Was medical equipment sold with one segment of a combined practice exempt as an occasional sale or business reorganization?

Subject

Tax on the sale of medical equipment to a physician made in connection with the sale of the medical practice.

Plain-English summary

Virginia taxed the medical equipment sold with the medical-practice segment because the transaction did not qualify as an occasional sale. It was not a statutory reorganization involving an exchange for stock.

The medical, chiropractic, physical-therapy, and counseling operations used one accounting system and bank account and were not housed separately before the sale. Although some employees and equipment were dedicated to medical work, the facts did not establish a separate division whose entire assets were sold.

Building a wall and separating records at the time of sale did not change the pre-sale organization. The assessment was upheld.

What this means for you

• Selling one segment of a business is not automatically an exempt occasional sale.
• Maintain separate books, accounts, facilities, and operational identity if relying on a separate-division rule.
• A qualifying statutory reorganization has specific form requirements.
• Post-deal separation does not prove the division was separate before the sale.

Common questions

Q: Why was the transaction not a reorganization?
A: It did not involve an exchange for stock and was simply a sale of a business segment.

Q: Did dedicated medical equipment establish a separate division?
A: No. Shared books, banking, premises, and records outweighed that evidence.

Citations and references

• Va. Code §§ 58.1-609.10 2 and 58.1-602.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-118

Original ruling text

June 26, 2008

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 2004 through May 2007. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operated a chiropractic practice and a medical practice. As a result of the audit for the aforementioned period, the Taxpayer was assessed tax on the sale of medical equipment to a physician made in connection with the sale of the medical practice. The Taxpayer contends that the sale of the medical practice was the result of a reorganization, and the sale of medical equipment qualifies as an exempt occasional sale.

DETERMINATION

Virginia Code § 58.1-609.10 2 provides that the retail sales and use tax shall not apply to "[a]n occasional sale, as defined in § 58.1-602." Virginia Code § 58.1-602 defines occasional sale as:

A sale of tangible personal property not held or used by a seller in the course of an activity for which he is required to hold a certificate of registration, including the sale or exchange of all or substantially all the assets of any business and the reorganization or liquidation of any business, provided such sale or exchange is not one of a series of sales and exchanges sufficient in number, scope and character to constitute an activity requiring the holding of a certificate of registration.

Sale of Assets

Pursuant to Va. Code § 58.1-602, the occasional sale exemption applies to the sale of all or substantially all the assets of any business. Following the sale, the Taxpayer still remained in business, operating as a chiropractor. Additionally, the Taxpayer has not provided any documentation demonstrating that a substantial portion of the assets of the practices transferred when the medical practice was sold. Accordingly, the sale at issue does not constitute the sale of all or substantially all of the assets of the Taxpayer's business.

Reorganization of a Business

Pursuant to P.D. 04-134 (9/16/04), "[t]he Tax Commissioner has previously determined that the transfer of assets for stock, which qualifies for nonrecognition of income under § 351 of the Internal Revenue Code, qualifies as a 'reorganization' for purposes of the occasional sale exemption."

In this instance, the transfer of the assets at issue does not involve an exchange for stock. In addition, no evidence has been presented indicating a reorganization as contemplated in the statute has occurred. Instead, the Taxpayer sold a segment of its business. Accordingly, the transfer of assets does not constitute a reorganization for purposes of the occasional sale exemption.

Sale of a Division

In Public Document (P.D.) 99-69 (4/16/99), the taxpayer contended that the sale of all or substantially all of the assets of a division of its business qualified as an exempt occasional sale. In order for the sale to qualify for the exemption, it must be engaged in totally separate and distinct activities based on such considerations as separate books which are separately maintained, separate bank accounts, separation of fixed assets, separation of employees and the flow of economic advantage from one division of the organization to another. In P.D. 99-69, the division at issue was separately housed. Employees worked exclusively in the division's activities (and not other facets of the taxpayer's business), and assets used in the division were not shared with other activities of the corporation. Financial records and financial reports were substantially separate. The division did not have its own checking account, but did use separate checks which were identified with the division's exclusive logo. Finally, the division operated as a distinct business activity, had its own salesman and ran separate advertisements in specialty publications. Based on these facts, it was determined that the division operated as a separate and distinct activity of the taxpayer's multifaceted business. As such, the sale of all or substantially all of the assets of the division was deemed an exempt occasional sale.

In P.D. 06-67 (8/16/06), the Department's criteria were applied to determine if the sale of a division qualified as a sale of all or substantially all of the assets of a business: 1

1. Each division must have a completely separate set of books, which are separately maintained.

2. Separate bank accounts must be maintained.

3. Employees must be active in only one division.

4. Divisions must be separately housed.

5. Each division must have its own fixed assets, which are not used interchangeably.

In this instance it was determined that the sale of the tangible personal property at issue did not qualify for the occasional sale exemption. The taxpayer did not have separate books or bank accounts, nor did it house its divisions separately.

In order to determine if the sale of the medical equipment at issue qualifies for the occasional sale exemption, the criteria applied in P.D. 99-69 and P.D. 06-67 must be analyzed based on the facts relating to the Taxpayer's sale.

Separate Accounting

The Taxpayer indicates that prior to the sale at issue, its medical, chiropractic, physical therapy and counseling practices had one accounting system.

Pursuant to P.D. 06-67, separate books are required for a division to be considered separate and distinct. Therefore, this criterion is not satisfied.

Separate Bank Accounts

The Taxpayer represents that prior to the sale at issue, its medical, chiropractic, physical therapy and counseling practices had one bank account.

Pursuant to P.D. 06-67, separate bank accounts are required for a division to be considered separate and distinct. Therefore, this criterion is not satisfied.

Separate Employees

The Taxpayer asserts that the medical practice had its own clinical employees that only performed medical duties.

Pursuant to P.D. 06-67, a division must have separate employees to be considered separate and distinct. In this instance, the medical practice had separate clinical employees. However, there is no evidence to suggest that the Taxpayer's practice did not share employees that performed other duties within the business.

Separately Housed Divisions

The Taxpayer provides that prior to the sale of the medical practice, medical treatment was provided by the medical practice in a separate medical wing of the office. The Taxpayer asserts that only medical treatment and procedures were provided in the medical wing. The Taxpayer further asserts that when the sale took place, the office was split down the middle and a wall was built to separate the two businesses.

While the medical practice utilized a separate wing in the building, the Taxpayer's medical practice was not a separately housed division as required by P.D. 06-67. Therefore, this criterion is not satisfied.

Separate Fixed Assets

The Taxpayer asserts that all property located in the medical wing of the practice remained with the medical practice following the sale. This includes file cabinets, exam tables, various treatment equipment, blood analyzer, EKG, and other items (the Taxpayer provided a list of assets that were transferred in the sale). The Taxpayer asserts that the clinical equipment for the medical practice was separate and was purchased at various times over the eight-year period that the Taxpayer employed medical doctors. The Taxpayer provides that an x-ray machine was also included in the sale, and that prior to the sale it was shared equipment. The Taxpayer asserts that following the sale a new x-ray machine was purchased for the chiropractic practice. The Taxpayer also asserts that prior to the sale, patient medical charts included notes for all practices. The medical practice notes were removed from the charts and transferred to the medical practice at the time of the sale.

Based on the facts presented, it appears that the Taxpayer's medical practice utilized certain fixed assets exclusively while a part of the Taxpayer' business.

Based on the foregoing analysis, the occasional sale exemption is not applicable to the tangible personal property sold in connection with the Taxpayer's medical practice. Separate books were not maintained for the medical practice, nor was separate bank account. Additionally, the medical practice was not housed separately from the other practices.

CONCLUSION

Based on this determination, the assessment is correct as issued. 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 of the date of this letter.

To avoid the accrual of additional interest, please remit payment within 30 days from the date of the bill to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Attn: *, Post Office Box 27203, Richmond, Virginia 23261-7203.

The Code of Virginia sections and public documents 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

AR/1-1799110190.P

1The criteria were established in P.D. 91-290 (11/18/91).