Were laboratory batch controls used to validate patient-test runs exempt from Florida sales tax as diagnostic chemical compounds?

Subject

Chemical Compounds and Test Kits

Plain-English summary

The described laboratory batch controls were exempt from sales tax as chemical compounds used in diagnosing or treating human disease, illness, or injury. Their different formulations used human serum, whole blood, urine, spinal fluid and other body fluids, or blood-gas material with added chemicals.

Laboratories ran a control sample with patient samples to verify equipment and procedure accuracy before reporting patient results. Because federal and Florida rules required that validation, the Department treated the controls as part of the diagnostic procedure.

What this means for you

The exemption depended on both product character and use. Florida classified the controls as chemical compounds and connected their required validation function directly to patient diagnosis or treatment.

Common questions

Did all five described control groups qualify? Yes. The response referred to the batch controls collectively.

Were the controls applied directly to a patient? No. They were added as separate samples to batches of patient samples.

Why did that indirect use still qualify? Results could not be reported unless the controls validated the testing run.

Citations and references

• Fla. Stat. §§ 212.08(2)(a) and 213.22
• Fla. Admin. Code rr. 12A-1.020(7) and 59A-7.011(1)(f)
• 42 C.F.R. § 493.1218

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-016

Original ruling text

Feb 21, 1994

Re: TAA 94A-016
Chemical Compounds and Test Kits
Section 212.08(2)(a), F.S.
Rule 12A-1.020(7), F.A.C.

Dear:

This is in response to your letters of December 17, 1993,
and January 11, 1994, in which you requested the issuance of a
technical assistance advisement for XXXX (hereinafter
"Taxpayer") concerning the taxable or exempt status of certain
"Batch Controls" sold to diagnostic laboratories in the state of
Florida.

Your letter of December 17, 1993, provides in part:

"[Taxpayer] is a publicly traded, for profit corporation,
incorporated in XXXXX and licensed to do business in
Florida. [Taxpayer] manufactures and sells in Florida a
product line called 'Batch Controls'. The batch controls
are of several types - immunoassay, diabetes urine metals,
TDM lyphochek, immunology liquid, hemoglobin glycated, drug
free serum, whole blood, urine quant, spinal fluid, urine
toxicology, hemoglobin A1 C, chemistry unassayed and blood
gas.

"These different controls all share the following
characteristics: they are used by trained laboratory
technicians employed in medical diagnostic laboratories and
hospitals. The controls are used to validate the test
results produced by laboratory diagnostic equipment, as
well as to validate the testing procedure used by the
diagnostic laboratory. These tests being validated by
these controls are performed pursuant to written
instructions from a medical practitioner and the tests are
performed on a blood, urine or tissue sample from the

patient. These testing procedures involve testing a number
of different patient samples in a batch. If there are, for
example, twenty-four patient samples in each batch, then a
twenty-fifth `sample' which contains only the control will
be added to the batch of samples from the twenty-four
patients and the batch of 25 samples will then be analyzed
by the testing equipment. The testing equipment will
individually analyze each sample in the batch and produce a
test result on each sample. If the test result from the
analysis of the control sample is within the perimeters of
acceptability for validating the test results, the other
samples from the various patients are judged to have been
correctly analyzed. If the test results are outside the
perimeters of acceptability, the testing equipment must be
recalibrated using a calibration solution and the patient
samples must be retested in a batch with one sample
containing only the control.

"While these batch controls are all used in a similar
manner, they are not the same in origin or content. Based
on their origin and content, they can be divided into the
following five groups:

"Group 1: immunoassay, TDM lyphocheck, immunology liquid,
drug free serum, and unassayed chemistry.

"Group 2: diabetes, whole blood and hemoglobin A1 C

"Group 3: urine metals, urine quant and urine toxicology.

"Group 4: spinal fluid

"Group 5: blood gas

"The controls in the first group are composed of
approximately 99% human blood serum which is purchased from
outside vendors then purified and processed. Finally, a
very very small quantity of chemicals is added to the serum
so that the control will produce a very specific profile
which must be read by the testing equipment.

"The second group of controls are composed of approximately
99% human whole blood which is purchased from outside
vendors. The whole blood is purified and processed and
finally, it has a very very small amount of chemicals added
to it so that the control will produce a very specific
profile which must be read by the testing equipment.

"The third group of controls are composed of approximately
99% human urine which is purchased from various vendors.
The urine is filtered and processed before having a very
very small quantity of chemicals added to it so that the
control will produce a very specific profile which must be
read by the testing equipment.

"The fourth group of controls consists of approximately 52%
human spinal fluid. The remainder of this control consists
of about 5% chemicals not of a human origin and about 43%
other human body fluids. The fifth group has less than 1%
content of human origin.

"... Accordingly, [Taxpayer] has billed Florida sales tax
to its customers consistently and remitted the sales tax to
the Florida Department of Revenue each month...."

"The reason I am writing you this letter is that some of
our customers refuse to reimburse us this sales tax because
they believe these batch controls are exempt from sales
tax. They believe these batch controls are exempt because
they are used as part of a procedure which has as its
object the diagnosis of a human disease or illness. The
confirmation of the test's validity by the batch control is
required by Florida state law before the test results may
be reported by the diagnostic laboratory to the prescribing
physician.

"Do these batch controls qualify for any exemption from
Florida sales tax?"

Your January 11, 1994, letter provides in pertinent part:

"I have located the current federal requirements and I am

enclosing them for your review. All the enclosed pages are
from the Federal Register. These pages in the Federal
Register are the ones in which the public was notified of
the regulations relating to the implementation of the
Clinical Improvement Amendments of 1988 (CLIA).

"The relevant portions of these regulations are effective
from January 1, 1992 and these regulations subject
accredited and non-credited hospitals as well as
independent and physician office laboratories to the rules
of CLIA. All of our customers in Florida with the
exception of some resale vendors are one of these four
types of customers.

"As you can see from Section 493.1218 on page 7166
attached, each user must use either calibration materials
or control materials in connection with each run of patient
samples....

"Our question is: Does the use of our batch control by a
hospital, a clinical testing laboratory or a physician in
Florida as a requirement of CLIA qualify these batch
controls for any exemption from Florida sales tax?"

Applicable Authority

Section 212.08(2)(a), F.S., provides in part:

"(2) EXEMPTIONS; MEDICAL."(a) There shall be exempt from the tax imposed by this
chapter any product, supply, or medicine dispensed in a
retail establishment by a pharmacist licensed by the state,
according to an individual prescription or prescriptions
written by a prescriber authorized by law to prescribe
medicinal drugs; hypodermic needles; hypodermic syringes;
chemical compounds and test kits used for the diagnosis or
treatment of human disease, illness, or injury; and common
household remedies recommended and generally sold for
internal or external use in the cure, mitigation,
treatment, or prevention of illness or disease in human
beings, but not including cosmetics or toilet articles,

notwithstanding the presence of medicinal ingredients
therein, according to a list prescribed and approved by the
Department of Health and Rehabilitative Services, which
list shall be certified to the Department of Revenue from
time to time and included in the rules promulgated by the
Department of Revenue. There shall also be exempt from the
tax imposed by this chapter artificial eyes and limbs;
orthopedic shoes; prescription eyeglasses and items
incidental thereto or which become a part thereof;
dentures; hearing aids; crutches; prosthetic and orthopedic
appliances; and funerals...." (Emphasis Supplied)

Rule 12A-1.020(7)(a) and (b), F.A.C., provides:

"(7)(a) The chemical compounds and test kits specified in
this paragraph which are used for the diagnosis or
treatment of disease, illness or injury are specifically
exempt. Examples of chemical compounds and test kits
include, but are not limited to the following: Albustix
reagent strips and tablets; blood pressure units;
cholesterol tests; clinistix reagent strips; clinitest
tablets; combistix reagent strips; dextrostix, reagent
strips; dextrotest kit and refills; diabetic test kits;
galatest; ictotest reagent tablets; sugar test tablets for
diabetics; thermometers for human use; tuberculin patch
test; urine testing kits; urograph test.
"(b) Likewise exempt is any chemical compound and test kit
used for the diagnosis or treatment of disease, illness, or
injury, ordered and dispensed in a retail establishment by
a pharmacist licensed by the State of Florida, according to
an individual prescription or prescriptions written by a
duly licensed practitioner authorized by the laws of the
state to prescribe medicinal drugs."

Department Response

Section 212.08(2)(a), F,S., exempts from tax the use of
chemical compounds which are used for the diagnosis or treatment
of human disease, illness, or injury.

Webster's Ninth New Collegiate Dictionary defines

"chemical" as "a substance obtained by a chemical process or
used for producing a chemical effect." The dictionary states
the word "compound" means "composed of... separate elements,
ingredients, or parts."

It seems reasonable to conclude that a chemical compound is
a mixture of parts or a substance obtained by chemical process
for the production of a chemical effect. Therefore, the batch
controls described in your letter of December 17, 1993, fit the
description of "chemical compounds" under section 212.08(2)(a),
F.S.

A Federal Regulation found in s. 493.1218, 42CFR, requires
that testing laboratories that report patient specific results
must include at least two samples of either calibration
materials or control materials not less frequently than once
each run of patient samples in order to assess the accuracy and
precision of patient test results.

Rule 59A-7.011(1)(f), F.A.C., states that control samples
and standards shall be assessed regularly in order to validate
the test results for patient samples and monitor the reagents,
the operating characteristics of the instrument, and the
accuracy of volumetric equipment. Patient values must be
reported only if they are part of an "in-control" group.

Since the Federal regulations and the Florida regulations
both require that a batch of patient test results must be
validated by the use of a control sample, such as the ones in
question, before the test results can be reported to the
prescribing physician, these control samples are part of the
procedure which is used in the diagnosis or treatment of human
disease, illness, or injury. As such, the control samples are
exempt from tax as chemical compounds used for that purpose
under section 212.08(2)(a), F.S.

This response constitutes a Technical Assistance Advisement
under s. 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 s. 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.

You are further advised that this response and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response.

Sincerely,

Richard S. Harrod
Technical Assistant

RSH/h
Control No. 12650