Was a home-infusion pharmacy a retailer of IV drugs and medical supplies when an affiliate separately provided nursing services?

Subject

Pharmacy retailer of the IV medications and medical supplies purchased for resale

Plain-English summary

Virginia treated the home-infusion pharmacy as a retailer of IV medications and medical supplies, not as the provider of a bundled medical service. The pharmacy sold prescribed products for patients to administer at home, while a related but separate legal entity supplied home-health and physical-therapy services.

Although one reimbursement contract covered both entities and payments were made on a per-diem basis, the remittance records separately identified the pharmacy's medication charges and the affiliate's service charges. Virginia would not hold one legal entity responsible for the other's products or services for sales-tax purposes.

The pharmacy's purchases of IV drugs, pumps, and medical supplies were therefore purchases for resale. Virginia ordered a refund of the paid assessment with interest.

What this means for you

• A shared reimbursement contract does not necessarily combine separate legal entities into one service provider.
• Contracts and remittance records should separately identify each entity's charges and responsibilities.
• Home-infusion products sold for patient use can be retail tangible personal property under the true-object analysis.
• Qualifying inventory bought for resale is not a taxable purchase by the pharmacy.

Common questions

Q: Why did the auditor initially treat the pharmacy as a service provider?
A: One reimbursement contract paid for the pharmacy's products and the affiliate's services.

Q: What changed the result?
A: The pharmacy and home-health provider were separate legal entities, and the payment records separately listed their product and service charges.

Q: What happened to the paid assessment?
A: Virginia ordered a refund with interest from the payment date.

Citations and references

• P.D. 07-14, P.D. 07-15, and P.D. 07-16 (March 26, 2007).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-79

Original ruling text

June 6, 2008

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

Dear *:

This is in reply to your letter submitted on behalf of * (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment (bill #***) issued for the period August 2002 through July 2005. It is noted that the assessment is paid. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a for-profit subsidiary of a health care system, is comprised of a number of affiliated entities that provide medical services. The Taxpayer handles the administrative and day-to-day operations for the health care system's for-profit affiliates, including the affiliates that make up the Taxpayer. At issue are certain purchases made by the Taxpayer in regard to its operation of a home infusion entity.

The Taxpayer through the home infusion entity maintains a pharmacy (the "Pharmacy") and provides intravenous (IV) medications and medical products pursuant to physicians' prescriptions. The IV medications and medical products are sold to customers for administration in the home. The reimbursement contracts entered into between the Taxpayer and the insurance providers set out payments to the Pharmacy for the IV medications and medical products, as well as, payment for services billed by an affiliated home health care entity (the "Affiliate") that is not operated by the Taxpayer. Payments are provided on a per diem basis.

Because a single contract provides payment for the services, IV medications and medical products, the auditor concluded that the Taxpayer is a service provider with regard to the operation of the Pharmacy. Based on this conclusion, the auditor assessed the tax on the Taxpayer's purchases of IV medications, pumps and other medical supplies sold by the Pharmacy.

You contend that the auditor erroneously concluded that the inclusion of the Pharmacy and the Affiliate in the same reimbursement contract implies that the Pharmacy is rendering medical services. You dispute this and further contend that the Pharmacy does not employ physicians or nurses and does not provide medical or nursing services. Instead, the Pharmacy sells medications pursuant to physicians prescriptions to customers who self administer the medications. To support your position, you cite applicable case law and a number of prior determinations of the Tax Commissioner.

DETERMINATION

In Public Documents 07-14, 07-15 and 07-16, all issued on March 26, 2007, the Department addressed pharmacies that sell home infusion therapy medications to patients in the home for self administration. The issue considered is whether such transactions constitute the provision of a service or the sale of tangible personal property. In each instance, the Tax Commissioner determined that the "true object" of such transactions is the sale of tangible personal property, i.e. , IV medications and medical supplies.

The Pharmacy in this case provides generally the same types of medications and medical products as the taxpayers in the cited documents. Also, the Pharmacy receives payment on a per diem basis similar to the taxpayers discussed in the prior determinations. However, there is a slightly different fact pattern in this instance that must be considered. The taxpayers in the cited determinations are single entity operators of home infusion pharmacies. In the case at hand, the Taxpayer operates the Pharmacy through the home infusion entity and is related to the Affiliate that provides home care services to the customers of the Pharmacy.

A review of the reimbursement contract documents is instructive. Attachment C provides a rate schedule for combined home health and home infusion services. This schedule includes pricing to cover IV medications, supplies, nursing services and pharmaceutical support services. The Remittance Advice Summary documents set out the charges and allowed payments by provider. The Pharmacy has charges listed for injectible home infusion medications. The Affiliate is listed separately and has charges listed for home infusion and physical therapy. Because the Pharmacy and the Affiliate are separate legal entities, I do not believe that either can be held responsible for the services and products provided by the other for purposes of the sales and use tax. Therefore, the Taxpayer cannot be deemed a service provider because the Affiliate provides services and is reimbursed for payment in the same contract that includes payment to the Taxpayer for the IV medications and medical supplies provided by the Pharmacy.

Based on the documents reviewed and the cited prior determinations, the Pharmacy is deemed a retailer of the IV medications and medical supplies, and the tax does not apply to purchases of these items by the Taxpayer because they are purchased for resale.

In accordance with this determination, the Taxpayer is entitled to a refund of the assessment amount paid. The refund will be issued shortly and will include refund interest from the date of payment.

The public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department of Taxation's web site. If you have questions regarding this determination or the refund, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1328319907.J