Which production and packaging materials could a prescription-drug manufacturer buy without California sales or use tax?

Plain-English summary

A redacted manufacturer produced two prescription drugs through cell growth, fermentation, purification, formulation, vialling, and cold shipment. It asked how California sales and use tax applied to materials used in production and packaging.

Serum, yeast extracts, and nutrients used for inoculation, cell growth, and fermentation qualified under Regulation 1525(b). Although only minute and invisible traces remained, those materials became part of the finished drugs and were not taxable to the manufacturer.

Materials used and consumed only in manufacturing were taxable under Regulation 1525(a). The letter identified buffers, separating agents, cleaning agents, agents that killed or detached cells, pH-control agents, and anti-foam agents as examples.

Containers, packaging materials, and labels were not taxable when purchased and were not taxable when sold with the nontaxable drugs under Regulation 1589. Shipping tags and advertising inserts remained taxable.

Citations and references

• California Revenue and Taxation Code section 6369 (as cited)
• California Sales and Use Tax Regulations 1525 and 1589 (as cited)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/440-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/440-1890.pdf

Original ruling text

440.1890

STATE OF CALIFORNIA

(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-2641

MEMBER
First District
BRAD SHERMAN
Second District, Los Angeles

February 16, 1993
REDACTED TEXT
Re: SR REDACTED TEXT

ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Dear REDACTED TEXT:
This is in response to the questions which we discussed when we met on December 1, 1992, as well as a response to the letter from REDACTED TEXT, dated December 1, 1992. We understand that REDACTED TEXT manufactures two products marketed under the trade names PRODUCT A and PRODUCT B. Both products are prescription drugs, exempt from the sales and use taxes under Revenue and Taxation Code section 6369. You requested a written opinion as to whether certain materials used in the manufacture of these products are exempt under Regulation 1525(b) as being incorporated into the manufactured product. You also requested our opinion as to whether certain packaging and shipping materials are exempt under Regulation 1589(b)(1)(A). PRODUCT A PRODUCT A is a recombinant form of the naturally occurring protein REDACTED TEXT. In the human body, REDACTED TEXT is produced primarily REDACTED TEXT. PRODUCT A is used to treat anemia REDACTED TEXT. PRODUCT A is produced using a series of production processes:

1. A small vial of genetically engineered REDACTED TEXT cells is thawed and
   inoculated with the gene for human REDACTED TEXT. In approximately five weeks, these cells are grown to a sizable volume, and contained in a large stainless steel fermentor.
2. Cell cultures are produced by the use of roller bottles (to continue the cell growth
   process) and diafiltration whereby REDACTED TEXT is collected after the cells secrete it into the nutrient media.
3. The collected REDACTED TEXT is frozen in a quarantine freezer, tested to establish
   the protein quality, and purified. The purification process uses the electrical charge, size, weight and other properties of the REDACTED TEXT molecule to separate it from other materials.
4. In the last phase, it is formulated into various dosage strengths, vialled for shipment,
   and packed in blue ice, foam and styrofoam.

REDACTED TEXT

-2-

February 16, 1993
440.1890

PRODUCT B
PRODUCT B is a recombinant form of human REDACTED TEXT which stimulates the production of REDACTED TEXT. If a person's REDACTED TEXT level is too low, a PRODUCT B injection can REDACTED TEXT. PRODUCT B is produced from REDACTED TEXT cells which are genetically engineered to produce REDACTED TEXT. The process is similar to the production of PRODUCT A. It begins with the fermentation of REDACTED TEXT. The cells are grown, fermented and purified in bulk form, and then formulated into prescribed concentrations and vialled. Use of Tangible Personal Property The manufacturing processes described above involve the use of tangible personal property, some of which is physically incorporated into the finished products, and some of which is only used and consumed in the process. The lists of products, as contained in your computer output includes serum, yeast extracts, and nutrients used for inoculation, cell growth and fermentation processes which form the bulk proteins from which PRODUCT A and PRODUCT B are formulated. Although only minute traces of these materials are found in the finished product and are not visible, they do become a part of the finished product, for purposes of Regulation 1525(b), and are not subject to tax. Also in your list are materials which are not for the purpose of incorporation into the final product, but are for use in the manufacturing process and are consumed during that process. These would include items such as buffers, separating agents, cleaning agents, agents that kill cells or detach the cells from a flask, ph control agents, and anti-foam agents. These materials are taxable to you, as the consumer, when you purchase them, pursuant to Regulation 1525(a). The third category concerns containers, packaging material, and labels. Under Regulation 1589(b)(1)(A), such items are not taxable when you purchase them, and under Regulation 1589(b)(1)(C), are not taxable when sold by you if sold with nontaxable contents. Tax does apply to shipping tags and advertising inserts, under Regulation 1589(c). Copies of each of these regulations are enclosed for your files. If you have further questions, please contact me. Sincerely yours, Donald L. Fillman Tax Counsel DLF:wk bc: REDACTED TEXT District Administrator