Did associating a supplement seller with a doctor make the seller's vitamin and herb sales exempt?

Plain-English summary

Settlement staff asked about an audited seller's food-supplement sales after receiving a settlement offer. The taxpayer offered nutritional counseling, was not a licensed pharmacy, and sold vitamins, minerals, amino acids, herbs and similar pills. An attached chart reportedly showed herbal pills and dietary supplements at about 73 percent of sales; an absent auditor memorandum reportedly described a 100 percent markup and said these sales supplied most of the taxpayer's revenue.

The taxpayer's quoted letter said a doctor oversaw patient care and prescribed individualized nutrients after medical testing, but the corporation belonged to someone else. Tax Counsel found that the record identified no diseases its clients actually had and described stopping supplements after nutrients were repleted. On those facts, the memorandum treated the activity as correcting nutritional deficiencies rather than treating a specific disease and concluded that the products did not qualify as medicines.

The memorandum also applied a separate furnishing-method test. It said the taxpayer was neither a registered pharmacy nor an apparent health facility, likely bought the products itself, and sold them at retail. Because the taxpayer—not the doctor—furnished them, none of the analyzed historical Regulation 1591(a) routes applied. The record therefore did not support the medical exemption or settlement.

Live annotation and source posture

The current live annotation states only the general proposition that a doctor's professional-corporation sales are regarded as the doctor's sales for Regulation 1591. The supporting memorandum acknowledges that prior position but applies the opposite side of the distinction here: the audited corporation was owned by someone other than the doctor and made the retail sales as a major part of its own business. The live annotation omits that taxpayer-specific conclusion, the two-part exemption analysis and the recommendation against settlement.

The source left room for narrower results on better facts. It said the taxpayer might be able to prove that some vitamins treated specific diseases. It also said items the doctor personally handed or directly furnished to clients—probably samples, in counsel's view—could qualify under historical subdivision (a)(2), while predicting that amount would be small. No product-level proof, quantities or completed allocation appears in the source.

The memorandum cites Annotation 425.0940 for nontaxable vitamin sales to a physician for human treatment. It cites Annotation 425.0410 only for the proposition that herbs and herbal products may qualify as medicines. The current 425.0410 page separately says the medicinal acupuncturist sales discussed there did not satisfy the prescription-medicine exemption and did not qualify as food products. Those distinct facts are not imported into this audit.

Several evidentiary inputs are only described, not reproduced: the May 18 settlement memorandum, a proposed 1994 auditor memorandum, the sales chart, an undated taxpayer letter and a private-attorney opinion. The published source quotes part of the taxpayer letter but supplies no underlying patient, diagnosis, prescription, purchase or sales records. Its final statement that the record did not indicate settlement was appropriate is a recommendation; no settlement order, assessment, appeal or other final outcome is supplied.

The official three-page PDF has a complete native text layer 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.

CDTFA's Annotated Legal Opinions collection says the opinion letters are summarized as annotations and statutory law controls when a statute and annotation conflict.

What this means for you

Doctor involvement alone did not convert a separately owned retail seller into the doctor's professional corporation. Entity ownership, who bought and sold the product, and who physically furnished it mattered independently of the product's asserted medical purpose.

For supplement transactions, document both parts of the claimed exemption: product-specific evidence of treatment for a qualifying medical condition, and the exact statutory or regulatory furnishing route. Also preserve ownership records, pharmacy or facility status, prescriptions, invoices, patient-specific records and any direct transfers by a licensed provider. Apply current law, not the 1995 subdivisions alone.

Common questions

Q: Did a doctor's involvement convert the separate seller into the doctor's professional corporation?

A: No. The source says someone other than the doctor owned the taxpayer and the taxpayer made the retail sales.

Q: Was calling a product a vitamin or herb enough to make it medicine?

A: No. The memorandum required a disease-treatment purpose and found the supplied record described nutrient repletion without identifying diseases the clients had.

Q: Was medicine status alone sufficient?

A: No. A permitted sale or furnishing method also had to be established.

Q: Could the doctor directly furnish qualifying items?

A: The memorandum said direct transfers by the doctor could qualify under historical subdivision (a)(2), but it supplied no quantities or completed allocation.

Q: Did the memorandum finally reject the settlement?

A: It said the record did not indicate settlement was appropriate. The published source supplies no final settlement decision or audit outcome.

Missing evidence and references

• May 18, 1995 settlement memorandum and settlement offer — referenced but absent
• Proposed 1994 Alfredo Ortiz auditor memorandum — referenced but absent
• Attached chart reporting about 73 percent of sales — referenced but absent
• Undated taxpayer letter — partly quoted but not reproduced in full
• Private-attorney opinion obtained before the doctor association — referenced but absent
• Ownership, pharmacy, health-facility and purchasing records — not supplied
• Product identities, diagnoses, medical testing, prescriptions and patient files — not supplied
• Invoices, direct-furnishing quantities, audit workpapers, assessment and final settlement outcome — not supplied

Verbatim support

From the official July 18, 1995 Tax Counsel memorandum:

The chart you attached to your memorandum shows that sale of herbal pills and dietary supplements make up about 73% of its sales. Mr. Ortiz indicates that the items at issue are sold on a 100% mark-up and that these sales supply the majority of the taxpayer's revenue.

The medical exemption is two-pronged, however, and both the nature of the item as a medicine and the proper method of sale or use must be satisfied for the exemption to be applicable.

Although we have previously determined that sales by a doctor's professional corporation are the same as sales by the doctor personally, it is clear that Mr. REDACTED TEXT, and not Dr. REDACTED TEXT owns the taxpayer.

The record does not indicate settlement is appropriate.

Citations and references

• Historical California Sales and Use Tax Regulation 1591(a)(1)-(5) — permitted sale or furnishing routes analyzed in the memorandum
• Historical California Sales and Use Tax Regulation 1591(b)(1) — medicine definition and specific-medical-condition test applied in the memorandum
• California Sales and Use Tax Regulation 1602(a)(5) — food-product exclusion the memorandum says was undisputed
• Annotation 425.0940 (July 3, 1964) — prior vitamin-to-physician guidance cited in the memorandum
• Annotation 425.0410 (December 31, 1991) — prior herb and supplement guidance cited in the memorandum

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 425.0027
• Original supporting opinion: 425.0027 PDF
• Cited live authority: Annotation 425.0940
• Cited live authority: Annotation 425.0410

Original ruling text

State of California

Board of Equalization

Legal Division

425.0027

Memorandum
To:

From:

Subject:

Mr. Rick Kinoshita (MIC:87)
Settlement Section

Date:

July 18, 1995

John L. Waid
Tax Counsel
REDACTED TEXT

I am answering your memorandum to me dated May 18, 1995. You request our opinion as to the taxability of the taxpayer's sales of food supplements. You indicate that this taxpayer is under audit, but that a settlement offer has been received. You attached to your memorandum a copy of a draft memorandum that the auditor, Mr. Alfredo Ortiz of the REDACTED TEXT District, had proposed to send to me back in 1994, but, for unknown reasons, did not send. You indicate that the petitioner offers its customers nutritional counseling along with the sale of the food supplements. While it sells the supplements, it is not a licensed pharmacy. Mr. Ortiz' memorandum states that the head of the taxpayer is not an M.D., but "for prescription purposes, patients are 'rung up' through a doctor REDACTED TEXT who is a doctor of medicine." You indicate that the taxpayer sells dietary supplements such as vitamins, minerals, amino acids, herbs, and similar pills (hereinafter generally referred to as "vitamins"). The chart you attached to your memorandum shows that sale of herbal pills and dietary supplements make up about 73% of its sales. Mr. Ortiz indicates that the items at issue are sold on a 100% mark-up and that these sales supply the majority of the taxpayer's revenue. There appears to be no dispute that these items are excluded from the definition of food products under Regulation 1602(a) (5). Apparently, the proposed memorandum was shown to the taxpayer. You attached to your memorandum a copy of an undated letter entitled "To Whom It May Concern" on letterhead of Dr. REDACTED TEXT ("the letter"), signed by both Dr. REDACTED TEXT and the head of the taxpayer. A handwritten note on the letter says "Taxpayers response to proposed legal letter." The letter described the taxpayer's operation, in part, as follows: "Our operation took advantage of an existing corporation owned by REDACTED TEXT, Ph.D., however patient care was fully overseen by Dr. REDACTED TEXT. REDACTED TEXT worked under her. No one received any nutrients without paying sales tax unless Dr. REDACTED TEXT had seen them and prescribed nutritional supplementation care. "The nutrients prescribed were chosen on the basis of medical testing, blood, urine, etc. and on presentation of symptoms consistent with deficiency patterns well established in the literature. Patients were never given the same nutrients in the same amounts. A supplement chart was prepared for each patient and good only for a specified time period.

"Once nutrients were repleted the patients were of course recommended to stop use." (Emphasis in original.) The letter further states that, prior to the time Dr. REDACTED TEXT became associated with it, the taxpayer paid tax on all supplement sales. Although the letter does not say so, it leaves the impression that the taxpayer operated after Dr. REDACTED TEXT became associated with it essentially as it had before then. OPINION We have previously determined that vitamins can be considered medicines as defined by Regulation 1591(b) (l); if so, their sales to a physician or surgeon for the treatment of a human being are exempt from tax under Regulation 1591(a) (4). (Annot. 425.0940 (7/3/64).) We have also determined that herbs and herbal products may also qualify as medicines. (Annot. 425.0410 (12/31/91).) Under the regulation, however, the "medicine" must be used in the "diagnosis, cure, mitigation, treatment or prevention of disease." As a result, vitamins and herbs are deemed medicines only when they are sold for the purpose of treating a specific medical condition. Sales of vitamins merely to regulate vitamin intake would not be generally recognized as a medical purpose. (Reg. 1591(b) (1).) The same logic applies to the amino acid and the "similar" pills. You do not indicate the nature of the taxpayer other than to say that it offers its patrons "nutritional counseling," and its letter does not describe any diseases from which its patients were suffering. The letter does list certain diseases which are caused by vitamin deficiencies, but does not say that its clients were suffering from any of those diseases. The taxpayer is also not apparently operating as a hospital or any other medical facility. Therefore, we conclude that the taxpayer is not treating its clients for any kind of medical condition, i.e. one that a doctor would have to treat. We find especially significant the phrase in the letter regarding stopping supplement use once the clients' "nutrients were repleted." This appears more related to the correction of nutrition deficiencies than to treatment of a disease. Thus, we conclude, based on the facts as we have them here, that the vitamins do not qualify as "medicines" as that term is defined in Regulation 1591(b) (1). The letter refers, however, to "presentation of symptoms consistent with deficiency patterns well established in the literature." There thus may be an argument that some, at least, of the vitamins are in fact sold to treat specific diseases and thus qualify as medicines under the above authority. Even if they are considered medicines, though, their sales are not exempt unless made pursuant to the requirements of Regulation 1591(a) (1-4), subdivision (a) (5) is not applicable. You note that the taxpayer is not a registered pharmacy, so (1) is out. We have noted that the taxpayer does not appear to be a health facility as defined in the regulation, so the sales of these items would not qualify under (3). You state that the taxpayer sells the vitamins, and the letter indicates that it is an entity separate from Dr. REDACTED TEXT. It is most likely the taxpayer that is purchasing the items. They are thus not sold to a licensed physician or health facility so subdivision (4) does not apply. Could the vitamins be considered to be sold or furnished by Dr. REDACTED TEXT herself so that subdivision (a)(2) would apply? They are, as noted above, sold to the customers at retail by the taxpayer as the major source of its revenue. Although we have previously determined that sales by a doctor's professional corporation are the same as sales by the doctor personally, it is clear that Mr. REDACTED TEXT, and not Dr. REDACTED TEXT owns the taxpayer. We conclude that the taxpayer is selling the items at issue as the major portion of its business. Regulation 1591(a)(2) covers transfers of medicines from the hands of the doctor

directly to the patient. Sales by a health facility or pharmacy are covered by other subdivisions. Thus, we conclude that, since the taxpayer, and not Dr. REDACTED TEXT is furnishing the items at issue, such sales are not exempt under subdivision (2). Dr. REDACTED TEXT may possibly hand out or otherwise directly furnish some of the items at issue, probably mostly as samples, directly to some of the taxpayer's clients herself; if so, such transfers would be exempt from tax under subdivision (2). We would expect this amount to be small. Should this case be settled? The letter is quite right when it states that diseases such as scurvy and beri-beri are caused by vitamin deficiencies. Another is rickets. However, these diseases are exceedingly rare in the United States--so rare as to make it highly unlikely that the taxpayer's clients have them. Such diseases would have to be treated in a hospital anyway. The taxpayer may be able to demonstrate that it does sell some of its vitamins for the treatment of specific diseases. If so, under the annotations, the vitamins would be considered medicines in those instances. The medical exemption is two-pronged, however, and both the nature of the item as a medicine and the proper method of sale or use must be satisfied for the exemption to be applicable. We have concluded that the taxpayer and not Dr. REDACTED TEXT is buying and selling the vitamins, and the taxpayer is not a registered pharmacy. As a result, none of the conditions of Regulation 1591(a) are met. Based on the facts as we have them, the medical exemption does not appear to be available. The letter states that the taxpayer got an opinion from a private attorney before associating with Dr. REDACTED TEXT. This case thus appears to be one in which a taxpayer selling vitamins in taxable transactions associated itself with a medical doctor in order to try to exempt its sales from tax. The facts and the law seem to be pretty strong on the side of the Board. The record does not indicate settlement is appropriate. JLW:sr Cc:

REDACTED TEXT District Administrator