Did another agency's refusal to reimburse sales tax make incontinence creams and washes exempt?

Plain-English summary

A medical-supply taxpayer claimed a refund on equal-protection grounds. The proposed response says California's Department of Health Services treated creams and washes for incontinent persons as medical items and did not reimburse supply houses for sales tax, while the Board treated their sales as taxable when the products were not sold or otherwise transferred through Regulation 1591(a)'s qualifying methods.

Senior Staff Counsel John L. Waid treated the dispute as an apparent conflict between two state agencies' opinions. He proposed telling the claimant that the Board had to enforce section 6369 as it interpreted the statute because article III, section 3.5 of the California Constitution did not permit the agency to declare state law unconstitutional.

The memorandum supplies suggested response language, not a signed response or final decision. It does not establish that the Board actually denied the claim, identify a particular transaction's furnishing method, or give the refund amount or period.

Live annotation and source posture

The current live annotation preserves the creams-and-washes dispute, the two-agency conflict, the section 6369 interpretation, the constitutional agency limit and the January 10, 1996 date. It adds that the Board must deny the claim. The supporting memorandum does not record that outcome: it says the auditor asked for a suggested response, introduces proposed language with We suggest the following, and supplies no final response, order, refund denial or later proceeding.

The source does not say every sale of these products was taxable. Its stated Board position concerns sales not made through the furnishing methods in Regulation 1591(a). It does not supply the prescriptions, orders, invoices, transfers or other evidence needed to apply that condition to a particular sale.

The proposed response calls MediCal a state-run program in which the federal government supplies money, then ends by saying no federal programs are involved. The source does not reconcile those statements. This page preserves the conflict without deciding whether counsel meant that no specific federal right or no controlling federal program was involved.

The taxpayer's claim and attached allegations, Herrmann's memorandum to Assistant Chief Counsel Gary J. Jugum, DHS policy materials and transaction records are absent. The subject and district office are redacted. The official extraction prints medicinal supply houses once and REDATED TEXT; because the native-text PDF contains those words, they remain unchanged in the source tail.

Both printed case reporters resolve to the named cases: Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356 and Oliver & Williams Elevator Corp. v. State Board of Equalization, 48 Cal. App. 3d 890.

CDTFA's Annotated Legal Opinions collection says these documents are summarized as annotations and statutory law controls over an inconsistent annotation. The official two-page PDF has native text and no raster images, so no OCR was required. Two fresh direct PDF downloads and two live-page downloads were byte-identical; duplicate default text extractions also matched.

What this means for you

Do not treat a reimbursement agency's payment position as the taxability rule. For a medicine claim, document the product, prescription or order, seller and patient roles, and the precise way the item was furnished or transferred under the current law. Keep the reimbursement determination separate from the sales-tax return, payment and refund evidence.

If a refund theory is constitutional rather than statutory, distinguish staff's proposed agency response from a final administrative decision or court judgment. This memorandum supplies neither.

Common questions

Q: Did DHS's reimbursement position bind the Board?

A: No, under the proposed response. Counsel treated it as another agency's apparently conflicting interpretation, not a tax exemption.

Q: Did the memorandum say the products were always taxable?

A: No. It describes the Board's position as taxing sales when the products were not sold or otherwise transferred under Regulation 1591(a).

Q: Did the Board deny this refund claim?

A: The live annotation says so, but the supporting memorandum only proposes response language and supplies no final disposition.

Q: Did counsel decide whether the tax law was constitutional?

A: No. Counsel said the Board lacked power to declare a state law unconstitutional and therefore had to enforce the statute as written.

Q: Does the source consistently describe the federal role?

A: No. It says the federal government supplied MediCal reimbursement money and later says no federal programs were involved, without explaining the difference.

Missing evidence and references

• Herrmann memorandum, attached refund claim and taxpayer allegations — absent
• Taxpayer, subject and district-office identity — redacted
• Product identities, ingredients, labels and medical classifications — absent
• Prescriptions, orders, invoices and Regulation 1591(a) furnishing evidence — absent
• DHS reimbursement rules, correspondence and payment records — absent
• Tax periods, returns, sales, tax paid, refund amount and audit workpapers — absent
• Final Board response, refund determination, appeal and judicial result — not supplied

Verbatim support

From the official January 10, 1996 Senior Staff Counsel memorandum:

“The basis for your refund claim is that the Department of Health Services (DHS) maintains that sales of creams and washes for incontinent persons are medical items not subject to sales tax under Regulation 1591(b) (1) but that such sales of creams and washes have been determined by the Board to be subject to tax when they are not sold or otherwise transferred pursuant to Regulation 1591(a).

MediCal is a state-run program in which the federal government supplies money for reimbursement of patients for their medicinal costs.

"DHS has chosen, apparently, not to follow the Board's interpretation of Revenue and Taxation Code section 6369 as regards the sales of incontinence creams and washes by medicinal supply houses.

As a state agency, the State Board of Equalization has no power to declare a state law unconstitutional. (Cal. Const. Art. III, § 3.5.) Therefore, the Board must enforce the statute as written.

"Finally, as no federal programs are involved, there is no specific federal right in danger.

Citations and references

• California Revenue and Taxation Code § 6369 — Board interpretation discussed in the memorandum
• California Sales and Use Tax Regulation 1591(a) and (b)(1) — medicine status and qualifying furnishing methods discussed in the memorandum
• California Constitution article III, § 3.5 — agency limit cited as the reason the Board could not declare state law unconstitutional
• Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 359 (1973) — reporter resolves to the named equal-protection tax-classification case
• Oliver & Williams Elevator Corp. v. State Board of Equalization, 48 Cal. App. 3d 890, 894–95 (1975) — reporter resolves to the named California tax-classification case

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 425.0021
• Original supporting opinion: 425.0021 PDF

Original ruling text

State of California

Board of Equalization

425.0021
Memorandum
To:

From:

Subject:

Mr. Donald Herrmann
Senior Tax Auditor
Audit Rev. & Ref. Sect. (MIC:40)

Date:

January 10, 1996

John L. Waid
Senior Staff Counsel
REDACTED TEXT

I am responding to your memorandum to Assistant Chief Counsel Gary J. Jugum regarding this taxpayer's claim for refund. The taxpayer has claimed a violation of its equal protection rights. You attached the Claim for Refund to your memorandum and asked for a suggested response to the taxpayer's allegations. We suggest the following: “The basis for your refund claim is that the Department of Health Services (DHS) maintains that sales of creams and washes for incontinent persons are medical items not subject to sales tax under Regulation 1591(b) (1) but that such sales of creams and washes have been determined by the Board to be subject to tax when they are not sold or otherwise transferred pursuant to Regulation 1591(a). As a result, DHS does not reimburse medical supply houses for tax that they pay on their sales of such items. You claim that this situation violates your rights to equal protection under the Federal Constitution. “Where taxation is concerned and no specific federal right, apart from equal protection, is imperiled, the States have large leeway in making classifications and drawing lines which in their judgment produce reasonable systems of taxation.” Lehnhausen v. Lake Shore Auto Parts Co. (1973) 410 U.S. 356, 359. There appears to be no federal issue here other than your assertion of equal protection. You assert your rights under "the federal system of funding and dispensing such funds to qualified providers via the California administered MediCal program is imperiled and should preempt the SBE's right to assert sales tax in a discriminatory fashion." MediCal is a state-run program in which the federal government supplies money for reimbursement of patients for their medicinal costs. As such, transfers of tangible personal property under MediCal are subject to the Sales and Use Tax Law. The courts have repeatedly upheld a state's right to draw rational classifications in furtherance of its tax programs. (See, Oliver and Williams Elevator Corp. v. St. Bd. of Equalization (1975) 48 Cal.App.3d 890, 894-895.) "DHS has chosen, apparently, not to follow the Board's interpretation of Revenue and Taxation Code section 6369 as regards the sales of incontinence creams and washes by medicinal supply houses. The issue in this claim thus concerns an apparent conflict in

opinions issued by two state agencies. As a state agency, the State Board of Equalization has no power to declare a state law unconstitutional. (Cal. Const. Art. III, § 3.5.) Therefore, the Board must enforce the statute as written. "Finally, as no federal programs are involved, there is no specific federal right in danger. The resolution of this matter depends entirely on the state law principles set forth above." JLW:sr Cc:

REDATED TEXT District Office