Which pharmacy purchases did Virginia remove from a retirement community's sales-and-use-tax audit?

Plain-English summary

Virginia granted limited audit relief: five documented line items were removed, but the remaining contested pharmacy purchases stayed taxable.

For claimed medicines, medical supplies, and packaging, the taxpayer cited exemptions without specifically explaining how the individual purchases qualified. It therefore failed to overcome the assessment's presumed correctness.

Two other line items appeared to be administrative supplies, which were outside the medical exemption. Another group of purchases occurred only in 2003, but timing alone did not prove they were isolated from the pharmacy's normal operations, so they remained in the audit sample.

The audit returned to staff for the five specified removals and a revised bill.

What this means for you

• Exemption claims need item-level descriptions and supporting records.
• Administrative supplies do not become exempt merely because a pharmacy uses them.
• Purchases limited to one year are not automatically isolated from normal business.
• Audit appeals can produce partial adjustments rather than all-or-nothing results.

Citations and references

• Va. Code §§ 58.1-609.10, 58.1-609.3(2)(iv), and 58.1-205.

Subject

Purchases from pharmacies

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-88

Original ruling text

May 25, 2007

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

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the period July 2001 through June 2004. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates two pharmacies in a retirement community. One is a retail store that can be used by residents of the retirement community. The other is a closed pharmacy that is used to provide medical services to residents of the assisted living (long-term care) facility. The Taxpayer was assessed tax on certain purchases and maintains that these contested purchases should be removed from the audit.

DETERMINATION

Line Items 5, 33, 35, 36 and 37

Based on additional information provided by the Taxpayer to the audit staff, these line items will be removed from the audit.

Line Items 22-25 and 28-32

The Taxpayer maintains that these line items represent purchases of medicine, medical supplies and packaging materials. The Taxpayer contends that these items qualify for the exemptions found at Va. Code §§ 58.1-609.10 and 58.1-609.3 2 (iv).

Virginia Code § 58.1-609.10 provides a number of medical related exemptions to include exemptions for medicines, drugs and certain medical supplies dispensed by or sold on prescriptions or work orders of licensed physicians and other medical practitioners, and nonprescription drugs and proprietary medicines and their packaging materials.

Virginia Code § 58.1-609.3 2 (iv) provides an exemption for materials, containers, label, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale.

The Taxpayer has not specifically explained how these line items qualify for the cited exemptions. Virginia Code § 58.1-205 states, "Any assessment of a tax by the Department shall be deemed prima facie correct." The burden of proof is upon the taxpayer to show that the assessment is in error. In this case, the Taxpayer has not met this burden; therefore, these line items will not be removed from the audit.

Line Items 26 and 27

The Taxpayer asserts that these items are exempt under Va. Code § 58.1-609.10. Based on the description in the audit report, these items appear to be administrative items used by the Taxpayer. The exemption in Va. Code § 58.1-609.10 does not apply to administrative items. Accordingly, these line items will not removed from the audit.

Line Items 17-21

The Taxpayer maintains that these purchases occurred in 2003 only. The Taxpayer contends that it is inappropriate to include these purchases in the sample used to generate the audit liability.

For an item to be removed from the audit sample, a taxpayer must show that the transaction was isolated in nature and not a normal part of its operation. In this instance, the Taxpayer has not offered evidence to show that the purchases are not part of its normal business operation. Accordingly, there is no basis to remove these line items from the sample.

CONCLUSION

Based on this determination, the audit will be returned to the audit staff to make the aforementioned adjustments for line items 5, 33, 35, 36, and 37. A revised 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 of the date of the bill. Please remit payment to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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