When can a Virginia seller treat human allograft and porcine xenograft soft-tissue products as sales-tax exempt?

Subject

Manufacturer and seller of biological soft tissue products.

Plain-English summary

Both products could be sold exempt, but under different exemptions and documentation rules. The human-derived allograft was classified as banked human tissue and a Schedule VI controlled substance, not a medical device. The porcine-derived xenograft was classified as a Schedule VI medical device.

The allograft could be sold exempt to qualifying licensed physicians and other listed practitioners for professional use, and to licensed hospitals, nursing homes, clinics, or similar corporations. The seller's purchase documentation needed the licensed physician's name or federal DEA number to support the exemption.

The xenograft qualified under the medical-device exemption only when purchased by or specifically on behalf of an individual for that individual's use. The seller needed patient identification at the time of purchase. A provider's bulk purchase for later dispensing to patients did not satisfy that rule, even if a product was later fitted or modified for a particular patient.

The ruling separately noted that qualifying nonprofit hospitals, clinics, and nursing homes could document their exempt status with a Department-issued Sales and Use Tax Certificate of Exemption letter and tax-exempt number.

What this means for you

• Do not apply one medical-product exemption to every tissue product; classification controls the route.
• For qualifying controlled-drug sales, retain the physician name or DEA number identified by the ruling.
• For a medical device bought on behalf of an individual, capture patient identification when the order is placed.
• Bulk inventory for later patient use does not qualify under the patient-specific medical-device exemption described here.

Common questions

Was the human allograft treated as a medical device?

No. The ruling treated it as a Schedule VI controlled substance based on the stated FDA and Virginia Board of Pharmacy classifications.

Could a hospital buy xenograft products in bulk under the individual medical-device exemption?

No. That exemption required a purchase specifically for an identified individual. A separate nonprofit exemption could apply if the entity provided the required Department exemption letter.

Citations and references

• Va. Code § 58.1-609.10(9) and (10).
• 23 VAC 10-210-940 G.
• Va. Code § 58.1-609 11, as formatted in the ruling.
• P.D. 06-110, P.D. 08-78, and P.D. 00-215.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-75

Original ruling text

May 18, 2011

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you request a ruling on the application of the Virginia retail sales and use tax to the sale of two products by * (the "Taxpayer"). I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a manufacturer and seller of two biological soft tissue products. The Taxpayer sells the soft tissue products to hospitals and medical service providers used in the treatment of individual patients suffering from damaged soft tissue. The products are used in the repair or replacement of missing or permanently malfunctioning body parts.

The Taxpayer sells an allograft tissue that is an acellular dermal matrix derived from donated human skin. The allograft tissue is predominately used as a subcutaneous implant for the replacement of soft tissue in reconstructive surgical procedures in various areas of the body. The Federal Food and Drug Administration (FDA) classifies the allograft tissue as "banked human tissue" subject to the rules and regulations under the American Association of Tissue Banks. The Virginia Board of Pharmacy concurs with the FDA classification and deems the allograft tissue as a Schedule VI controlled substance under the Virginia Drug Control Act found in Va. Code Title 54.1, Chapter 34.

The Taxpayer also sells a xenograft product that is porcine dermis that has been processed to form an acellular tissue matrix. The xenograft product supports the repair of damaged tissue by allowing rapid revascularization and cell repopulation required for tissue regeneration. The FDA classifies the xenograft product as a medical device. The Virginia Board of Pharmacy concurs with the federal classification and deems the xenograft product as a Schedule VI medical device under the Virginia Drug Control Act found in Va. Code Title 54.1, Chapter 34.

The Taxpayer believes that the biological soft tissue products qualify for exemption under the provisions of Va. Code § 58.1-609.10 10 and Title 23 of the Virginia Administrative Code (VAC) 10-210-940 A.

RULING

Medicines and Drugs

Virginia Code § 58.1-609.10 9 provides an exemption from the retail sales and use tax for:

Medicines [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 . . . . "

Based on the FDA classification of the allograft tissue, the allograft tissue is a Schedule VI controlled substance and not a medical device. Pursuant to Va. Code § 58.1-609.10 9, the Taxpayer may sell the allograft tissue exempt of the tax to a licensed physician, optometrist., licensed nurse practitioner, or licensed physician assistant for use in his professional practice. The Taxpayer may also sell the allograft tissue exempt of the tax to a licensed hospital, nursing home, clinic, or similar corporation not otherwise exempt under this section. In Public Documents (P.D.) 06-110 (10/10/06) and 08-78 (6/6/08), the Tax Commissioner ruled that the purchase documentation must include the licensed physician's name or the physician's federal Drug Enforcement Agency (DEA) number to support the exempt sale.

Medical Devices

Virginia Code § 58.1-609.10 10 provides an exemption for "prosthetic devices and . . . other durable medical equipment and devices , and related parts and supplies specifically designed for those products . . . when such items or parts are purchased by or on behalf of an individual for use by such individual. [Emphasis added].

Title 23 VAC 10-210-940 G addresses purchases on behalf of an individual and states, "In order to be deemed a purchase on behalf of an individual, the item must be specifically bought for the individual. If items are purchased in bulk and then dispensed to individual patients, no exemption is applicable even if the item is modified or fitted for a specific individual."

The xenograft tissue is deemed a medical device. The Taxpayer may sell the xenograft product exempt of the tax when such product is purchased by or on behalf of an individual for use by such individual. Pursuant to P.D. 00-215 (12/7/00), a taxpayer's purchase documentation must include patient identification information at the time of purchase in order for the purchase to be deemed made on behalf of an individual.

Virginia Code § 58.1-609 11 provides a nonprofit exemption that includes the sale of tangible personal property to nonprofit hospitals, nonprofit clinics, and nonprofit nursing homes. These entities must provide the Taxpayer a Sales and Use Tax Certificate of Exemption letter issued by the Department. This letter verifies the entity's exempt status and includes the tax exempt number necessary for making tax exempt sales to such an entity.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulation 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 ruling, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-3207687887.T