April 6, 2017
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you request a reconsideration of the prior determination issued to the Taxpayer. I apologize for the delay in responding to your correspondence.
FACTS
The Taxpayer is a retail dealer of furniture and 100% natural latex mattresses. In Public Document 16-81 (5/16/16), the Tax Commissioner determined that the Taxpayer's 100% natural latex mattresses did not qualify for the exemption in Va. Code § 58.1-609.10 10 and were subject to the retail sales tax. The Taxpayer continues to maintain that the 100% natural latex mattresses qualify for the durable medical exemption and cites Code of Federal Regulations (CFR) § 1632.31 (f) (1) in support of its claim.
In addition, the Taxpayer provides redacted copies of prescriptions provided to patients for the purchase of the 100% natural latex mattresses to support the exempt sales. The Taxpayer cites several rulings issued by the Tax Commissioner in support of its claims. In addition, the Taxpayer claims that the prior determination incorrectly states that the sales tax was collected on the sales of the 100% natural latex mattresses. Therefore, the Taxpayer requests that the penalty assessed be abated in accordance with Title 23 of the Virginia Administrative Code (VAC) 10-210-2032 B 3.
DETERMINATION
Virginia Code § 58.1-609.10 10 provides an exemption for “prosthetic devices 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.”
Title 23 VAC 10-210-940 sets forth the Department's regulation as it relates to medicines, drugs, eyeglasses and related items. Subsection F of this regulation addresses durable medical equipment and states the following:
The tax does not apply to . . . durable medical equipment . . . purchased by or on behalf of an individual. The fact that an item is purchased from a medical equipment supplier or on .a physician's prescription is not dispositive of its exempt status.” [Emphasis added.]
Subsection A of this regulation defines the term “durable medical equipment” to mean medical equipment that meets all the following requirements: (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. In order for an item to be exempt from the tax, it must meet all of the above criteria.
In my prior determination, I ruled that the administration and enforcement of flammable fabrics under CFR § 1632.31 (f) (1) is a federal regulation and has no bearing on the enforcement of the Virginia retail sales and use tax. Further, other state's tax laws regarding the application of the retail sales tax to mattresses have no bearing on the Virginia retail sales and use tax. In order for an item to be exempt as durable medical equipment under Virginia law, the item must qualify under all four of the above stated criteria in Title 23 VAC 10-210-940 F. In this instance, the 100% natural latex mattresses do not meet criteria (iii) because they are useful in instances when illness or injury is not present. While the 100% natural latex mattresses may be useful in treating a number of medical conditions, the mattresses are not designed specifically for medical purposes within the meaning of Va. Code § 58.1-609.10 10.
The Taxpayer cites Public Documents 89-178 (5/31/89), 01-19 (3/16/01), and 13-81 (5/29/13) and asserts that there is no functional distinction between the exempt specialized hospital beds addressed in these public documents and the Taxpayer's 100% natural latex mattresses. I disagree with the Taxpayer's assertions. The specialized hospital beds addressed in the public documents cited are specifically made for acute care patients used in the treatment and prevention of various pulmonary, wound and other medical conditions for the individual's exclusive use. Unlike the specialized hospital beds, the Taxpayer's 100% natural latex mattresses are not specifically manufactured for medical purposes and would be appropriate for the use of others present in the home without a medical illness or injury. The Taxpayer's 100% natural mattresses require a prescription because they do not meet federal flammability standards. Other retailers selling similar 100% natural latex mattresses that use a organic wool covering on the mattresses are sold without a doctor's prescription to the public for general use because the organic wool covering is a natural fire retardant that meets the federal flammability standards. Therefore, the public documents cited by the Taxpayer do not support the exemption of the 100% natural latex mattresses.
Penalty
Virginia Code § 58.1-635 mandates the application of penalty to tax deficiencies. Title 23 VAC 10-210-2032 generally provides that a penalty will not be assessed in first generation audits. However, the regulation sets out an exception to this rule that when an audit by the Department discloses that the sales tax has been collected but not remitted, the penalty will apply.
In the prior determination, I stated that the fraud penalty was improperly imposed in this case. While the penalty could not be waived entirely because the Taxpayer collected sales tax and did not remit the tax to the Department, I found basis to reduce the penalty from 50% to 30% on sales tax collected and not remitted and to remove the penalty on the untaxed sales of the 100% natural latex mattresses. According to the audit, the sales tax collected and not remitted is on the sale of pillows, regular mattresses, adjusters, and toppers. Therefore, the Taxpayer's claim that the penalty was incorrectly assessed on the 100% natural latex mattress is not valid. Accordingly, I find no basis to abate the penalty assessed on sales tax collected and not remitted.
CONCLUSION
Based upon a review of the information before me regarding the 100% natural latex mattresses and explanations provided in the Taxpayer's request for reconsideration, I do not find a basis to change my prior determination. Accordingly, with respect to the issues addressed herein, the determination previously issued is upheld. Based on this determination, the assessment is correct. An updated bill with interest accrued to date will be mailed to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. The Taxpayer should submit payment to: Virginia Department of Taxation, Main Street Centre, 600 East Main Street, 15th Floor, Richmond, Virginia 23219, Attention: *****. If the Taxpayer has questions concerning payment of the assessment or needs to set up a payment plan, please contact ***** at *****.
The Code of Virginia section, regulations and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, please contact ***** in Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/831.T