Could a nonprofit health-care organization buy laboratory supplies tax-free when testing for an affiliated for-profit services company?

Plain-English summary

The nonprofit health-care organization operated a Florida laboratory as part of its medical treatment, education, and research work. An affiliated for-profit company marketed reference-lab services and contracted with the nonprofit to perform testing for local clinics.

Florida ruled that the nonprofit could use its Consumer's Certificate of Exemption to buy the laboratory supplies. The testing remained within its customary nonprofit medical activities even though the affiliate resold the services for profit, and the nonprofit charged a reasonable wholesale rate.

The nonprofit consumed the supplies while providing nontaxable professional medical services. The affiliate and clinics did not purchase or take title to consequential tangible personal property. The exemption continued only while the organization maintained its Section 501(c)(3) status and used the purchases for its authorized exempt purposes.

What this means for you

Work for a for-profit affiliate did not automatically taint the nonprofit purchase exemption. The activity's medical purpose, pricing, use of the nonprofit's own funds and certificate, and absence of a material property transfer all mattered.

Common questions

Were the laboratory supplies exempt? Yes, on the stated facts.

Did the affiliate's for-profit status defeat the exemption? No.

What ongoing conditions applied? The organization had to retain Section 501(c)(3) status, a valid Florida exemption certificate, and use the property in customary nonprofit activities.

Citations and references

• Fla. Stat. § 212.08(7)(p), (v) and Fla. Admin. Code r. 12A-1.038, as discussed in the advisement.

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09A-020

Original ruling text

SUMMARY
QUESTION:
Is the portion of tangible personal property purchased or used by Taxpayer in performing testing
and diagnostic services for Services exempt from Florida sales and use tax?
ANSWER:
Taxpayer maintains a Section 501(c)(3), I.R.C., determination. Taxpayer’s customary activity is
medical treatment, research, and education. Taxpayer has and maintains a Florida Consumer’s
Certificate of Exemption under Rule 12A-1.038, F.A.C. Therefore, tangible personal property
purchased by Taxpayer with the Certificate of Exemption and used for medical treatment,
research, and education is exempt from sales tax.
Taxpayer consumes the tangible personal property in the process of providing nontaxable
professional medical services to Services, and Services does not purchase or take title to
consequential tangible personal property. Therefore, Taxpayer may purchase the items tax
exempt for its customary activities using the Certificate of Exemption as long as it maintains its
Section 501(c)(3), I.R.C., designation.
April 16, 2009
XXX
Re:

Technical Assistance Advisement 09A-020
Manufacture and Export
Sales and Use Tax
Sections 212.02, 212.05, 212.06, 608.471, Florida Statutes (F.S.)
Rules 12A-1.0015, 12A-1.051, Florida Administrative Code (F.A.C.)
XXX (“Taxpayer”)
FEIN: XXX
XXX ("Services")
FEIN: XXX

Dear XXX:
This is in response to your letter dated March 5, 2009, requesting this Department’s issuance of a
Technical Assistance Advisement (TAA) pursuant to Section 213.22, F.S., and Rule Chapter 1211, F.A.C., regarding the above referenced matter and parties. An examination of your letter has
established that you have complied with the statutory and regulatory requirements for issuance
of a TAA. Therefore, the Department is hereby granting your request for a TAA.

FACTS

Letter of Technical Advice
Page 2 of 6
Your letter provides in part:
Facts:
[Taxpayer] is a health care organization that provides medical treatment to the sick and
infirm. In some instances, these services are provided on a discounted or charitable basis.
The corporation's patient care activities also support the medical education and research
programs of the organization as well as those of other health care providers and
organizations.
[Taxpayer] is a Florida nonprofit corporation and is exempt from federal income tax
under Section 501(c)(3) of the Internal Revenue Code ("IRC'). The organization's patient
care activities include a laboratory located in Florida. This laboratory functions to
provide
testing and diagnostic services to the organization's patients. An affiliated for-profit
entity [“Services”] contracts with [Taxpayer] to provide testing and diagnostic services.
These services are commonly called "reference lab" services. [Services] markets these
services to affiliated entities as well as other health care providers.
[Taxpayer] is compensated for these testing activities through intercompany charges. The
fees charged by [Services] to its clients are set at retail rates and generate profits for
[Services].
[Taxpayer] does not market itself as a reference lab business. [Taxpayer] charges
[Services] a reasonable wholesale rate for these services. . . . These services do not
provide any material tangible personal property to the customer.
During our phone conversation on April 2, 2009, you provided some clarification on the
transaction. Services contracts with local clinics for their lab testing and diagnostic needs.
Services then contracts with Taxpayer to fulfill the needs of the local clinics. Services does not
currently operate an independent lab in XXX.
You provided a November 11, 2001, letter from the Internal Revenue Service documenting
Taxpayer’s Section 501(c)(3), I.R.C., status. Taxpayer currently holds a valid Consumer
Certificate of Exemption (Form DR-14) issued by the Department.
ISSUE
Is the portion of tangible personal property purchased or used by Taxpayer in performing testing
and diagnostic services for Services exempt from Florida sales and use tax?

ADVISEMENT REQUESTED

Letter of Technical Advice
Page 3 of 6

Your letter provides in part:
[Taxpayer], which is organized for the purpose of practicing medicine, performing
medical research, and providing medical education, is exempt from federal income tax
under Section 501(c)(3) of the IRC. In addition, [Taxpayer] has obtained a Consumer's
Exemption Certificate from the Department and provides copies of the document to
selling dealers. Further, purchases are paid from the organization's own funds. When
rendering its services, [Taxpayer] is not providing any material tangible personal
property to its customers and as a result, such services are exempt from taxation under
Florida Statue Section 212.08(7)(v).
However, the question remains whether [Taxpayer] may exempt its purchases of supplies
that are consumed in performing laboratory testing services for [Services]. In other
words, are the testing services performed by [Taxpayer] for [Services] deemed to be
within the organization's customary nonprofit activities? If so, the supplies purchased by
[Taxpayer] to perform these activities are exempt from tax. If not, these supplies are
taxable.
The laboratory testing activities performed by [Taxpayer] for [Services] are wholly
consistent with the testing and diagnostic services provided by [Taxpayer] to its patients.
Whether it be the patients of [Taxpayer] or the patients that ultimately use the testing
results provided by [Services], the purpose of the testing activity is the same, the
diagnosis and treatment of the sick and infirm. Consequently, it follows that to the extent
the activity is deemed to further the exempt purposes of [Taxpayer] when performed for
the organization's patients, the activity is no less exempt when performed for nonpatients. The charitable intent of [Taxpayer] does not distinguish between patients and
non-patients. It only requires service to humanity in its broadest sense (e.g., care of the
sick and infirm).
If any distinction exists, it is that [Services] is a for-profit entity that resells the results of
the services. Accordingly, the issue is whether the profit earned by [Services] for the
testing services somehow taints the exempt purposes of [Taxpayer]. . . .
First, the stated purpose of [Taxpayer] is to be of service to humanity and not the material
enrichment of any individual. The testing activities performed for [Services] are for the
sole purpose of diagnosing and treating the sick. Moreover, these intercompany services
are priced by [Taxpayer] at reasonable wholesale rates. Consequently, [Taxpayer] is not
unduly enriched by providing these services to [Services] nor is it subsidizing the
operations of [Services].

The testing services performed for [Services] fall within the customary nonprofit
activities of [Taxpayer]. In particular, the services are performed for the diagnosis and
treatment of the sick and infirm. The fees charged for the services are set at reasonable
wholesale rates. Moreover, by providing this testing, [Taxpayer] increases the availability

Letter of Technical Advice
Page 4 of 6
of similar tests for its patients and the costs per test decrease due to the volume of testing
being performed. Similarly, this testing benefits local health care providers by decreasing
the time required for patient diagnosis. Because the testing activities support
[Taxpayer’s] customary nonprofit activities, the purchase of tangible personal property
used to perform these services is exempt from tax under Statute Section 212.08(7)(p).
Applicable Authority
Section 212.08(7)(p), F.S., provides:
Section 501(c)(3) organizations.--Also exempt from the tax imposed by this chapter are
sales or leases to organizations determined by the Internal Revenue Service to be
currently exempt from federal income tax pursuant to s. 501(c)(3) of the Internal
Revenue Code of 1986, as amended, when such leases or purchases are used in carrying
on their customary nonprofit activities.
Rule 12A-1.038, F.A.C., provides in part:
(1) It is the specific legislative intent that each and every sale, admission, use, storage,
consumption, or rental is taxable, unless such sale, admission, use, storage, consumption,
or rental is specifically exempt. The exempt nature of the transaction must be established
by the selling dealer. . . .
(2) HOW TO OBTAIN A CONSUMER’S CERTIFICATE OF EXEMPTION.
(a)1. Any organization determined by the Internal Revenue Service to be currently
exempt from federal income tax pursuant to s. 501(c)(3) of the Internal Revenue Code of
1986, as amended, . . . desiring to qualify for these exemptions must obtain a Consumer’s
Certificate of Exemption. Any limited liability company determined by the Internal
Revenue Service to be currently exempt from federal income tax pursuant to s. 501(c)(3)
of the Internal Revenue Code of 1986, as amended, must obtain a separate Consumer’s
Certificate of Exemption, even though its parent corporation may currently hold a
Consumer’s Certificate of Exemption.

(3) SALES MADE TO EXEMPT ENTITIES OTHER THAN GOVERNMENTAL UNITS.
(a) An entity that holds a valid Consumer’s Certificate of Exemption (Form DR-14)
issued by the Florida Department of Revenue may extend a copy of its certificate to the
selling dealer to purchase or rent taxable property, admissions, or services used for its
authorized tax exempt purpose in lieu of paying sales tax. Purchases of property,
admissions, or services used for the entity’s authorized tax exempt purposes must be
made with the purchasing entity’s funds and may not be made with personal funds of the
purchasing entity’s authorized representative. . . .

Letter of Technical Advice
Page 5 of 6
(b) To make purchases or rentals for the purposes of resale, the entity must be registered as a
sales tax dealer and issue the selling dealer an Annual Resale Certificate (Form DR-13), as
provided in Rule 12A-1.039, F.A.C.
Response
In Florida, the sale of tangible personal property is subject to tax. See Section 212.05, F.S. The
term “sale” includes a license to use tangible personal property. Service only transactions,
except those authorized for taxation by Chapter 212, F.S., are generally not subject to tax. When
tangible personal property and services are a part of the same sale, the entire sales price is
subject to tax, unless the tangible personal property is an inconsequential part of a professional
service. See Sections 212.02(16) and 212.08(7)(v), F.S.
Section 212.08(7)(p), F.S., provides a specific sales tax exemption for sales or leases to
organizations determined to fall under the designation of Section 501(c)(3), I.R.C. These
organizations’ purchases of tangible personal property are exempt when the property is used in
the organization’s customary nonprofit activities. Many courts have held that tax exemptions are
to be narrowly construed, and doubtful language should be construed against the taxpayer.
Sebring Airport Auth. v. McIntyre, 642 So.2d 1072, 1073 (Fla. 1994) (citing Volusia County v.
Daytona Beach Racing and Recreational Facilities District, 341 So.2d 498, 502 (Fla. 1976) and
Williams v. Jones, 326 So.2d 425, 435 (Fla.1975)); United States Gypsum Co. v. Green, 110
So.2d 409, 413 (Fla. 1959).
Here, Taxpayer maintains a Section 501(c)(3), I.R.C., determination. Taxpayer’s customary
activity is medical treatment, research, and education. Taxpayer has and maintains a Florida
Consumer’s Certificate of Exemption under Rule 12A-1.038, F.A.C. Therefore, tangible
personal property purchased by Taxpayer with the Certificate of Exemption and used for medical
treatment, research, and education is exempt from sales tax.
Taxpayer sells medical services to Services, which is a for profit entity. You ask whether
Taxpayer may purchase tangible personal property tax exempt if the property is used for services
rendered to Services.
Here, Taxpayer consumes the tangible personal property in the process of providing nontaxable
professional medical services to Services, and Services does not purchase or take title to
consequential tangible personal property. Therefore, Taxpayer may purchase the items tax
exempt for its customary activities using the Certificate of Exemption as long as it maintains its
Section 501(c)(3), I.R.C., designation.
This response constitutes a Technical Assistance Advisement under Section 213.22, F.S., which
is binding on the Department only under the facts and circumstances described in the request for
this advice as specified in Section 213.22, F.S. Our response is predicated on those facts and the
specific situation summarized above. You are advised that subsequent statutory or administrative
rule changes, or judicial interpretations of the statutes or rules, upon which this advice is based,
may subject similar future transactions to a different treatment than expressed in this response.

Letter of Technical Advice
Page 6 of 6
You are further advised that this response, your request and related backup documents are public
records under Chapter 119, F.S., and are subject to disclosure to the public under the conditions
of s. 213.22, F.S. Confidential information must be deleted before public disclosure. In an effort
to protect confidentiality, we request you provide the undersigned with an edited copy of your
request for Technical Assistance Advisement, the backup material and this response, deleting
names, addresses and any other details which might lead to identification of the taxpayer. Your
response should be received by the Department within 15 days of the date of this letter.
Sincerely,

H. French Brown, IV
Attorney
Technical Assistance and Dispute Resolution
(850) 922-4708
Record ID: 61365