When were controlled drugs bought in bulk by a Virginia cardiac center exempt from sales tax?

Subject

Assessment of tax on prescription drugs used in the provision of cardiac services

Plain-English summary

Virginia applied the controlled-drug exemption invoice by invoice. The outpatient cardiac center bought Definity, Atropine, Dobutamine, and Adenosine in bulk for use as needed in echocardiograms and stress testing.

Purchases were exempt when the supporting invoice named a licensed physician or listed that physician's DEA number. Invoices showing only the center as buyer and delivery recipient did not establish a purchase by a physician for professional use, so those purchases remained taxable.

The Tc99m Cardiolite radioisotope tracer also qualified because it was bought on a licensed physician's order for a specific patient. Because the vendor had collected the tax, the Department directed the center to seek that refund from the vendor, its preferred route for preserving the local sales-tax allocation.

What this means for you

• For bulk controlled-drug purchases, the invoice should identify the licensed physician or the physician's DEA number.
• A medical practice's name alone may not prove that the statutory purchaser requirement is met.
• Patient-specific physician orders can support the exemption for qualifying drugs.
• When a vendor collected the tax, Virginia may prefer the vendor to issue the refund.

Common questions

Q: Were all bulk cardiac drugs exempt?
A: No. The result depended on whether each vendor's invoices identified a physician or DEA number.

Q: Why was a DEA number sufficient?
A: The ruling stated that a DEA number is issued to an individual physician, so listing it effectively identified the physician purchaser.

Q: Did Tc99m Cardiolite qualify?
A: Yes. The invoices showed it was purchased for a specific patient on a licensed physician's order.

Q: Who should issue the Cardiolite tax refund?
A: The vendor, under the Department's preferred procedure when the dealer collected the tax.

Citations and references

• Va. Code §§ 58.1-609.10 9 and 58.1-1822.
• P.D. 06-110, P.D. 04-116, and P.D. 96-358.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-78

Original ruling text

June 6, 2008

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 October 2001 through December 2006. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, a healthcare provider, operates a for-profit outpatient center dedicated to cardiac services. An audit was conducted by the Department that resulted in the assessment of tax on prescription drugs used in the provision of cardiac services.

The Taxpayer takes exception to the tax on the prescription drugs Definity, Atropine, Dobutamine and Adenosine. These drugs are used to enhance the image production of echocardiograms and in cardiac stress testing. Each drug is ordered in bulk and used on an as-needed basis. The Taxpayer states the drugs are dispensed on a physician's order when needed for a specific patient.

In addition, the Taxpayer seeks clarification regarding the application of the exemption provided under Va. Code § 58.1-609.10 9 to the purchase of a radioisotope tracer, Tc99m Cardiolite. This drug is purchased on the order of a licensed physician for a specific patient.

DETERMINATION

Bulk Purchases of Controlled Drugs

Virginia Code § 58.1-609.10 9 provides an exemption from the retail sales and use tax for "[m]edicines [and] drugs . . . dispensed by or sold on prescriptions or work orders of . . . licensed physicians . . . [and] controlled drugs purchased for use by a licensed physician, optometrist, licensed nurse practitioner, or licensed physician assistant in his professional practice."

In order to determine the application of the tax to the purchase of controlled drugs in this instance, the Department looks to the purchasers on the invoices that support the transactions. Public Documents (P.D.) 06-110 (10/10/06) and 04-116 (9/14/04) provide that when an invoice includes a licensed physician as purchaser, this is sufficient to document that the purchase is by a physician for use in his practice. P.D. 06-110 advises that the invoice also include a federal Drug Enforcement Agency (DEA) number. According to information obtained from a local DEA office, the DEA number is issued to an individual physician and not a medical practice. As such, the use of a DEA number is synonymous with the naming of a physician.

The Taxpayer purchased controlled drugs from four pharmaceutical companies. I will address the Taxpayer's purchases from each of the pharmaceutical companies as they relate to the above stated criteria.

These invoices indicate the drugs were sold to and delivered to the Taxpayer. The invoices fail to list a physician or DEA number. Therefore, the auditor properly applied the tax to these purchases.

These invoices indicate a physician name in the "ship to" portion of the invoice. These purchases will be removed from the audit.

These invoices list a DEA number. I will agree to remove these purchases from the audit.

These invoices list a DEA number. I will agree to remove these purchases from the audit.

Purchase of Radioisotope Tracer

The Taxpayer paid the tax on its purchases of Tc99m Cardiolite, a controlled drug used in performing nuclear imaging of the heart. A review of the invoices indicates that the drug qualifies for the exemption outlined under Va. Code § 58.1-609.10 9, as the drug was purchased for use by a licensed physician in his professional practice.

CONCLUSION

The purchases will remain in the assessment. The purchases related to * and *** will be removed from the assessment. The Department will issue the Taxpayer a refund of the tax and interest paid on the latter purchases. The refund will include refund interest.

In regard to the purchase of Tc99m Cardiolite, the Taxpayer is entitled to a refund of the tax and should seek the refund from its vendor. P.D. 96-358 (12/6/96) explains the Department's longstanding policy with respect to such refunds. In instances where the tax is collected by the dealer (vendor), the Department prefers to refund such tax through the dealer (vendor) to prevent misallocations of the 1% local sales tax. Virginia Code § 58.1-­1822 limits the amount of refund to those monies actually paid to the state. Therefore any refund issued to the Taxpayer by the Department would be less any dealer discount taken by the vendor.

The Code of Virginia section 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 concerning this determination, you may contact the Department's Office of Tax Policy, Appeals and Rulings, at *.

Sincerely,

Janie E. Bowen

Tax Commissioner

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