My dental practice buys prosthetic devices and implants in bulk without a specific patient's name on each purchase (to protect patient privacy) -- do these still qualify for Virginia's durable medical equipment sales tax exemption?

Plain-English summary

A dental practice specializing in implants was audited and assessed consumer use tax on its purchases of prosthetic devices and implants -- purchases made without referencing a specific patient at the time of purchase. The practice appealed on two grounds: first, that requiring patient identifiers on its purchase records to prove the "for a specific patient" connection would violate HIPAA's patient privacy protections; second, that in a prior Department audit, similar unlabeled durable medical devices had been removed from the assessment as exempt, so the same treatment should apply here.

Virginia exempts prosthetic devices and other durable medical equipment from sales and use tax -- but only when purchased "by or on behalf of an individual for use by such individual." The Department's own regulation specifically excludes bulk purchases: buying a supply of devices and later dispensing them to whichever patient needs one doesn't qualify, even if the device ends up being fitted or modified for that specific patient afterward. The Department pointed to two of its own prior rulings addressing nearly identical situations (bulk purchases of braces/collars and orthopedic implants) where medical providers COULD trace items back to specific patients after the fact, and even that wasn't enough -- the purchase itself has to be made on behalf of a specific individual, not simply traceable to one later. (The Department noted one narrow path where bulk-style arrangements CAN qualify: a consignment setup where a manufacturer retains title to equipment stored at a provider's location, and a sale only occurs when a doctor issues a purchase order tied to a specific patient's prescription -- but that wasn't the situation here.) The only other exception to the bulk-purchase bar is for nonprofit hospitals and licensed nonprofit nursing homes holding a specific Department-issued exemption certificate, which this practice wasn't.

On the HIPAA argument, the Department wasn't persuaded. HIPAA protects patient health information from unauthorized disclosure, but it doesn't force a practice to choose between compliance and the tax exemption -- providers can use internal patient identification numbers instead of names to link a purchase to a specific patient, avoiding any disclosure risk while still meeting the exemption's requirements. Many Virginia medical providers already do this. Because the practice couldn't show its purchases were actually tied to specific patients at the time of purchase, they didn't qualify for the exemption.

On the prior audit, the Department checked its own records and found the earlier "exempt" treatment had nothing to do with a bulk-purchase exception -- those items had simply already been taxed at the vendor level, because the practice's supplier was separately audited at the same time and paid the sales tax itself. Since no vendor had paid the tax on the purchases at issue in this new audit, there was no double-taxation concern, and the assessment was upheld, with 60 days given to pay before additional interest would accrue.

What this means for you

Medical practices buying prosthetic devices, implants, or other durable medical equipment

To qualify for Virginia's sales tax exemption, the purchase itself needs to be made on behalf of a specific patient -- not just traceable to one afterward. Buying in bulk and dispensing as needed doesn't qualify, even if you can later match each item to whichever patient received it.

Practices worried that patient-specific purchase documentation might violate HIPAA

It generally doesn't have to. You can satisfy the exemption's "specific individual" requirement using internal patient ID numbers rather than names -- a common practice among Virginia medical providers that avoids disclosing protected health information while still linking each purchase to a patient.

Medical equipment suppliers considering a consignment arrangement with providers

Structuring a deal so the manufacturer retains title until a doctor issues a purchase order tied to a specific patient's prescription is one way bulk-style equipment supply CAN still qualify for the exemption -- unlike a straightforward bulk purchase where title transfers to the provider upfront.

Anyone relying on how a prior, similar-looking audit turned out

Don't assume identical-looking items got exempt treatment for the reason you think. Here, the earlier "exemption" was really just the Department avoiding double taxation because the vendor had already paid the tax -- not a general rule that bulk medical device purchases are tax-free. Verify the actual basis for any favorable prior treatment before relying on it.

Common questions

Q: My practice buys medical devices in bulk and dispenses them to patients as needed -- are these purchases exempt from Virginia sales tax?
A: Generally no. The exemption requires the purchase to be made on behalf of a specific individual for that individual's use -- bulk purchases dispensed later don't qualify, even if you can trace a given item to a specific patient after the fact.

Q: Won't putting a patient's name on a purchase order to claim this exemption violate HIPAA?
A: You don't need to use the patient's name. Internal patient identification numbers can establish the same specific-patient connection without disclosing protected health information -- a method many Virginia providers already use.

Q: Is there any way bulk-style equipment purchasing can still qualify for the exemption?
A: Yes, through a consignment arrangement: if the manufacturer retains title to equipment stored at your location and a sale only occurs when a doctor issues a purchase order tied to a specific patient's prescription, that structure can qualify.

Q: Who else can buy durable medical equipment tax-exempt without the specific-patient requirement?
A: Nonprofit hospitals and licensed nonprofit nursing homes, but only if they hold a Sales and Use Tax Certificate of Exception issued by the Department verifying their tax-exempt status.

Citations and references

• Va. Code § 58.1-609.10 10 (exemption for prosthetic devices/durable medical equipment purchased by or on behalf of a specific individual for that individual's use)
• 23 VAC 10-210-940 (definition of "prosthetic devices"; subsection G excludes bulk-purchased-then-dispensed equipment from the exemption)
• Va. Code § 58.1-609.7 4 (separate exemption for nonprofit hospitals/licensed nonprofit nursing homes with a Department exemption certificate)
• P.D. 00-215 (12/7/2000) (bulk purchase of braces/collars not exempt even though traceable to specific patients afterward)
• P.D. 01-137 (9/19/2001) (bulk purchase of orthopedic implants, same analysis)
• P.D. 16-85 (5/17/2016) (consignment arrangement -- manufacturer retains title until a patient-specific purchase order issues -- can qualify as an exempt sale)

Subject

Exemption : Durable Medical Devices - Bulk Purchases Administration : Appeal - Reliance on Previous Audit

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-86

Original ruling text

April 28, 2022

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

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period January 2014 through December 2018. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer operates a dental practice specializing in dental implants. As a result of an audit, the Taxpayer was assessed consumer use tax due to the purchase of prosthetic devices and implants without reference to a specific patient. The Taxpayer appeals, contending that the inclusion of patient identities would violate its patient’s right to privacy under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The Taxpayer also references a prior audit with the Department where similar items were removed from the audit exceptions as exempt.

DETERMINATION

Prosthetic 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”. Prosthetic devices are defined in Title 23 of the Virginia Administrative Code (VAC) 10-210-940 to mean “devices which replace a missing part or function of the body and shall include any supplies physically connected to such devices.”

The tangible personal property at issue in this appeal qualifies as durable medical equipment under Virginia Code § 58.1-609.10 10. At issue, however, is whether the purchase of such equipment by the Taxpayer falls within the purview of Title 23 VAC 10-210-940 G. Under this regulation, purchases of such property only qualify for the exemption if the transaction is deemed to be a purchase on behalf of an individual and is required to be specifically bought for that individual. Durable medical equipment and devices purchased in bulk and then dispensed to individual patients are not eligible for the exemption even if the device is modified or fitted for a specific individual.

The only exception to the “bulk purchase” rule is set out in Virginia Code § 58.1-609.7 4, which authorizes the exempt sale of tangible personal property to nonprofit hospitals and licensed nonprofit nursing homes. In order for nonprofit hospitals to make exempt purchases, such nonprofit hospitals and nursing homes must be able to provide a Sales and Use Tax Certificate of Exception letter issued by the Department of Taxation, verifying the entity’s tax-exempt status. Here, it does appear the Taxpayer was not a nonprofit hospital or nursing home.

The Department has previously addressed this issue in Public Documents (P.D.) 00-215 (12/7/2000) and P.D. 01-137 (9/19/2001). While the discussion in P.D. 00-215 centers on the bulk purchase of braces and collars, and P.D. 01-137 deals with the bulk purchase of orthopedic implants, in both cases, the medical service provider purchased the items in bulk for use on an “as needed” basis. After the purchases, each service provider was able to trace the items to specific patients. Consistent with the regulation, however, the Department ruled that the purchase of the items did not qualify as exempt purchases on behalf of specific patients, regardless of the fact the taxpayers could trace the items to specific patients.

The Department has permitted the exemption to apply when purchases are made under a consignment agreement. In P.D. 16-85 (5/17/2016), the Department considered a scenario wherein a manufacturer of durable medical equipment shipped the equipment to a taxpayer, and stored it on the taxpayer’s premises. No consideration would be exchanged and therefore title to the equipment would remain with the manufacturer. A sale of the equipment takes place when a purchase order is issued by the doctor on the prescription or work order for a specific patient. At this point, the equipment is transferred and consideration exchanged. Under these circumstances, the Department determined that the transaction would qualify as an exempt sale based on the fact that the product is purchased on the prescription or work order of a licensed physician or medical practitioner for a specific patient.

The Taxpayer, here, contends that orders of prosthetic devices and implants commonly include items for multiple patients and that inclusion of the patients name or other identifiers on the invoice would be a violation of HIPAA.

The Department disagrees. HIPAA is a federal law that required the creation of national standards to protect sensitive patient health information from being disclosed without the patient’s consent or knowledge. While disclosure of a patient’s name or other identifying information may constitute a violation of protected health information, there are internal processes available to the Taxpayer that would allow for coordination of patient health records without the risk of disclosure, such as assignment of patient identification numbers. Many medical providers in the Commonwealth use such processes without issue. Because the Taxpayer is unable to show that the equipment was purchased for a specific patient, and not ordered in bulk, the transactions would not qualify for the exemption under Virginia Code § 58.1-609.10 10.

Prior Audit

The Taxpayer further contends that in the prior audit, similar durable medical devices lacking patient identifiers were ultimately not included in the assessment because they were exempt as durable medical equipment under Virginia Code § 58.1-609.10 10.

Upon review of the Department’s records regarding the prior appeal, the referenced durable medical devices were removed from the audit exceptions because payment of the required tax was accounted for by other sources. In the prior audit, the Taxpayer’s vendor was undergoing a simultaneous audit and was assessed and paid the sales tax at issue. This is not the case in the current audit.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days of the date of the bill.

The Code of Virginia sections, regulation and public documents cited are 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 response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/2159.A

Related Documents

00-215

01-137

16-85