Were stretch-mark cream, anti-wrinkle cream with SPF 15, and SPF 50 sunscreen exempt nonprescription drugs?

Subject

Nonprescription Drugs Exemption

Plain-English summary

A retailer challenged tax on stretch-mark therapy, anti-wrinkle cream with SPF 15, and SPF 50 sunscreen. Virginia classified each product by its primary intended use, using the product labels and the Department's nonprescription-drug guidance.

The stretch-mark product promoted appearance, softness, hydration, texture, and reduced discoloration, so it was a taxable cosmetic. The anti-wrinkle cream's primary purpose was reducing lines, wrinkles, and age spots; its SPF protection was secondary, so it also remained a taxable cosmetic.

The SPF 50 product was different. It was a topical sunscreen containing a nonprescription drug used to prevent sunburn, and the Department's guidance specifically treated SPF sunscreen as exempt.

Virginia revised the audit only for the SPF 50 sunscreen. The stretch-mark and anti-wrinkle products remained taxable, and the general Department guidance on sunscreen did not establish that the anti-wrinkle cream was exempt.

Citations and references

• Va. Code §§ 58.1-609.10(14) and 54.1-3400.
• 23 VAC 10-210-940.
• Virginia Tax Bulletin 13-5.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-106

Original ruling text

May 25, 2016

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

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the “Taxpayer”) for the period September 2010 through August 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates retail stores in Virginia selling merchandise and food. As a result of the Department's audit, an assessment was issued on untaxed sales, purchases and assets. The Taxpayer contests the tax assessed on three sales items held in the audit. The Taxpayer claims that the contested items qualify as exempt nonprescription drugs and cites Va. Code § 58.1-609.10 14, Virginia Tax Bulletin (VTB) 13-5 (3/15/13), Title 23 of the Virginia Administrative Code (VAC) 10-210-940 and Va. Code § 54.1-3400 in support of its position. In addition, the Taxpayer argues that it followed guidance provided by the Department regarding the application of the tax on the items containing SPF properties.

DETERMINATION

Nonprescription Drugs

Virginia Code § 58.1-609.10 14 provides, in pertinent part, that the retail sales and use tax shall not apply to “(i) any nonprescription drugs and proprietary medicine purchased for the cure, mitigation, treatment, or prevention of disease in human beings.”

VTB 13-5 provides that nonprescription drugs include “any substances or mixture of substances containing medicines or drugs for which no prescription is required and which are generally sold for internal or topical use in the cure, mitigation, treatment, or prevention of disease in human beings.” VTB 13-5 defines “proprietary medicines” as “any nonprescription drug sold to the general public under the brand name or trade name of the manufacturer and which does not contain any controlled substance or marijuana.” VTB 13-5 also provides categories of items that generally would not qualify for exemption as nonprescription drugs. These categories include:

Cosmetics — articles applied to the body for cleansing, beautifying, promoting attractiveness or altering the appearance (including makeup, body lotions, cold creams, daily moisturizers, and hair restoration products), regardless of whether the items contain nonprescription drugs or other medicinal ingredients;

Toilet articles — articles advertised or held out for sale for grooming purposes (including many soaps, toothpastes, hair sprays, shaving products, colognes, deodorants, and mouthwashes);

Food products and supplements – items classified as such by the Federal Food and Drug Administration (including herbal teas, drinks, pills or supplements, diet aids, and weight control preparations);

Vitamins and mineral concentrates – sold as dietary supplements or adjuncts (except when sold pursuant to a written prescription by a licensed physician, nurse practitioner, or physician's assistant);

Devices — including contraceptive items, birth control preparations, and testing kits;

Products listing natural and herbal ingredients as the active components , where such products do not contain a nonprescription drug or proprietary medicine or do not treat, cure, or prevent disease in human beings; and

Items containing nonprescription drugs or other medicinal ingredients , where the inclusion of such substances serves as a secondary function to the intended use of the product.

Title 23 VAC 10-210-940 A states that, “[t]he tax does not apply to medicines, drugs,. . . dispensed by or sold on prescriptions or work orders of licensed physicians,.. . and controlled drugs purchased by a licensed physician for use in his professional practice.” The exemption applies to controlled drugs and proprietary medicines contained in Schedules I through VI of the Virginia Drug Control Act (Chapter 34 of the Code of Virginia § 54.1.) Section C 1 of the regulation states, “Sales of medicines or drugs . . . on written prescriptions of physicians . . . are exempt from the tax.”

The Department considers the federal Food and Drug Administration's (FDA) guidelines in the classification of products for purposes of the above exemptions.

Keeping in mind the above, I will address the contested products listed in the appeal.

Mederma Stretch Marks Therapy . According to the product label, Mederma Stretch Marks Therapy is used to improve appearance, reduce discoloration, smooth texture, enhance softness and hydrate the skin to help prevent stretch marks. Based on VTB 13-5, Mederma Stretch Marks Therapy falls in the category of a cosmetic for sales and use tax purposes because it is used in promoting attractiveness or altering the appearance in human beings. A product that is a cosmetic is not a medicine regardless of whether it contains nonprescription drugs or other medicinal ingredients. As a cosmetic, Mederma Stretch Mark Therapy does not qualify for the nonprescription drug exemption. Further, because Mederma Stretch Marks Therapy is not a medicine or drug dispensed by or sold on prescriptions or work orders of licensed physicians it does not qualify for the exemption in Title 23 VAC 10-210-940 A. Accordingly, the tax assessed on the stretch marks therapy product is correct.

Anti-Wrinkle Cream with SPF 15 sunscreen : According to the product label, the Anti-Wrinkle Cream is used to reduce the appearance of fine lines, wrinkles, age spots and softens and smoothes skin. VTB 13-5 specifically lists wrinkle removing and concealing preparations as items that do not qualify for the nonprescription drug exemption regardless of whether the item contains nonprescription drugs or other medicinal ingredients. In this instance, the primary purpose of the anti-wrinkle cream is for promoting attractiveness or altering the appearance and falls in the category of a cosmetic for sales and use tax purposes. The inclusion of the SPF protection serves as a secondary function to the intended use of the product. As a cosmetic, the anti-wrinkle cream does not qualify for the nonprescription drug exemption. Further, because the anti-wrinkle cream is not a medicine or drug dispensed by or sold on prescriptions or work orders of licensed physicians it does not qualify for the exemption in Title 23 VAC 10-210-940 A. Accordingly, the tax assessed on the anti-wrinkle cream is correct.

Regarding the Taxpayer's claim that it relied on the Department's guidance in determining the taxability of lotions containing sunscreen, the Department provided the Taxpayer general guidance that: (1) all body lotions are subject to the retail sales and use tax unless they are medicated, and (2) lotions with sunscreen that contain SPF protection are exempt from the retail sales and use tax. Therefore, I cannot agree that the Taxpayer relied on the Department's guidance in determining the taxability of the anti-wrinkle cream because the anti-wrinkle cream is not medicated nor is it marketed as a sunscreen. Accordingly, the Taxpayer's claim it relied on the Department's guidance in this instance is not valid.

Ocean Protect sunscreen with SPF-50 : Ocean Protect is a topical sunscreen lotion that contains a nonprescription drug used to prevent sunburn in human beings. VTB 13-5 specifically provides an exemption for sunscreen containing SPF protection. According, the Ocean Protect sunscreen with SPF protection qualifies for exemption and will be removed from the audit.

CONCLUSION

Based on the foregoing, the audit will be adjusted to remove the tax assessed on the contested Ocean Protect sunscreen with SPF-50 consistent with this determination and a revised audit report will be mailed to the Taxpayer. The remaining portion of the contested assessment is correct. An updated bill, with interest accrued to date, will be mailed to the Taxpayer and should be paid within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia sections, regulation and tax bulletin cited are available on­line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6155775389.T