July 2, 2015
Re: 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to ***** (the "Taxpayer") for the period July 2009 through March 2013. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer operates discount retail stores in Virginia and throughout the southeastern United States. As a result of the Department's audit, an assessment was issued on untaxed sales. The Taxpayer contests the tax assessed on six products held in the audit. The Taxpayer claims that the contested products qualify as exempt nonprescription drugs or exempt durable medical equipment. The Taxpayer cites Virginia Tax Bulletin (VTB) 13-5 (3/15/13) and Title 23 of the Virginia Administrative Code (VAC) 10-210-940 in support of its position. The Taxpayer has paid the assessment in full and requests a refund of the tax paid on the contested products.
Nonprescription Drugs
Virginia Code § 58.1-609.10 14 provides, in pertinent part, that the retail sales and use tax shall not apply to "(i) any nonprescription drugs and proprietary medicine purchased for the cure, mitigation, treatment, or prevention of disease in human beings." VTB 13-5 provides that nonprescription drugs include "any substances or mixture of substances containing medicines or drugs for which no prescription is required and which are generally sold for internal or topical use in the cure, mitigation, treatment, or prevention of disease in human beings." VTB 13-5 defines "proprietary medicines" as "any nonprescription drug sold to the general public under the brand name or trade name of the manufacturer and which does not contain any controlled substance or marijuana."
In VTB 13-5, the Department set out three factors to determine if a product falls within the scope of the exemption: (1) whether the item is a nonprescription drug (i.e., is the product a substance or mixture of substances containing medicines or drugs for which no prescription is required); (2) whether the product is for topical or internal use; and (3) whether the product is for the cure, mitigation, treatment, or prevention of a disease in human beings.
VTB 13-5 also provides categories of items that generally would not qualify for exemption as nonprescription drugs. These categories include:
Cosmetics — articles applied to the body for cleansing, beautifying, promoting attractiveness or altering the appearance (including makeup, body lotions, cold creams, daily moisturizers, and hair restoration products), regardless of whether the items contain nonprescription drugs or other medicinal ingredients;
Toilet articles — articles advertised or held out for sale for grooming purposes (including many soaps, toothpastes, hair sprays, shaving products, colognes, deodorants, and mouthwashes);
Food products and supplements — items classified as such by the Federal Food and Drug Administration (including herbal teas, drinks, pills or supplements, diet aids, and weight control preparations);
Vitamins and mineral concentrates – sold as dietary supplements or adjuncts (except when sold pursuant to a written prescription by a licensed physician, nurse practitioner, or physician's assistant);
Devices — including contraceptive items, birth control preparations, and testing kits;
Products listing natural and herbal ingredients as the active components, where such products do not contain a nonprescription drug or proprietary medicine or do not treat, cure, or prevent disease in human beings; and
Items containing nonprescription drugs or other medicinal ingredients, where the inclusion of such substances serves as a secondary function to the intended use of the product.
The Department considers the federal Food and Drug Administration's (FDA) guidelines in the classification of products for purposes of the above exemptions.
Keeping in mind the above, I will address the contested products listed in the appeal.
A&D Ointment: A&D Ointment contains both vitamin A and vitamin D. The FDA does not classify vitamins as nonprescription drugs. Based on the statute, the A&D Ointment at issue does not qualify for the cited exemption because it does not contain a nonprescription drug. Accordingly, the tax assessed on the A&D Ointment is correct.
Aloe Vera: Aloe Vera is a natural ingredient derived from the leaves of an aloe plant. Based on the statute, the Aloe Vera at issue does not qualify for the cited exemption because it does not contain a nonprescription drug. Accordingly, the tax assessed on the Aloe Vera is correct.
Desensitizing Toothpaste: As provided in VTB 13-5, toothpaste is in the taxable category of articles advertised or held out for sale for grooming purposes. Toothpaste is used for cleaning, whiting and providing fresh breath. Any nonprescription drug added to the toothpaste to help prevent sensitivity serves as a secondary function to the intended use of the product. Accordingly, the desensitizing toothpaste at issue does not qualify for the cited exemption and is subject to the tax.
Contact Lens Solution: Contact lens solutions are used to clean, condition and disinfect contact lens and are not designed for topical use on humans. Based on the statute, the contact lens solution at issue does not qualify for the cited exemption because the product is not sold for internal or topical use in humans. Accordingly, the tax assessed on the contact lens solution is correct.
Durable Medical Equivalent:
Virginia Code § 58.1-609.10 10 provides, in part, an exemption from the retail sales and use tax for "prosthetic devices, orthopedic appliances, catheters...[and] other durable medical equipment and devices, and related parts and supplies specifically designed for those products . . .when such items or parts are purchased by or on behalf of an individual for use by such individual." Durable medical equipment is equipment that (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.
Heating Pad: In this instance, the Taxpayer provides an information facts sheet that addresses both electrical heating pads and disposable chemical pads.
The Department has previously ruled in Public Document 14-98 (7/2/14) that thermophore heating pads are classified by the FDA as Class II medical devices and meet the four criteria for exemption in the statute when purchased by or on behalf of an individual for use by such individual. Based on P.D. 14-98, the contested electrical heating pads qualify for the cited exemption and will be removed from the audit.
Disposable chemical pads cannot withstand repeated use. Therefore, disposable chemical pads do not qualify for the cited exemption because they do not meet all the criteria in the statute. As such, disposable chemical pads are subject to the tax.
Vaporizer: The vaporizer is classified by the FDA as a Class I medical device and meets the criteria set forth in the exemption when purchased by or on behalf of an individual for use by such individual. Accordingly, the audit will be revised to remove the contested vaporizer products from the audit.
CONCLUSION
Based on the foregoing, the audit will be adjusted to remove the tax assessed on the contested electrical heating pads and vaporizers and a revised audit report will be mailed to the Taxpayer. A refund of the tax, plus interest from the date of payment, will be issued as soon as practicable.
The Code of Virginia sections, regulation, tax bulletin and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions about this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5702865209.T