Was a nonprofit hospital's fee for screening, testing, pasteurizing, storing, and distributing donated human milk subject to Virginia retail sales tax?

Subject

Donor human milk processing fee was not taxable

Plain-English summary

Virginia ruled that the hospital's donor human milk processing fee was not subject to retail sales tax. The nonprofit hospital received all milk by donation and charged patients only to cover screening, laboratory testing, pasteurization, storage, and distribution. Milk could be dispensed only by prescription or hospital purchase order.

The Commissioner treated donor human milk as a "self-replicating body fluid" under the cited Virginia statute. Drawing on an earlier ruling about blood processing, the Commissioner found that the fee recovered the cost of processing and storing the donated fluid rather than the cost of goods sold.

Result: the charge to the patient was a nontaxable processing service.

What this means for you

• Separate the donated product from the screening, processing, storage, and distribution charge.
• Document that the material was donated and that the fee recovers service costs.
• Prescription or hospital-order controls were part of the facts presented.
• A program that buys the milk or bundles other goods may require a different analysis.

Common questions

Q: Did Virginia say donor human milk is not a sale?

A: No. It treated the milk as a self-replicating body fluid that could qualify as a sale, then classified this particular processing charge as a nontaxable service.

Q: Why did the lack of a purchase price matter?

A: All milk was donated, so there was no cost of goods sold embedded in the patient charge.

Q: Does this cover any breast-milk business?

A: No. The ruling addressed one nonprofit hospital's specific donated-milk and processing-fee model.

Citations and references

• Va. Code §§ 32.1-291.16 and 58.1-609.11.
• IRC § 501(c)(3).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-219

Original ruling text

December 8, 2015

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which * (the "Taxpayer") requests a ruling on the Virginia retail sales and use tax application to donor human milk (hereinafter referred to as "DHM").

FACTS

The Taxpayer is organized under Virginia law as a nonstock corporation and is exempt from federal income tax under Internal Revenue Code § 501(c)(3). The Taxpayer is also exempt from the Virginia retail sales and use tax pursuant to Va. Code § 58.1-609.11, Exemption for Nonprofit Organizations. The Taxpayer provides pediatric hospital and outpatient care in Virginia and North Carolina through a main hospital, surgery centers, several therapy and clinical locations, and provides other health care services. As part of its service, the Taxpayer operates * which provides DHM to at-risk infants, including those prematurely born or critically ill. The Taxpayer operates under the guidelines of the Human Milk Banking Association of North America to ensure the safety of donated milk and implement required screening, laboratory testing, pasteurizing and storage techniques. All milk dispensed by the Taxpayer must be dispensed by prescription or hospital purchase order only.

All DHM dispensed by the Taxpayer is donated to the Taxpayer. The Taxpayer does not charge patients for the DHM; however, the Taxpayer does assess a processing fee to cover the cost incurred by the Taxpayer in dispensing the DHM. The processing fee charged by the Taxpayer covers the costs of additional screening, laboratory testing, pasteurization, storage and distribution. The Taxpayer requests a ruling as to the application of the Virginia retail sales and use tax to the processing fee assessed by the Taxpayer to the patient.

RULING

In order to determine the application of the tax to the transaction at issue, it must be determined if a sale actually takes place. Public Document (P.D.) 96-168 (7/12/96) addresses the sale and purchase of blood. This ruling addresses the sale of body parts in accordance with Va. Code § 32.1-291.16, which prohibits the sale or purchase of natural body parts. However, Va. Code § 32.1-291.16 goes on to provide that hair, ova, blood, and other self-replicating body fluids, are exceptions to this statute and would qualify as a sale in Virginia. (Emphasis added). P.D. 96-168 provides that blood is generally accepted in the medical community as human tissue and the fee charged in connection with the sale of blood are for testing and processing blood into usable blood products. This ruling concludes that the charge for the sale of blood is a recovery charge associated with the processing of blood and such charge qualifies as a nontaxable processing and service charge.

Based on the findings in P.D. 96-168, and the statutory language found under Va. Code § 32.1-291.16, I find that the DHM at issue in this ruling would qualify as a "self-replicating body fluid" and therefore qualify as a sale in Virginia. Also in keeping with the findings in P.D. 96-168, I find that the charge for DHM by the Taxpayer, i.e. , screening, laboratory testing, pasteurization and storage fees, also qualifies as a charge associated with the processing and storage of DHM, a nontaxable service. This position is further supported by the fact that all DHM is donated to the Taxpayer; therefore, there is no cost of goods sold associated with the charge by the Taxpayer to the patient. For these reasons, I find that the charge by the Taxpayer to the patient for DHM is not subject to the Virginia retail sales tax.

This ruling is based on the facts presented as summarized in this letter. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and public document cited in this letter are available on line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you should have any questions concerning this ruling, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6095761599.T