Tax Type
Retail Sales and Use Tax
Description
Medical equipment specifically exempted from the tax
Topic
Exemptions
Taxability of Persons and Transactions
Date Issued
12-17-1997
December 17, 1997
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear*****************
This is in reply to your letter of October 15, 1997, in which you seek correction of a sales and use tax assessment issued to ***********(the Taxpayer) for the period September 1991 through May 1997.
FACTS
The Taxpayer is a physician's practice which provides alternative treatments including acupuncture. As a result of the department's audit an assessment was made for untaxed purchases of tangible personal property used in the Taxpayer's practice for acupuncture treatment. The sales price the Taxpayer paid for the purchases included in the audit included shipment charges and insurance fees. The Taxpayer feels that the entire assessment should be abated on grounds that the equipment purchased is similar to the items of medical equipment specifically exempted from the tax under Title 23 Virginia Administrative Code (VAC) 10-210-940.
DETERMINATION
Acupuncture Supply Purchases
VAC 10-210-2060 provides that physicians, surgeons and other "practitioners of the healing arts" are the consumers of all tangible personal property used in performing their professional services. They must pay the tax to their suppliers at the time of purchase...." If the supplier fails to collect the tax, the practitioner must pay the tax on a Consumer's Use Tax Return, Form ST-7. The only exception is the purchase of controlled drugs, hemodialysis, and peritoneal equipment and supplies by licensed physicians for use in their professional practice. In addition, purchases by a licensed physician of durable medical equipment and similar items are exempt from the tax if purchased on behalf of a specific patient.
The acupuncture supplies purchased in this case are not specifically described by the exemptions referenced above. Under principles established by the courts, exemptions from the sales and use tax are strictly construed, that is, when exemption language is susceptible of two constructions one granting the exemption and the other not granting it, the construction denying the exemption will be followed. Thus, the fact that the acupuncture products purchased are similar to medical products specifically set out in the Code as exempt is insufficient to make these purchases exempt from the tax.
Shipping and Insurance Charges
In regard to shipping charges, Code of Virginia § 58.1-609.5(3) provides an exemption from the sales tax for "[t]ransportation charges separately stated." The statute is explained by VAC 10-210-6000. The department has consistently held that shipping, postage, or mailing charges are exempt from the tax when separately stated on the invoice. When these charges, however, are combined on an invoice with handling charges or other charges, the exemption does not apply.
Although an insurance charge does not represent a charge for the "actual" delivery or transportation of the product to the customer, l find that an insurance charge for the protection of the seller or purchaser against a monetary loss in case the goods are damaged or lost during shipment to the customer is an element of transportation. Accordingly, an insurance charge which only insures the goods during shipment from the seller to the purchaser is exempt from the tax when separately stated on the customer's invoice as "shipping insurance" or combined with the actual shipping, freight, delivery or transportation charge and billed as a "freight and insurance" charge or as a "shipping and insurance" charge.
In this case, invoices itemizing shipping and insurance charges separately were not available or did not exist. Thus, absent invoices breaking out the charges, the auditor was correct in assessing tax on the entire amount of the sales transactions.
Penalty
The application of penalty charges to audits is addressed in VAC 10-210-2032 and indicates that penalty will be applied to second generation audits unless the compliance ratio for purchases meets or exceeds 60%. In this second generation audit, the Taxpayer failed to comply with the use tax requirements established in the prior audit, and its compliance ratio fell well short of the required 60%. As such, l find no basis for relief of the penalty. As required under the regulation, the Taxpayer will be expected to meet or exceed a use tax compliance ratio of 85% in subsequent audits in order to avoid the application of the penalty.
Federal Law on Mail Order Purchases
Your reference to federal law on the use tax issue appears to be related to the U.S. Supreme Court's decision in Quill Corporation v. North Dakota. 112 S. Ct. 1904 (1992). This case recognized limits on a state's authority to impose a duty to collect sales tax on out-of-state vendors when the vendors had no physical presence or minimal contacts with the taxing state. This decision only provides limited protection to vendors The case provides no authority to limit a state's inherent authority to impose a use tax on those who purchase through mail order tangible personal property for use within the state's borders. Therefore, the Taxpayer's purchases in this case are fully taxable.
Based on the above, the assessment is correct as issued. You have indicated that the liability resulting from the audit could put an undue hardship on the Taxpayer's business. Based on the circumstances surrounding this case, there is basis for establishing a payment plan to pay the outstanding assessment. l will refer this case to the department's Collections Unit, which will contact the Taxpayer to establish terms of the payment plan.
If you have any questions regarding this determination, please contact ***** of my Office of Tax Policy at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13229D
Rulings of the Tax Commissioner