Were reagents, calibrators, and controls sold for testing patient specimens exempt from Florida sales tax as medical chemical compounds?

Plain-English summary

The Florida Department of Revenue concluded that a manufacturer's sales of reagents, calibrators, and controls to medical practitioners and testing laboratories were exempt from sales tax when used to test patient specimens.

Because the statute did not define "chemical compound," the Department used ordinary dictionary meanings. A reagent participated in chemical reactions or biological processes and therefore fit that term. Controls were reagents used for quality control, while calibrators contained reagents used to calibrate a test.

The compounds also had to be used to diagnose or treat human disease, illness, or injury. Federal and Florida laboratory requirements made calibration material or control samples necessary to validate patient results before reporting them. That required role connected the products to diagnosis and brought the sales within section 212.08(2)(a).

The taxpayer believed it had previously collected tax in error. The ruling said it had to refund tax to customers before seeking its own refund on Form DR-26 and provide documentation showing both the exemption and the customer refunds. The filing periods quoted in this 1997 advisement are historical and should be checked against current law.

What this means for you

Medical-test manufacturers

The exemption covered the described reagents, calibrators, and controls when sold for use in testing patient blood, urine, or tissue specimens. Their function in the diagnostic procedure mattered.

Laboratories and medical practitioners

The Department treated required calibration and quality-control materials as part of the diagnosis process, even though the test systems and calibrator sets were sold separately.

Accountants and tax professionals

For tax collected in error, distinguish the product-exemption question from the refund procedure. This ruling required repayment to customers before the seller applied to recover remitted tax.

Common questions

Q: Why did reagents qualify as chemical compounds?
A: The Department said a reagent is a substance that participates in chemical reactions or biological processes and fits the ordinary meaning of a chemical compound.

Q: Why were calibrators and controls covered?
A: They contained or functioned as reagents and were required to validate patient test results before those results could be reported.

Q: Did the exemption depend on patient testing?
A: Yes. The conclusion addressed sales to medical practitioners and testing laboratories for use in testing patient specimens.

Q: Could the seller immediately claim a refund of tax it had collected?
A: No. The ruling required the seller first to refund customers, then file Form DR-26 with supporting documentation.

Citations and references

• Fla. Stat. §§ 212.08(2)(a), 213.22, and 215.26(2)
• Fla. Admin. Code rr. 12A-1.020(7) and 59A-7.029(7)
• 42 C.F.R. § 493.1218 (as cited in the 1997 advisement)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 97A-006

Original ruling text

SUMMARY

The term "chemical compound" is not defined for purposes of
the exemption from tax for this item under section
212.08(2)(a), F.S., so the plain and ordinary meaning of
the words must be considered. The term "chemical" is
defined as "a substance...obtained by a chemical process,
prepared for use in chemical manufacturing or used for
producing a chemical effect." Webster's Third New
International Dictionary of the English Language,
Unabridged (hereafter referred to as "Webster's"), page

384. The term "compound" is defined as "composed of or
     produced by the union of several elements, ingredients,
     parts or things." Webster's at page 466. A chemical
     compound would be a mixture or product, comprised of
     various components and prepared via a chemical process,
     having as a purpose the production of a chemical effect. A
     "reagent" is "a substance used for various purposes (as in
     detecting, examining or measuring other substances...)
     because it takes part in one or more chemical reactions or
     biological processes." Webster's at page 1890. As such, a
     reagent would be encompassed by the term "chemical
     compound." Since Federal regulations and Florida
     regulations both require that a batch of patient test
     results must be validated by the use of calibration
     material or a control sample before the test results can be
     reported to the prescribing physician, calibrators and
     controls are a necessary part of the procedure which is
     used in the diagnosis or treatment of human disease,
     illness, or injury. As such the sale of reagents,
     calibrators, and controls to medical practitioners and
     testing laboratories in this state for use in testing
     patient specimens are exempt from tax as chemical compounds
     used for the diagnosis of human disease pursuant to section
     212.08(2)(a), F.S.

Jan 23, 1997

Re: TAA 97A-006
XXX (Hereafter "Taxpayer")
Chemical Compounds and Test Kits
Sections 212.08(2)(a), 215.26(2), F.S.
Rule 12A-1.020(7), F.A.C.

Dear :

This is in response to your letter of December 13, 1996, in
which you requested the issuance of a technical assistance
advisement on behalf of your client XXX (hereinafter
"Taxpayer"), regarding the taxable or exempt status of its sales
of reagents, calibrators, and controls, to medical practitioners
and testing laboratories in the state of Florida. Your client
believes it has been erroneously collecting and remitting sales
tax on its sales in this state, and wishes to file for a refund
of such taxes.

You provided our office with an Analyte Application Manual,
which describes each Automated Immunoassay System sold by your
client together with the materials provided and needed to
perform the various tests. A review of the manual clarifies
that each System (test kit) is sold separately from the sale of
calibrator sets and other materials which are used to perform
the analysis of the samples.

Your letter provides in pertinent part:

[Taxpayer] manufacturers and sells in Florida a variety of
Automated Immunoassay Systems (AIA Systems) used for
diagnosing and treating human disease, illness and injury.
These AIA Systems are of several types and include several
types of tests: (1) Thyroid Hormones: TSH, T4, T-Uptake,
T3, and Free T4; (2) Tumor Markers: AFP, PSA, and CEA,...;
(3) Anemia Markers: Ferritin; (4) Reproductive Hormones:
HCG(intact), FSH, Prolactin, Progestrone, Total Beta HCG,
LH, and Estradiol; and (5) Additional Analysis: CKMB,
Cortisol, C-Peptide, Beta-2 Microglobulin, Insulin,
PAP,..., Human Growth Hormone, and IgE.

[Taxpayer] sells reagents, calibrators and controls to

accredited and non-accredited hospitals as well as
independent and physician office laboratories.
[Taxpayer's] customers are governed by regulations
implemented by the Clinical Laboratory Improvement
Amendments of 1988 (CLIA) which became effective January 1,
1992. The relevant portions of the regulations relating to
the implementation of the regulations of CLIA are attached
for your review.

These reagents, calibrators and controls are chemical
compounds and test kits that [Taxpayer's] customers use for
diagnosing and treating human disease, illness and injury. More
specifically, reagents, calibrators and controls sold by
[Taxpayer] are used by the customers to test human blood, urine
or tissue samples from the patient to determine if the person
has a disease, illness or injury.

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, chemical
compounds and test kits which are used for the diagnosis or
treatment of human disease, illness, or injury.

The term "chemical compound" is not defined for purposes of
this statutory exemption, so the plain and ordinary meaning of
the words must be considered. The term "chemical" is defined as
"a substance... obtained by a chemical process, prepared for use
in chemical manufacturing or used for producing a chemical
effect." Webster's Third New International Dictionary of the

English Language, Unabridged (hereafter referred to as
"Webster's"), page 384. The term "compound" is defined as
"composed of or produced by the union of several elements,
ingredients, parts or things." Webster's at page 466. A
chemical compound would be a mixture or product, comprised of
various components and prepared via a chemical process, having
as a purpose the production of a chemical effect.

A "reagent" is "a substance used for various purposes (as
in detecting, examining or measuring other substances...)
because it takes part in one or more chemical reactions or
biological processes." Webster's at page 1890. As such, a
reagent would be encompassed by the term "chemical compound."

Controls are reagents which are used for quality control of
the particular test being done. Calibrators contain reagents
which are used to calibrate the particular test. Therefore, the
controls and calibrators in question fit the description of
"chemical compounds " under s. 212.08(2)(a), F.S.

It must be determined whether these reagents or chemical
compounds, are used for the diagnosis or treatment of human
disease, illness, or injury. Federal Regulation section
493.1218, requires that, for quantative testing, 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-7.029(7), F.A.C., states that control samples must
be included at least once with each run of patient specimens;
must be tested in the same manner as patient specimens; must be
processed through each step of patient testing; and must meet
the laboratory's criteria for acceptability prior to reporting
patient test results.

Since the Federal regulations and the Florida regulations
both require that a batch of patient test results must be
validated by the use of calibration material or a control
sample, such as the ones in question, before the test results

can be reported to the prescribing physician, these calibrators
and controls are a necessary part of the procedure which is used
in the diagnosis or treatment of human disease, illness, or
injury. As such, your client's sales of reagents, calibrators,
and controls to medical practitioners and testing laboratories
in this state for use in testing patient specimens are exempt
from tax as chemical compounds used for the diagnosis of human
disease pursuant to section 212.08(2)(a), F.S.

Concerning applications for refunds of sales tax, section
215.26(2), F.S., provides that they must be filed with the
Comptroller within 3 years after the right to the refund shall
have accrued, except applications for refunds of sales tax which
was paid after September 30, 1994, must be filed with the
Comptroller within 5 years after the date the tax is paid. If
your client has sold chemical compounds and test kits which are
exempt from tax, and collected tax thereon, it must first refund
the tax to its customers before filing an application for refund
with the Department on form DR-26. Your client must provide
documentation with its refund application to show that the items
are exempt from tax and that the tax was refunded to its
customers.

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
Senior Tax Specialist
Tax Policy and Dispute Resolution

RSH/h
Control No. 27289