Were dental implants exempt when a dental practice could not document on invoices that each implant was purchased for a specific patient?

Subject

All invoices for purchases of dental implants for individuals should be documented

Plain-English summary

Virginia upheld tax on dental implants that the periodontal practice could not document as purchases made for specific patients. The exemption required the devices to be purchased by or on behalf of an individual for that person's use.

Some invoices contained patient names and were properly documented. The audited invoices did not. The practice said it used internal order forms showing who each implant was for, but it discarded those forms after ordering, leaving the auditor no way to verify the claim.

The ruling distinguished patient-specific purchases from bulk inventory. Dental devices bought in bulk remain taxable even if later selected or modified for a patient. Because the missing records could not prove patient-specific purchase at the time of acquisition, there was no basis to adjust the assessment.

For future audits, the Commissioner said a separate internal form was unnecessary if the purchase invoice itself contained the patient-identifying information. The practice was instructed to ensure that all patient-specific purchase invoices were properly documented.

What this means for you

• Put patient identification on the supplier invoice when claiming the patient-specific medical-device exemption.
• Retain supporting records; a discarded internal form cannot substantiate an exemption later.
• Buying implants for general inventory is taxable under the rule applied here, even if an item is later fitted to a patient.
• Consistent documentation matters across every order, not only selected invoices.

Common questions

Were all dental implants taxable? No. The ruling says some invoices were properly documented with patient names; the assessment covered purchases that were not adequately documented.

Did the practice need a separate internal order form? No. The Commissioner said the purchase invoice was sufficient if it showed the specific patient.

Why did custom fitting not prove the exemption? The exemption depended on the purchase being made for a specific individual, and the available purchase records did not prove that fact for the audited items.

Citations and references

• Va. Code § 58.1-609.10(10).
• 23 VAC 10-210-500.
• P.D. 00-215 (December 7, 2000) and P.D. 04-218 (December 13, 2004).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-169

Original ruling text

November 7, 2007

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period November 2002 through October 2005. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates a dental practice, specializing in periodontics. The Taxpayer's dental practice includes providing dental implants for patients who need to replace missing teeth. The Taxpayer purchases dental implants for patients in order to perform the reconstructive dental surgery. Each dental implant that is purchased must be fitted through CAT scans, radiology and models to the exact specifications of each patient. Despite the use of these measurement procedures, the implant size that is ordered for a patient is sometimes incorrect. Therefore, the Taxpayer maintains an inventory of implants for this situation.

In an audit conducted by the Department, the auditor reviewed multiple invoices in which a patient name, or other identifying information, was not listed on the purchase invoice. These purchases were considered purchases that were not made on behalf of an individual and the tax, penalty and interest was assessed.

The Taxpayer contends that it has been using an internal form to place orders for implants and other materials. This form is for office use only and is not submitted to the dental supply vendor. Once the implant and materials are ordered, the Taxpayer discards the form. The Taxpayer states that it was unaware it had to maintain copies of the forms for three years in order to verify that the implants and materials were purchased on behalf of individuals.

DETERMINATION

Virginia Code § 58.1-609.10 10 provides, in part, an exemption from the retail sales and use tax for, "prosthetic devices, orthopedic appliances, catheters . . . [and] other durable medical equipment and devices, and related parts and supplies specifically designed for those products . . . when such items or parts are purchased by or on behalf of an individual for use by such individual."

Title 23 of the Virginia Administrative Code 10-210-500 addresses purchases on behalf of an individual:

The tax applies to sales to a dentist by a dental laboratory or supplier of dentures, plates, braces and similar prosthetic devices, or the component parts thereof, unless such dentures, braces, etc. are purchased on behalf of a specific patient. If such items are purchased in bulk and then dispensed to a particular patient, the original purchase will be subject to the tax even if the items withdrawn from the bulk inventory are modified for a specific patient.

The taxable status of dental crowns and similar items is governed by the above exemption and regulation, which require that these devices be purchased on behalf of an individual patient. In this instance, some of the purchase invoices were properly documented with the patients' names. However, the invoices taxed in the audit were not properly documented. The Taxpayer appears to have had procedures in place to properly document the invoices; however, these procedures were not consistently followed in regard to all orders placed for individual patients. Without patient information on the Taxpayer's purchase invoices, the auditor could not confirm that the purchases were made on behalf of specific individuals. The Taxpayer's internal order forms may have assisted the auditor in this regard but the forms were unavailable for review because the Taxpayer discarded them. Absent evidence to prove that the dental implants were purchased on behalf of individuals, there is no basis to adjust the assessment.

This determination is consistent with previous guidance provided by the Department in Public Documents 00-215 (12/7/00) and 04-218 (12/13/04). In each instance, the taxpayer was instructed that its purchase documentation must include patient identification information at the time of purchase in order for the purchase to be deemed made on behalf of individuals. It is not necessary that the Taxpayer maintain a separate internal form for purposes of documenting purchases on behalf of individual patients. The purchase invoice is sufficient for this. Therefore, in future audits of the Taxpayer, the Department's auditor will look to the purchase invoices to verify whether the purchase is on behalf of a specific individual. The Taxpayer should ensure that all invoices for purchases on behalf of individuals are properly documented.

An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days from the date of the unpaid bill.

The Code of Virginia section, regulation and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions about this determination, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-872676458.i