When were a charitable nonprofit hospital's sales of medicines, skin-care, and grooming products to patients exempt?

Plain-English summary

A university operating a hospital and health clinics under one Illinois E-number sold physician- or esthetician-recommended chemical peels, creams, cleansers, injections, anti-aging kits, and other beauty products to patients. It asked about organizational exemption and the lower drug rate.

IDOR could not classify each product without more facts and its label. A medicine or drug had to make a written medicinal claim on the label about curing or treating disease, illness, injury, or pain or mitigating symptoms. Nonprescription grooming and hygiene products—including soaps, cleaning solutions, shampoo, toothpaste, mouthwash, antiperspirants, and sunscreen—remained at the 6.25% general State rate described in 2015 regardless of medicinal claims, unless available only by prescription.

An exclusively charitable nonprofit hospital with a valid E-number did not owe Retailers' Occupation Tax on medicine sold to patients in connection with hospital service. The exemption also covered grooming and hygiene products supplied to a person while a patient in the hospital or clinic in furtherance of care.

After a patient left, a later purchase of a product that did not meet the drug definition was taxable. The letter contrasted those sales with drugs sold in furtherance of hospital service and with necessary patient-care products.

What this means for you

The organizational exemption did not make every retail item tax-free. Product labels, drug-versus-grooming classification, the customer's current patient status, and the connection to hospital or clinic care all mattered.

Common questions

Did IDOR classify every listed beauty product? No.

Were grooming products used in current patient care exempt? Yes, for the qualifying charitable hospital described.

What about a former patient returning to buy non-drug products? Those sales were taxable.

Citations and references

• 86 Ill. Adm. Code 130.311.
• 86 Ill. Adm. Code 130.2005(a)(2)(A) and 130.2005(b)(1)(A).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0023-gil.pdf

Original ruling text

ST 15-0023-GIL 04/24/2015 EXEMPT ORGANIZATIONS
Nonprofit hospitals which qualify as exclusively charitable institutions are not
taxable when selling food, medicine or grooming and hygiene products to their
patients in connection with the furnishing of hospital service to them. See 86 Ill.
Adm. Code 130.2005(b)(1)(a) and 130.2005(a)(2)(A).

April 24, 2015

Dear XXXX:
This letter is in response to your letter dated December 19, 2014, in which you
request information. The Department issues two types of letter rulings. Private Letter
Rulings (“PLRs”) are issued by the Department in response to specific taxpayer
inquiries concerning the application of a tax statute or rule to a particular fact situation.
A PLR is binding on the Department, but only as to the taxpayer who is the subject of
the request for ruling and only to the extent the facts recited in the PLR are correct and
complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General
Information Letter (“GIL”) is to direct taxpayers to Department regulations or other
sources of information regarding the topic about which they have inquired. A GIL is not
a statement of Department policy and is not binding on the Department. See 2 Ill. Adm.
Code 1200.120. You may access our website at www.tax.illinois.gov to review
regulations, letter rulings and other types of information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we
respond with a GIL. In your letter you have stated and made inquiry as follows:
This is a request for a Private Letter Ruling or General Information Letter
pursuant to the provisions of 2 Ill. Admin. Code 1200. The (University) is
requesting information from the Illinois Department of Revenue (IDOR)
regarding the exemption of Illinois Retailers’ Occupation Tax on the sale of
beauty products to patients, students, and staff. Students, staff, and
members of the general public are eligible to become patients.
The University’s mission is teaching, research, public service, and
economic development. As part of its programs for education and public
service, the University trains professionals in a variety of public service
disciplines, including health care professionals. The University serves as
a major health care provider to underserved communities. The University
operates a hospital and healthcare clinics in conjunction with its medical
school. All of these facilities utilize the same E number (sales tax
exemption certificate number) issued by the IDOR.

RELEVANT CITATIONS

1) Per Illinois Retailers’ Occupation Tax 35 ILCS 120/2:
A tax is imposed upon persons engaged in the business of
selling at retail tangible personal property.
2) Per Illinois Regulation Title 86 Part 130 Section 130.2005(b)(1),
Hospital Sales:
Nonprofit hospitals which qualify as exclusively charitable
institutions are not taxable when selling food or medicine to their
patients in connection with the furnishing of hospital service to
them.
In the case of hospitals which qualify as charitable institutions,
such as hospitals are not taxable when selling drugs to anyone
because this is for the relief of the sick (which is the hospital’s
primary purpose) and so is “primarily for the purpose of” such
hospitals, thus qualifying such transactions for tax exemption.
3) Per ST 99-0044-GIL (Jan. 29, 1999) Exempt Organizations:
Section 130.2005(b)(1): This regulation would also apply to
health care clinics that have received an E number from the
Department.
4) Per Illinois Regulation Title 86 Part 130 Section 130.2005(a(2),
Sales to Members:
The first exception is that sales by such an organization are not
taxable if they are made to the organization’s members, or to its
students in the case of a school or to its patients in the case of a
nonprofit hospital which qualifies as a charitable institution,
primarily for the purposes of the selling organization.
5) Per Illinois Regulation Title 86 Part 130 Section 130.2005(a)(3),
Noncompetitive Sales:
The second exception is that sales by exclusively charitable,
religious or educational organizations are not subject to the
Retailers’ Occupation Tax when it can be said that such selling is
noncompetitive with business establishments.
6) Per Illinois Regulation Title 86 Part 130 Section 130.311(b), Drugs,
Medicines, Medical Appliances and Grooming and Hygiene
Products:

Medicines and Drugs. Except for grooming and hygiene products
described in subsection (c), a medicine or drug is any pill, powder,
potion, salve or other preparation for human use that purports on
the label to have medicinal qualities.

FACTS
The University offers a medical education program and provides medical
services to patients, including recommendations and treatment for medical
procedures and selling medical products. The procedures and products
relate to the University’s educational and public service tax exempt
purpose.
The products (see attached list) are composed of medically proven
ingredients (medicinal purposes). Some of the products contain high
concentrations of active ingredients. In several of the products, the active
ingredients increase collagen and elastin production, reducing fine lines
and wrinkles and decreasing hyperpigmentation.
At the University, sales of products are limited to patients only. The
products are not on display. Any one may become a patient. The patient
must make an appointment and be seen by a physician or licensed
medical esthetician. Based on the diagnosis and treatment, the products
are sold to the patient at the end of the appointment from the available onsite inventory. If refills are required, the established patient must call the
physician’s office for pick-up or the products are mailed directly to him/her.
Some of these products may be available for purchase from other
physicians’ offices, pharmacies, or online retail locations without
prescriptions, such as amazon.com or dermstore.com.

RULING REQUESTED INFORMATION REQUESTED
The University requests confirmation regarding the possibility of sales tax
exemption and/or the high vs. low rate for sales of the following types of
products to patients:
1) Chemical peels
2) Skin/eye/lip cleansers, creams, moisturizers, masks, lotions,
infusions, scrubs, balms, sticks, and gels
3) Cosmetic injections, such as Botox
4) Anti-aging kits

5) Other various beauty products
See complete list of products available for purchase.
If these products are available for purchase at other locations (i.e.,
competition), would the sales still be exempt under the hospital sales
and/or sales to members exemptions?
If these products are subject to the Retailers’ Occupation Tax, are they
taxed at the high or low rate?
Please contact me at [xxx-xxx-xxxx] or [email] if you have any questions or
require additional information.
Thank you for your assistance in this matter.
DEPARTMENT’S RESPONSE:
We cannot make determinations regarding the taxability of each of the products
that you have inquired about without more information about each product and without
examining the product labels for each one. However, your letter mentions that many of
the items are “beauty products.” We urge you to closely examine the rules regarding
grooming and hygiene products and drugs to determine which products are taxed at the
State rate of 6.25% for general merchandise and which products are taxed at the lower
1% rate.
A medicine or drug is any pill, powder, potion, salve, or other preparation for
human use that purports on the label to have medicinal qualities. A written claim on the
label that a product is intended to cure or treat disease, illness, injury or pain, or to
mitigate the symptoms of such disease, illness, injury or pain constitutes a medicinal
claim. See Section 130.311 for examples of medicinal claims. Examples of qualifying
products include prescription drugs or medicines and nonprescription drugs or
medicines such as aspirin or other pain relievers that purport on the label to have
medicinal qualities. The term "nonprescription medicines and drugs" does not include
grooming and hygiene products. Grooming and hygiene products include, but are not
limited to, soaps and cleaning solutions, shampoo, toothpaste, mouthwash,
antiperspirants, and sun tan lotions and screens, unless those products are available by
prescription only. If an item is a nonprescription grooming and hygiene product, it will be
taxed at the State 6.25% general merchandise rate regardless of any medicinal claims
made on the product’s label. Please refer to 86 Ill. Adm. Code 130.311 for a list of
common grooming and hygiene products.
While the sale of tangible personal property at retail by exclusively charitable,
religious and educational organizations is generally subject to Retailers’ Occupation
Tax, there are some very limited exceptions. See 86 Ill. Adm. Code 130.2005.

Specifically, with respect to nonprofit hospitals, please see the Department’s regulation
at 86 Ill. Adm. Code 130.2005(b)(1)(A). Under this subpart, nonprofit hospitals that
qualify as exclusively charitable institutions and that have obtained an exemption
identification (“E”) number from the Department are exempt from Retailers’ Occupation
Tax (“ROT”) when selling medicine to their patients in connection with the furnishing of
hospital service to them because this is for the relief of the sick (which is the hospital's
primary purpose) and so is "primarily for the purpose of" such hospitals, thus qualifying
such transactions for tax exemption. However, a hospital incurs ROT liability when
selling candy, chewing gum, tobacco products, razor blades and the like at retail even
when such items are sold only to patients because (unlike food and medicine) these
items are not necessary to the furnishing of hospital service, and they are competitive.
A nonprofit hospital that qualifies as exclusively charitable does not incur ROT on
the sale of drugs to its patients in furtherance of providing its hospital service to them.
Nor will the exempt hospital incur ROT when selling other grooming and hygiene
products to the patient while he/she is a patient in the hospital or clinic because these
products are provided in furtherance of the patient’s care. See 86 Ill. Adm. Code
130.2005(a)(2)(a). However, after a patient has left the hospital, if he/she returns to
purchase products which do not meet the definition of “drug,” the hospital will incur ROT
when selling such items. This generally includes grooming and hygiene products.
I hope this information is helpful. If you require additional information, please
visit our website at www.tax.illinois.gov or contact the Department’s Taxpayer
Information Division at (217) 782-3336.

Very truly yours,
Cara Bishop
Associate Counsel
CB:kad