Could a physician-owned medical corporation exempt bulk controlled-drug purchases when its invoices named only the corporation?

Subject

Controlled-drug exemption required documentation linking purchases to physicians

Plain-English summary

Virginia left bulk controlled-drug purchases in a medical practice's audit because the practice did not document that the drugs were purchased by or linked to its licensed physicians. The statute could exempt controlled drugs used by licensed medical professionals in their practices, including qualifying corporations whose shareholders and operators are licensed practitioners.

Here, the invoices named only the corporation as purchaser. The practice said physicians ordered the drugs using their names or Drug Enforcement Agency numbers, but it did not provide records connecting the corporation's purchases to those physicians despite repeated requests.

Because a Virginia assessment is presumed correct, the practice had the burden of proving the exemption. The Commissioner gave it 45 days to furnish the requested documentation. Acceptable evidence could support an audit revision; otherwise the assessment would remain correct.

What this means for you

• Physician ownership alone did not prove that a bulk drug purchase met the exemption.
• Invoices or related records needed to connect the purchaser and controlled drugs to licensed physicians in the corporation.
• The ruling treated an invoice naming a licensed physician as sufficient documentation in the prior healthcare-system decisions it cited.
• Exemption claims should be supported during the audit and appeal, not only asserted in a letter.
• Missing proof left the purchases taxable unless adequate documentation was supplied within the 45-day period.

Common questions

Did Virginia say physician-owned corporations can never qualify?

No. The statute expressly covered qualifying corporate medical practices; the problem was documentation.

What was missing from the invoices?

They identified the corporation, but not a licensed physician as purchaser.

Was a physician's DEA number potentially relevant?

The practice said physicians used their names or DEA numbers to order the drugs, but it did not provide documentation linking those orders to the audited purchases.

Was the assessment immediately final?

The practice received 45 days to provide the requested records before the contested purchases would remain assessed as issued.

Citations and references

• Va. Code §§ 58.1-609.10(9) and 58.1-205(1).
• Virginia Public Documents 08-78 and 06-110.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-118

Original ruling text

July 1, 2010

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

Dear *:

This is in response to your letter in which you seek correction of a retail sales and use tax assessment issued to * (the "Taxpayer") for the period June 2005 through May 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates medical practices that are engaged in the independent practice of specialized medicine. The Taxpayer was audited and assessed the tax on bulk purchases of controlled drugs. The Taxpayer states that the corporation is owned by the practicing physicians that requisition the controlled drugs for use in their practice. As such, the Taxpayer claims that the purchases of controlled drugs qualify for the exemption set out in Virginia Code § 58.1-609.10 9.

DETERMINATION

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, regardless of whether such practice is organized as a sole proprietorship, partnership, or professional corporation, or any other type of corporation in which the shareholders and operators are all licensed physicians, optometrists, licensed nurse practitioners, or licensed physician assistants engaged in the practice of medicine, optometry, or nursing; medicines and drugs purchased for use or consumption by a licensed hospital, nursing home, clinic, or similar corporation not otherwise exempt under this section . . . . "

In Public Documents 08-78 (6/6/08) and 06-110 (10/10/06), the Tax Commissioner addressed the documentation that is necessary to support tax-exempt purchases of prescription drugs by a nonprofit healthcare system consisting of hospitals, outpatient clinics, ancillary services and medical practices. The Tax Commissioner ruled 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 medical practice.

In this instance, the invoices identify the Taxpayer as the purchaser of the controlled drugs, but do not include a licensed physician as purchaser on the invoice. Although the Taxpayer claims in its letter that all of the controlled drugs purchased were ordered by a physician using his or her name and/or Drug Enforcement Agency number, the Taxpayer has provided no documentation that would link the Taxpayer's purchase of controlled drugs to a licensed physician of the corporation. A member of the Appeals and Rulings staff has made several attempts to obtain such information; however, the Taxpayer has not provided the requested documentation.

Virginia Code § 58.1-205 1 deems any tax assessment issued by the Department as prima facie correct. This means that the burden of proof is upon the Taxpayer to show that the assessment is incorrect. In the absence of documentation to verify that the purchases of controlled drugs are made by licensed physicians of the corporation, the Taxpayer has not met the burden of proof required by the statute. Accordingly, the contested purchases will remain in the audit, unless the Taxpayer furnishes the requested documentation.

CONCLUSION

The Taxpayer will be given an opportunity to furnish the requested documentation to the auditor within 45 days of the date of this letter. If the documentation is received within the time allotted and is found acceptable for adjustment, the audit will be revised in accordance with this determination. If the required documentation is not furnished within the allotted time, the tax assessed on those items will be deemed correct as issued and an updated bill, with interest accrued to date, will be mailed to the Taxpayer. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest charges.

The Code of Virginia section and public document 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 * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3014145374.T