Who had to prove a pharmacy's prescription sales were exempt, and could the Board inspect prescription records?

Plain-English summary

The pharmacist's representative raised two issues during a pending audit: whether the Board could treat prescriptions as invalid and assess tax using missing inventory, and whether it could obtain patient names, addresses and medications from prescription records.

Tax Counsel declined to comment on what the auditor had said or done and did not decide whether any prescription was invalid. Instead, the letter said the pharmacist bore the burden of proving that claimed prescription-medicine sales met section 6369: medicine prescribed for human treatment by an authorized prescriber and dispensed on a prescription lawfully filled by a registered pharmacist.

If the pharmacist did not establish the exemption to the Board's satisfaction, the letter said section 6481 allowed a tax determination based on available information. It identified estimated street value of drugs as information the Board could use.

The letter also said the Board could inspect prescription records, including patient names, addresses and medications, and that the auditor could decide relevance. Tax Counsel emphasized that the Board sought inspection, not removal of the records.

Live annotation and source posture

The current live annotation preserves the exemption conditions, section 6091 burden, available-information estimate, street-value example and inspection conclusion. It states that the estimate could cover drugs not accounted for by the sales records; the supporting letter discusses allegedly missing inventory and separately says street value is available information, but does not use that exact combined formulation.

The supporting letter is narrower than a general confidentiality ruling. It concerns the Board's claimed audit access under the cited historical statutes. It does not analyze every patient-privacy law, data safeguard, subpoena rule, privilege, disclosure beyond the audit, or current agency practice.

Tax Counsel distinguished the Board of Pharmacy's reported reliance on sections 4232 and 4049.5. He said section 4232 applied only to specified dangerous drugs and was not the Board's claimed authority; the tax agency instead relied on section 4331, which the letter describes as keeping filled prescriptions open to duly constituted authorities.

The final sentence then says Section 4323 has no relevance, even though the preceding discussion repeatedly identifies section 4232. The source supplies no explanation, so this page preserves both numbers rather than silently choosing one.

The September 23 and September 26 correspondence, July 18 letter, November 15 Board of Pharmacy letter and the prescription records are absent. No audit workpaper, inventory calculation, street-value estimate, proposed assessment, final determination, appeal or outcome is supplied.

The official three-page PDF has a native text layer. Its one small page-one image is letterhead artwork rather than scanned body text, so no OCR was required. Two fresh direct PDF downloads and two live-page downloads were byte-identical; duplicate default text extractions also matched.

CDTFA's Annotated Legal Opinions collection says these documents are summarized as annotations and statutory law controls over an inconsistent annotation.

What this means for you

For a pharmacy exemption audit, keep prescriptions, prescriber authority, pharmacist dispensing records, inventory, sales records and exemption support organized so each claimed sale can be substantiated. The 1985 letter treated withholding proof as a risk that the agency would estimate tax from other information.

Before producing patient-level records today, identify the current legal authority, exact scope, relevance, safeguards and permitted disclosure process. This historical tax letter does not supply a complete modern privacy analysis.

Common questions

Q: Did the Board have to prove that prescription sales were taxable?

A: The letter said no. Under its section 6091 analysis, the pharmacist bore the burden of establishing the exemption.

Q: What could the Board do if adequate proof was not supplied?

A: It could compute the tax from available information. The letter identified estimated street value as one source.

Q: Could the pharmacist withhold patient-identifying prescription records as irrelevant or confidential?

A: The letter said no for this audit. It concluded that the Board could inspect the records and that its auditor would determine relevance.

Q: Did the Board seek to remove the prescriptions?

A: Tax Counsel said no; the agency sought inspection, not removal.

Q: Did the letter declare any prescription invalid?

A: No. It declined to resolve what the auditor had said or done and instead explained the exemption burden and estimation authority.

Q: Did the Board rely on the dangerous-drug inspection provision?

A: No. The letter said section 4232 was limited to specified dangerous drugs and identified section 4331 as the Board's inspection authority.

Missing evidence and references

• July 18, September 23 and September 26, 1985 correspondence — absent
• November 15, 1985 Board of Pharmacy letter — absent
• Pharmacist, patients, prescribers and complete pharmacy identity — redacted
• Prescriptions, patient records, medication details and inventory — absent
• Sales records, returns, tax payments and exemption schedules — absent
• Audit workpapers, prescription-validity findings and street-value calculation — absent
• Proposed or final assessment, appeal and outcome — not supplied

Verbatim support

From the official December 20, 1985 Tax Counsel letter:

Under this section, the pharmacist, and not the Board, has the burden of establishing that his filling of a prescription qualifies for the section 6369 exemption for prescription medicines.

An estimate of the “street value” of drugs qualifies as information available to the Board which it may use in determining the amount of tax due.

While you may feel that those records are not relevant to the Board’s audit, they are nevertheless records which the Board is entitled to inspect, and it is up to the Board’s auditor to determine whether or not those records are relevant to the audit.

First, there has been no indication to me that the Board of Equalization has sought to remove any of the records of Mr. A---’s prescriptions from the pharmacy. The Board has merely sought to inspect the records.

Rather, as I pointed out in my September 23 letter to you the Board’s authority to inspect these records is found in section 4331 of the Business and Professions Code which provides that all prescriptions filled shall be kept on file and open for inspection by duly constituted authorities. Section 4323 has no relevance to the issue of whether the Board is entitled to inspect Mr. A---’s prescription records for the purpose of determining whether those prescriptions qualify for the section 6369 exemption.

Citations and references

• California Revenue and Taxation Code § 6091 — taxable-receipts presumption and seller's burden
• California Revenue and Taxation Code § 6369 — conditions for the prescription-medicine exemption
• California Revenue and Taxation Code § 6481 — available-information determination authority
• California Business and Professions Code §§ 4049.5 and 4232 — Board of Pharmacy provisions discussed but not relied on as the tax agency's authority
• California Business and Professions Code § 4331 — prescription-record inspection authority identified by Tax Counsel
• California Business and Professions Code § 4323 — printed only in the final irrelevance sentence, creating an unresolved conflict with the preceding section 4232 discussion

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 425.0023
• Original supporting opinion: 425.0023 PDF

Original ruling text

425.0023

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-6453

December 20, 1985

Mr. A--- T. C---, Jr.
XXXXX --- --- Avenue
--- ---, CA XXXXX
Re:

R--- A---, dba V--- P--SR -- XX-XXXXXX
Prescription Records – Audit Examination

Dear Mr. C---:
This is in reply to your September 26, 1985 letter to me, in which you are responding to my September 23, 1985 letter to you regarding Mr. A---. You also enclosed with your letter to me your letter to Mr. Robert Nunes of the Board dated July 18, 1985. In summary, your letters of September 26 and July 18 appear to raise two issues. The first issue relates to whether or not the Board can declare a prescription invalid, declare that those pills are therefore missing from the pharmacist’s inventory, and assess tax against the pharmacist based on the audit pending of Mr. A---’s pharmacy, and you relate that the Board’s auditor has told you that he could determine whether a particular prescription was written for legitimate medical purposes or not. You contend that the Board does not have the authority to determine whether or not a prescription is invalid, and that is the duty of other State agencies. The second issue you raise relates to whether or not the Board has the authority to obtain the names and addresses of patients, and the medications which they received, which is information contained on the prescription records maintained by the pharmacist. You contend that my September 23, 1985 letter to you is the opinion of the auditing agency, and you are still requesting an opinion from another agency. You also ask if we would request an opinion from the Auditor General’s office. Opinion With respect to the first issue you raise, we are not in a position to comment on what the Board auditor did or did not tell you in his conversations with you. We are in a position, however, to give you our opinion on what conditions must be met before a pharmacist’s filling of a prescription for medicines qualifies for an exemption from sales and use tax.

Mr. A--- T. C---, Jr.

-2-

December 20, 1985
425.0023

Revenue and Taxation Code section 6369 provides an exemption from sales and use taxes for medicines which are prescribed for the treatment of a human being by a person authorized to prescribe the medicines, and dispensed on prescription filled by a registered pharmacist in accordance with law. Thus, a sale of prescription medicines which qualifies for this exemption is not a taxable retail sale. Revenue and Taxation Codes section 6091 provides, among other things, that it shall be presumed that all gross receipts are subject to tax until the contrary is established, and that the burden of proving that the sale of tangible personal property is not a sale at retail is upon the person who makes the sale. Under this section, the pharmacist, and not the Board, has the burden of establishing that his filling of a prescription qualifies for the section 6369 exemption for prescription medicines. Finally, Revenue and Taxation Code section 6481 provides, among other things, that if the Board is not satisfied with the return or the amount of tax required to be paid to the State by any person, the Board may compute and determine the amount required to be paid upon the basis of the facts contained in the return or upon the basis of any information within its possession or that may come into its possession. Thus, if a pharmacist has not established to the Board’s satisfaction that a prescription does qualify for the section 6369 exemption, then the Board has the authority, and the duty, to make a determination of the amount of tax due based on any information available to it. An estimate of the “street value” of drugs qualifies as information available to the Board which it may use in determining the amount of tax due. In summary, then, our opinion is that Mr. A--- has the burden of establishing by satisfactory evidence to the Board, during the course of the Board’s audit of Mr. A---, that the prescription medications which he sold do in fact qualify for the section 6369 exemption. If he fails or refuses to do so, then the Board may use any information available to the Board to determine the correct amount of tax due. The second issue you raise in your September 26 letter has already been answered in my September 23 letter to you, and there is no need to repeat the substance of that letter again. We see no need to request an opinion of this subject from the Auditor General’s office, and we cannot see how the Auditor General’s office would be involved in this issue in any event. However, you are free to request an opinion from that office if you wish, and we have no objection to your doing so. You state in your September 26, letter, that “we have not withheld any information from the Board of Equalization.” This is contrary to my understanding of the facts. My understanding is that you have withheld from the Board’s auditor the names and addresses of the patients who received the medicines, contending that those records are confidential. While you may feel that those records are not relevant to the Board’s audit, they are nevertheless records which the Board is entitled to inspect, and it is up to the Board’s auditor to determine whether or not those records are relevant to the audit.

Mr. A--- T. C---, Jr.

-3-

December 20, 1985
425.0023

I also note that I received a copy of a letter dated November 15, 1985, from the Board of Pharmacy to you. In that letter, the Board of Pharmacy presumes that one of the questions you asked of them was who is authorized to inspect and remove prescriptions from a pharmacy. The Board of Pharmacy states that section 4232 of the Business and Professions Code specifies that all records of manufacturer and of sale, purchase of, or disposition of drugs are open to inspection authorized officers of the law. Section 4049.5 of the Business and Professions Code further defines “authorized officers of the law” as legally empowered peace officers, inspectors of the State Board of Pharmacy or the Department’s Division of Investigation, and Inspectors of the State Bureau of Food and Drug Inspection. There are several things I want to bring to your attention about this letter. First, there has been no indication to me that the Board of Equalization has sought to remove any of the records of Mr. A---’s prescriptions from the pharmacy. The Board has merely sought to inspect the records. Second, the effect of section 4232 is limited to certain specified dangerous drugs, and not all medicines sold by prescription by pharmacists. Third, the Board has not contended that it is entitled to inspect Mr. A---’s records under section 4232. Rather, as I pointed out in my September 23 letter to you the Board’s authority to inspect these records is found in section 4331 of the Business and Professions Code which provides that all prescriptions filled shall be kept on file and open for inspection by duly constituted authorities. Section 4323 has no relevance to the issue of whether the Board is entitled to inspect Mr. A---’s prescription records for the purpose of determining whether those prescriptions qualify for the section 6369 exemption. I trust that this letter will be satisfactory to answer the issues you have raised. Very truly yours,

John Abbott
Tax Counsel

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