical definition of a retail pharmacy.
The Pharmacy in this case meets criteria (1) and (2). However, the Taxpayer has failed to prove that any sales by the Pharmacy were made on a retail basis. In addition, the Virginia Board of Pharmacy issued the Pharmacy a non-retail license which does not authorize retail activity. Lastly, a member of my Tax Policy staff accompanied the auditors on a tour of the Pharmacy facility. Based on their observations, there was no evidence to support that the Pharmacy entertained retail traffic.
The department is bound by the doctrine of strict construction which provides that exemption from taxation must be strictly construed against the taxpayer, and any doubt as to whether the exemption applies must be resolved in favor of the Commonwealth. The burden is upon the taxpayer to show that he comes within the terms of the exemption. Golden Skillet Corporation v. Commonwealth of Virginia 214 Va. 276, 199 S.E. 2d 511 (1973).
Based on the facts and information presented, the Taxpayer has failed to meet the burden of proof in this case. Therefore, l must concur with the position of the auditors. The Taxpayer's Pharmacy does not satisfy the historical definition of a pharmacy as recognized in Northern Virginia Doctors Hospital. Because the Pharmacy is not truly independent of the Taxpayer, the drugs are used and consumed by the Taxpayer in the provision of medical services to its patients. The sale of such drugs from the Pharmacy to the Taxpayer does not qualify for the exemption under Code of Virginia §58.1-609.7(1).
The 1999 Virginia General Assembly expanded the exemption under Code of Virginia §58.1-609.7(1) to include medicines and drugs purchased for use or consumption by a licensed hospital. This exemption benefits any for-profit hospital in Virginia. Effective July 1, 2000, the Taxpayer will be entitled to purchase medicines and drugs used in the provision of its medical services exempt of the sales and use tax.
Please remit payment of the assessed tax and interest in the amount of $**** within 30 days from the date of this letter to avoid additional interest charges. Interest has been assessed through the date of the Taxpayer's letter of appeal. The Taxpayer may send payment to ***** in the Office of Tax Policy at P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this letter, you may contact **** at *****.
Sincerely,
Howard T. Macrae, Jr.
Assistant Commissioner
Office of Tax Policy
OTP/13797J
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, l hereby delegate to Howard T. Macrae, Jr., Assistant Commissioner for the Office of Tax Policy, the authority to determine and sign for me the response to the appeal filed by **** for the sales and use tax audit for the period of September 1995 through April 1997.
Done at Richmond, Virginia, this third day of April, 2000
Danny M. Payne
Tax Commissioner
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear ****
This is in reply to your letters in which you seek correction of the sales and use tax assessed to ***** (the "Taxpayer"), for the period September 1995 through April 1997. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a hospital and was formerly operated by a hospital authority as a nonprofit entity. The Taxpayer was sold in September 1995 to a hospital corporation. As a result of the sale, the Taxpayer's status changed from a nonprofit entity to a for-profit entity.
Prior to the sale of the Taxpayer, the previous owner (the hospital authority) entered into a pharmaceutical services agreement with a third-party pharmacy company to set up a pharmacy ("Pharmacy") on-site and supply pharmacy services to the Taxpayer and its patients. The obligations of the pharmaceutical services agreement transferred in the sale of the Taxpayer to the for-profit hospital corporation.
The department conducted an audit of the Taxpayer, and assessed the use tax on the charges from the Pharmacy to the Taxpayer for drugs provided to patients. The basis of the assessment was the auditors' conclusion that the Pharmacy does not meet the historical definition of a retail pharmacy and, therefore, is not independent of the Taxpayer. The auditors cite Department of Taxation v. Bluefield Sanitarium, Inc., 216 Va. 686, 222 S.E.2d 526 (1976) (hereinafter"Bluefield Sanitarium") and P.D. 97-322 (7/29/97) in support of their position.
The Taxpayer disagrees with the assessment and asserts that the Pharmacy makes sales of drugs to the Taxpayer on prescription orders of licensed physicians sufficient to qualify for exemption under Code of Virginia § 58.1-609.7(1). The Taxpayer believes the Pharmacy in this case operates in a manner consistent with the pharmacy operation in Northern Virginia Doctors Hospital v. Department of Taxation, 213 Va. 504, 193 S.E. 2d 684 (1973) (hereinafter "Northern Virginia Doctors Hospital"). The Taxpayer distinguishes the facts in this case from those in Bluefield Sanitarium and cites Bio-Medical Applications of Roanoke, Inc. v. Virginia Department of Taxation, 201 S.E. 2d 604 Va. Cir. (1988) (hereinafter "Bio-Medical Applications") to further support its position.
DETERMINATION
Code of Virginia §58.1-609.7(1) exempts from the sales and use tax, medicines and drugs dispensed by or sold on prescriptions or work orders of licensed physicians and other specified medical services personnel.
The above exemption has been interpreted by the Virginia Supreme Court ("Court") in the cited cases. In Northern Virginia Doctors Hospital, the hospital purchased drugs from an independent retail pharmacy. The purchases were made on behalf of specific patients pursuant to work orders of hospital physicians. These purchases satisfied the exemption in Code of Virginia § 58.1-609.7(1), regardless that the drugs were administered by the hospital's nurses.
In Bluefield Sanitarium, 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 Court held that the hospital was responsible for payment of the use tax on the purchase of medicines and drugs which were dispensed from the hospital pharmacy to patients on physicians' prescriptions and charged to Patients.
A similar set of facts was addressed in Bio-Medical Applications. This case involved a dialysis clinic that purchased and maintained an inventory of medicines and drugs for use in the treatment of its patients. The medicines and drugs were dispensed on prescription orders of licensed physicians. The clinic was held taxable on its purchases of the medicines and drugs dispensed to patients.
The department has set forth criteria in P.D. 97-322, copy enclosed, for determining when a pharmacy is independent of a hospital. The ruling provides that in order for the pharmacy to qualify as truly independent of the hospital, the pharmacy must (1) be organized as a separate and distinct entity from the hospital, (2) maintain a pharmacist on site, and (3) entertain retail traffic (patients other than those of the hospital).
The Taxpayer takes exception to the criteria set out in P.D. 97-322 and contends that the department has no basis for its interpretation that a pharmacy must make retail sales to the general public in order to be considered an independent pharmacy operation. I must disagree with the Taxpayer on this point. It cannot be ignored that the pharmacy in Northern Virginia Doctors Hospital operated as a retail establishment. This is evidenced by the Court's reference in two instances in Bluefield Sanitarium to the pharmacy operation in Northern Virginia Doctors Hospital as that of a "retail pharmacy" and a "conventional one." Based on this, it is reasonable to conclude that the pharmacy in Northern Virginia Doctors Hospital met the historical definition of a retail pharmacy.
The Pharmacy in this case meets criteria (1) and (2). However, the Taxpayer has failed to prove that any sales by the Pharmacy were made on a retail basis. In addition, the Virginia Board of Pharmacy issued the Pharmacy a non-retail license which does not authorize retail activity. Lastly, a member of my Tax Policy staff accompanied the auditors on a tour of the Pharmacy facility. Based on their observations, there was no evidence to support that the Pharmacy entertained retail traffic.
The department is bound by the doctrine of strict construction which provides that exemption from taxation must be strictly construed against the taxpayer, and any doubt as to whether the exemption applies must be resolved in favor of the Commonwealth. The burden is upon the taxpayer to show that he comes within the terms of the exemption. Golden Skillet Corporation v. Commonwealth of Virginia 214 Va. 276, 199 S.E. 2d 511 (1973).
Based on the facts and information presented, the Taxpayer has failed to meet the burden of proof in this case. Therefore, l must concur with the position of the auditors. The Taxpayer's Pharmacy does not satisfy the historical definition of a pharmacy as recognized in Northern Virginia Doctors Hospital. Because the Pharmacy is not truly independent of the Taxpayer, the drugs are used and consumed by the Taxpayer in the provision of medical services to its patients. The sale of such drugs from the Pharmacy to the Taxpayer does not qualify for the exemption under Code of Virginia §58.1-609.7(1).
The 1999 Virginia General Assembly expanded the exemption under Code of Virginia §58.1-609.7(1) to include medicines and drugs purchased for use or consumption by a licensed hospital. This exemption benefits any for-profit hospital in Virginia. Effective July 1, 2000, the Taxpayer will be entitled to purchase medicines and drugs used in the provision of its medical services exempt of the sales and use tax.
Please remit payment of the assessed tax and interest in the amount of $**** within 30 days from the date of this letter to avoid additional interest charges. Interest has been assessed through the date of the Taxpayer's letter of appeal. The Taxpayer may send payment to ***** in the Office of Tax Policy at P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this letter, you may contact **** at *****.
Sincerely,
Howard T. Macrae, Jr.
Assistant Commissioner
Office of Tax Policy
OTP/13797J
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, l hereby delegate to Howard T. Macrae, Jr., Assistant Commissioner for the Office of Tax Policy, the authority to determine and sign for me the response to the appeal filed by **** for the sales and use tax audit for the period of September 1995 through April 1997.
Done at Richmond, Virginia, this third day of April, 2000
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner