Audit: Refund - Separately Stated Labor
March 1, 2023
Re: § 58.1-1821 Refund Appeal: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you dispute the denial of a retail sales and use tax refund for the period March 2015 through December 2015. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, an operator of medical diagnostic laboratories in Virginia, timely submitted a refund request for the period at issue and received a refund credit for tax paid on several transactions because tax was either accrued or remitted on exempt transactions, or use tax was paid on transactions for which the vendor charged sales tax on the invoice. However, the auditor denied the Taxpayer a refund credit for tax accrued on reagents used in testing human blood, urine, and other bodily specimens because the auditor questioned whether the reagents qualified for the medicines and drugs exemption. In addition, refunds were not granted for tax paid or accrued on certain service or maintenance transactions because sufficient documentation was not provided.
The Taxpayer contests the disallowance of the refund credits for tax accrued on the purchase of reagents, claiming the reagents meet the definitional requirements of a drug in accordance with the Virginia Drug Control Act (Chapter 34 of Title 54.1, Virginia Code § 54.1-3400 et seq.). In addition, the Taxpayer asserts it is entitled to the tax refund denied on the transactions for certain service or maintenance transactions.
DETERMINATION
Medicines and Drugs
Virginia Code § 58.1-609.10 9 provides exemptions related to sales and purchases of medicines and drugs. At issue in this case is the exemption for “medicines and drugs purchased for use and consumption by a licensed hospital, nursing home, clinic or similar corporation not otherwise exempt under this section.” The Taxpayer believes its business operation is a “similar corporation” and, therefore, its purchases of reagents as drugs should qualify for the exemption. In addition to the exemption statute, the Taxpayer cites Public Document (P.D.) 15-242 (12/23/2015) in support of its claims.
The reagents in question are chemical compounds that consist of drugs and other substances. The reagents are used to react with other chemical or biological substances in order to promote a reaction that can help diagnose potential diseases or medical deficiencies.
Virginia Drug Control Act
Virginia Code § 54.1-3401 defines “drug” to mean:
(i) articles or substances recognized in the official United States Pharmacopoeia National Formulary or official Homeopathic Pharmacopoeia of the United States, or any supplement to any of them;
(ii) articles or substances intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or animals;
(iii) articles or substances, other than food, intended to affect the structure or any function of the body of man or animals;
(iv) articles or substances intended for use as a component of any article specified in clause (i), (ii), or (iii); or (v) a biological product.
This definition is consistent with the definition set forth in Title 23 of the Virginia Administrative Code (VAC) 10-210-940. The Taxpayer cites (ii) to support its claim that the reagents are drugs.
In a prior determination issued as P.D. 01-52 (4/30/2001), the Tax Commissioner addressed biological and allergy products as drugs. The Tax Commissioner determined that the products at issue qualified as drugs pursuant to the Virginia Drug Control Act based on the Virginia Pharmacy Board’s classification of the products as Schedule VI controlled drugs for use by licensed physicians and prescriber practitioners. As the products in P.D. 01-52 may be similar to the reagents in this case, the Department does not dispute that the reagents may be defined as controlled drugs. However, in order for the reagents to be purchased exempt (or to qualify for a refund credit of tax), the Taxpayer’s business operation must be similar to that of the qualifying entities stated in Virginia Code § 58.1-609.10 9.
Hospitals, Clinics, Nursing Homes and Similar Corporations
Sales and use tax exemptions are strictly construed pursuant to the decision in Commonwealth v. Community Motor Bus Co., Inc., 214 Va. 155, 198 S.E.2d 619 (1973). The medical entities cited in Virginia Code § 58.1-609.10 9 qualify for the exemption because their purchases of medicines and drugs are consumed or administered in their perspective roles as providers of (1) medical and surgical treatment to patients, (2) nursing home care for sick or injured persons, and (3) outpatient medical treatment and patient services, respectively. The Taxpayer, however, is engaged in providing diagnostic testing and analytical services in a laboratory setting for the purpose of testing human specimens in order to obtain information for medical providers (such as the stated entities) to use in the diagnosis, treatment and care of their patients. The Taxpayer does not provide direct medical treatment and care to individuals on an inpatient and outpatient basis. In addition, the reagents are not consumed by or administered to individuals by the Taxpayer. Rather they are used by the Taxpayer to perform diagnostic and analytical services. Based on these differences, the Taxpayer was not a “similar corporation” to a licensed hospital, nursing home or clinic.
Regarding P.D. 15-242, cited by the Taxpayer, the Tax Commissioner determined that a for-profit family medical practice qualified for the exemption in Virginia Code § 58.1-609.10 9 regarding purchases of medicines and drugs for use in the medical practice. This decision was made in accordance with the 2006 statutory amendment that expanded the exemption to include purchases of medicines and drugs by nursing homes, clinics, and similar corporations. In this instance, the Taxpayer is not similar to a family medical practice engaged in providing medical care and treatment to patients. Therefore, P.D. 15-242 is not applicable to this case.
Service or Maintenance Transactions
According to the audit report, the auditor gave refund credits for the tax paid on separately stated labor, and for use tax accrued on purchases upon which the vendor properly charged the tax, when documentation was provided to support the payment or overpayment of the tax. The auditor denied only those refund claims lacking documentation to support the payment of the tax.
The Taxpayer provided substantial documentation with its appeal, alleging it is entitled to a refund on various transactions unrelated to reagents. A review of the documentation provided indicates that tax on at least one of these transactions may be eligible for a refund.
CONCLUSION
In accordance with Virginia Code § 58.1-609.10 9, the Taxpayer’s purchase of reagents used for diagnostic testing do not qualify for the cited exemption in Virginia Code § 58.1-609.10 9. Therefore, the auditor properly denied the refund of taxes accrued by the Taxpayer on its purchases of biological and chemical reagents used in providing diagnostic testing and analytical services.
However, the tax on at least one of the service and maintenance transactions cited by the Taxpayer may be eligible for a refund. Accordingly, this case will be remanded to the appropriate audit staff to fully consider the Taxpayer’s claims and issue any necessary refund. The Taxpayer should review the documentation provided on appeal to ensure they reconcile with amounts claimed in the refund request and submit them to the auditor, *****, who can be contacted at *****, or *****. The Taxpayer must provide the auditor with sufficient information to reconcile the information provided on appeal with the information provided in the original refund request. The auditor will review the Taxpayer’s claims and issue a refund, as warranted.
Once the auditor’s review is completed, she will issue a written summary explaining which portions of the refund request have been approved and refunded, which have been denied, and the basis for such decisions. If the Taxpayer disagrees with the auditor’s determination with regard to the service and maintenance transactions, it will have ninety days from the date of the auditor’s updated report to file an appeal pursuant to Virginia Code § 58.1-1821.
The Code of Virginia sections, regulations, and the public documents cited are available online 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 Department’s Office of Tax Policy, Appeals and Rulings, at *****, or via email at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/2219-C