Tax Type
Individual Income Tax
Retail Sales and Use Tax
Description
Subsidized employee benefit program; Drug sales to employees
Topic
Taxability of Persons and Transactions
Date Issued
11-04-1987
November 4, 1987
Re: Ruling Request
Dear **************
This is in reply to your letter of February 27, 1987 in which you request a ruling regarding the tax implications of the employee benefit program subsidized by ********** I apologize for the delay in responding to your letter and I hope that the delay has not caused you any inconvenience.
FACTS
************** (Hospital) is a nonprofit institution. It subsidizes an employee benefit program, which includes as a benefit, legend drugs, i.e. physician order required prior to dispensing. Under this program the employee pays the hospital a nominal amount for these drugs and the balance of the cost is paid by the hospital. This employee benefit program is available only to the employees of the Hospital and their families.
You request a ruling regarding any tax implications of this employee benefit program.
RULING
Income Tax
Generally such employee benefit programs, which take the form of employee discounts, are not ordinarily treated as taxable fringe benefits for federal tax purposes. However, in order to formally determine if the amount of this benefit is subject to income taxation, the Internal Revenue Service should be contacted. Virginia is a conformity state and uses federal adjusted gross income as the starting point for computing Virginia taxable income. Any amounts excluded from federal adjusted gross income will be similarly excluded from Virginia adjusted gross income. Therefore, if the value of the amount subsidized by the Hospital is not included in federal adjusted gross income for federal income tax purposes, it will not be included in Virginia taxable income for Virginia income tax purposes.
Also, no Virginia income tax withholding will be required if, at the time the benefit is received, the employer reasonably believes the employee will be allowed to exclude it from federal adjusted gross income.
Sales Tax
Virginia Code §58.1-608.21 exempts "(m)edicines, drugs ... dispensed by or sold on prescriptions or orders of licensed physicians... from the sales and use tax.
Therefore, based upon this exemption, the Hospital may sell such drugs to its employees exclusive of the tax.
I hope that this answers your questions and if you have any further questions, please do not hesitate to contact this office.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner