Can a pharmacy buy prescription bottles and labels tax-free — under the medical-materials exemption, or the container/label exemption?

Plain-English summary

A pharmacy asked whether the bottles and labels it buys — the ones it later uses to fill and dispense prescriptions — can be purchased tax-free. It pointed to two possible exemptions: the medical-materials exemption and the container/label exemption. The Department said the pharmacy gets there, but through the second door, not the first.

Door 1 — medical-materials exemption: NO. Colorado exempts certain medical materials when a "licensed provider" furnishes them to a patient as part of professional services and they leave the premises with the patient. But a "licensed provider" is someone with authority to prescribe drugs under title 12 of the Colorado Revised Statutes — and pharmacists do not have prescriptive authority over prescription drugs (the Department points to § 12-42.5-102(27) and confirms the state's regulator, DORA, doesn't list pharmacists among professionals authorized to prescribe). So a pharmacist isn't a licensed provider, and the medical-materials exemption doesn't reach a pharmacy's purchases.

Door 2 — container/label exemption: YES. Colorado exempts containers, labels, and shipping cases in two situations: (1) manufacturers/compounders that use them to enclose what they produce, and (2) retailers that use them as containers or labels for the items they sell. Whether a pharmacy's compounding work makes it a "manufacturer or compounder" is a technical question the Department won't decide in a GIL — but it doesn't need to, because pharmacies are unquestionably retailers (§ 39-26-102(8)). And a retailer can buy containers and labels tax-free when they're used to contain and dispense orders for the retailer's customers. So the pharmacy's prescription bottles and labels are exempt under the container/label exemption.

The useful lesson: the right exemption matters. The medical-materials exemption is keyed to who prescribes, and a pharmacy doesn't qualify — but the container/label exemption is keyed to what the item does (it holds and labels what the retailer sells), and a pharmacy fits that cleanly.

Because this is a General Information Letter, it's general guidance only and not binding on the Department.

What this means for you

Pharmacies

You can buy your prescription vials, bottles, and labels free of sales and use tax — but claim the container/label exemption (you're a retailer using them to dispense what you sell), not the medical-materials exemption. The medical-materials exemption requires a prescriber, and pharmacists don't have prescriptive authority. Give your container/label suppliers the right exemption documentation for a retailer's container purchases.

Other retailers and manufacturers

The container/label exemption is broad: retailers buying containers/labels to hold and label the goods they sell, and manufacturers/compounders using them to enclose what they produce, can both buy them tax-free. The exemption follows the function of the container, not the buyer's professional license.

Accountants and tax professionals

This GIL cleanly separates two exemptions that look adjacent. Medical materials (§ 39-26-717(1)(k)) hinges on a licensed provider with prescriptive authority (§ 39-26-717(3)); pharmacists fail that gate (§ 12-42.5-102(27)). The container/label exemption (§§ 39-26-102(20), 39-26-713(2)(e)(I); SR-9) hinges on the container's use by a manufacturer/compounder or a retailer, and pharmacies qualify as retailers (§ 39-26-102(8)) — so the Department never has to resolve the manufacturer/compounder question.

Common questions

Q: Are prescription bottles and labels taxable when a pharmacy buys them in Colorado? A: No. A pharmacy can buy them free of sales and use tax under the container/label exemption, because it's a retailer using them to contain and dispense the items it sells.

Q: Why can't a pharmacy use the medical-materials exemption? A: That exemption requires a "licensed provider" — someone with authority to prescribe drugs under title 12. Pharmacists don't have prescriptive authority over prescription drugs, so they don't qualify as licensed providers for that exemption.

Q: Does it matter whether a pharmacy counts as a "manufacturer or compounder"? A: Not for this question. The Department declined to decide that technical point because pharmacies are clearly retailers, and the retailer branch of the container/label exemption already covers the bottles and labels.

Q: Does this cover city sales tax?
A: No. The Department administers state and state-administered local taxes only. Colorado's self-collected home-rule cities set their own rules. Check with each home-rule city.

Citations and references

Statutes and rules:

• § 39-26-717(1)(k), C.R.S. (medical-materials exemption; requires a licensed provider)
• § 39-26-717(3), C.R.S. (licensed provider = authority to prescribe drugs under title 12); § 12-42.5-102(27), C.R.S. (pharmacists lack prescriptive authority)
• § 39-26-102(20), C.R.S.; § 39-26-713(2)(e)(I), C.R.S. (containers, labels, and shipping cases exempt for manufacturers/compounders and retailers)
• § 39-26-102(8), C.R.S. (definition of retailer; pharmacies are retailers)
• §§ 39-26-104, 39-26-204, C.R.S. (sales and use tax); 1 CCR 201-4, Rule 39-26-102.20; Colorado Special Regulation SR-9 (Containers)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-18-010.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-18-010
July 10, 2018
XXXXXX
Attn: XXXXXX
XXXXXX
XXXXXX
Re: Prescription Containers Purchased by Pharmacies Dear XXXXXX, You submitted a request for guidance on behalf of XXXXXX (“Pharmacy”) to determine the taxable nature of prescription containers that are purchased by a pharmacy. The Colorado Department of Revenue (“Department”) issues general information letters and private letter rulings. A general information letter provides a general overview of the relevant tax issues, but is not binding on the Department. A private letter ruling provides a specific determination for a specific set of facts, is binding on the Department but not on the taxpayer, and requires payment of a fee. For more information about general information letters and private letter rulings, please see Department Rule 1 CCR 201-1, 24-35-103.5. The Department treats this request as a general information letter. It is important to remember that general information letters, such as this one, are general discussions of tax law and are not binding on the Department. If Company would like the Department to issue a private letter ruling on the issue raised here, Company can submit a request and pay the fee in compliance with Department Rule 1 CCR 201-1, 24-35-103.5. Issue Does a pharmacy’s purchase of containers and labels, which are later included in sales to patients pursuant to a prescription, qualify for the medical materials exemption found in §39-26-717(1)(k), C.R.S., or the container exemption found in
§39-26-102(20)(a) and § 39-26-713(2)(e)(1), C.R.S.?

Discussion
Colorado levies sales and use tax on the sale of tangible personal property.1 Colorado and state-administered local tax jurisdictions exempt from sales and use taxes certain medical materials. For example, medical materials are exempt from taxation when a licensed provider, as part of their professional services, provides the medical materials to a patient and the materials leave the premises with the patient.2 A licensed provider qualified for this exemption is any person with an authority to prescribe drugs under title 12 of the Colorado Revised Statutes.3 Pharmacists do not have a prescriptive authority in regards to prescription drugs.4 Additionally, the Colorado Department of Regulatory Agencies does not list pharmacists as medical professionals authorized to prescribe medication.5 As such, a pharmacist does not qualify as a licensed provider and the medical materials exemption cannot be extended to purchases made by pharmacists. Certain containers and labels are also exempt from state and state-administered sales and use tax. Manufacturers and compounders that use a container, label or shipping case to enclose or encase the article, substance, or commodity they produce may purchase such containers, labels and shipping cases free of sales or use tax.6 Retailers may also purchase containers and labels free of sales or use tax when the container or label will be used by the retailer as a container or label for items that they sell.7 Determination of a pharmacy’s work as either manufacturing or compounding is a technical question and outside the scope of a general information letter. However, pharmacies are undoubtedly retailers.8 As such, a pharmacy’s purchase of containers and labels from a vendor will be exempt from sales or use tax when the containers and labels purchased are later used to contain and dispense an order for the pharmacy’s customers. Miscellaneous This letter represents the good faith opinion of Department personnel who are knowledgeable on state taxes issues. However, the Department does not make a specific determination here on any of the issues raised and the Department is not bound by this general information letter. 1 §§ 39-26-104 and 204 C.R.S. 2 § 39-26-717(1)(k), C.R.S. 3 § 39-26-717(3), C.R.S.

4 § 12-42.5-102(27), C.R.S.

5 www.colorado.gov/pacific/dora/Pharmacy_Prescriptive_Authority

6 §§ 39-26-102(20) and 713(2)(e)(I), C.R.S. See also Department Regulation 1 CCR 201-4: 39-26-

102.20.

7 Colorado Special Regulation SR-9 Containers.
8 § 39-26-102(8), C.R.S.

2

DR 4010A (06/11/14)

The Department administers state and state-administered local sales and use taxes. This letter does not address sales and use taxes administered by home-rule cities and home-rule counties. You may wish to consult with local governments, which administer their own sales or use taxes about the applicability of those taxes. Visit our web site at www.colorado.gov/tax for more information about state and local sales taxes. Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter will be made public within 60 days of the date of this letter. Please let me know in writing within that 60 day period whether you have any suggestions or concerns about this redacted letter.

Sincerely,

Office of Tax Policy
Colorado Department of Revenue

3

DR 4010A (06/11/14)