Were charges to clean, test, package, and sterilize customer-owned used catheters taxable in Virginia?

Plain-English summary

The catheter-reprocessing charges were exempt from Virginia sales and use tax. Hospitals and medical clinics sent used catheters to the taxpayer's out-of-state facility. The taxpayer cleaned, decontaminated, reconditioned, tested, packaged, labeled, and sterilized the same catheters, then returned them for reuse.

The taxpayer never took title to the catheters. It charged for the reconditioning work and did not sell tangible personal property to the Virginia customers.

Virginia's true-object test distinguishes an exempt service with only incidental property from a taxable transaction whose object is the property produced. Here, the transaction's object was the service performed on customer-owned catheters. The service charges were therefore nontaxable.

Common questions

Q: Did packaging and labeling make the transaction taxable?
A: No. Those steps were part of reconditioning the customers' own catheters, not a sale of new property.

Q: Who owned the catheters during processing?
A: The hospitals and clinics; the service provider never took title.

Q: Would selling replacement catheters be the same?
A: The ruling did not address that arrangement. Its conclusion rested on no tangible personal property being sold to the customer.

Citations and references

• Va. Code § 58.1-609.5(1).
• 23 VAC 10-210-4040(D).

Subject

Services to recondition used catheters are exempt from the sales and use tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-178

Original ruling text

November 9, 2012

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter and conversation with a member of the Appeals and Rulings staff, in which you request a ruling on the application of the retail sales and use tax to a service provided by * (the "Taxpayer") to Virginia customers. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is headquartered outside of Virginia and offers a reprocessing service to hospitals and medical clinics. Used medical catheters are mailed to the Taxpayer's out-of-state location for reconditioning. The Taxpayer cleans, decontaminates, reconditions, tests, packages, labels, and sterilizes the used medical catheters. The Taxpayer never takes, title to the medical catheters being serviced. The reconditioned catheters are mailed to the hospitals and medical clinics in Virginia for reuse. The Taxpayer charges the hospitals and medical clinics for its services in reconditioning the used medical catheters. The Taxpayer requests a ruling on the taxability of the services provided to Virginia customers.

RULING

Virginia Code § 58,.1-609.5 1 provides an exemption for "[p]rofessional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made . . . ." Title 23 of the Virginia Administrative Code 10-210-4040 D provides:

In order to determine whether a particular transaction which involves both the rendering of a service and the provision of tangible personal property constitutes an exempt service or a taxable retail sale, the "true object" of the transaction must be examined. If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.

Based on the information presented, the Taxpayer does not make sales of tangible personal property to customers. The Taxpayer is providing a nontaxable service to its customers in reconditioning the used catheters. As such, charges billed for the services to recondition used catheters are exempt from the sales and use tax.

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

The Code of Virginia section and regulation cited is available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions 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/1-4989393820.T