Are the reagents a medical diagnostic laboratory buys to test blood and urine specimens exempt from Virginia sales tax under the medicines and drugs exemption?

Plain-English summary

An operator of medical diagnostic laboratories in Virginia asked for a refund of sales and use tax for February 2017 through December 2018. The auditor granted refunds on several transactions (tax accrued or remitted on exempt transactions, or use tax paid where the vendor had already charged sales tax) but denied the refund for tax the lab had accrued on reagents — chemical compounds, consisting of drugs and other substances, that react with human blood, urine, and other bodily specimens to help diagnose disease or medical deficiencies. The lab appealed under Va. Code § 58.1-1821, arguing the reagents qualify for the medicines and drugs exemption.

The exemption has two halves — and the lab only satisfied one. Va. Code § 58.1-609.10 9 exempts "medicines and drugs purchased for use and consumption by a licensed hospital, nursing home, clinic or similar corporation." So the question is both what is being bought (medicines/drugs) and who is buying it (a qualifying entity).

• The "what" half — the Department conceded it. "Medicines" and "drugs" are not defined in the sales-tax statute, so the Department has long borrowed the definitions in the Virginia Drug Control Act (Va. Code § 54.1-3401) and the federal Food, Drug and Cosmetic Act (see P.D. 89-254), consistent with 23 VAC 10-210-940. The lab pointed to clause (ii) of the definition — substances "intended for use in the diagnosis... of disease" — and, citing P.D. 01-52 (biological and allergy products classified as Schedule VI controlled drugs), the Department did not dispute that the reagents may be defined as controlled drugs.

• The "who" half — the lab failed it. Hospitals, nursing homes, and clinics qualify because their medicines and drugs are consumed or administered in providing treatment and care to patients — medical and surgical treatment, nursing care, outpatient services. The lab, by contrast, performs diagnostic testing and analytical services in a laboratory setting, producing information for medical providers to use in treating their patients. It provides no direct inpatient or outpatient care, and the reagents are never consumed by or administered to any individual — the lab uses them up itself in running tests. On those differences, the lab is not a "similar corporation" to a hospital, nursing home, or clinic.

P.D. 15-242 didn't rescue the claim. There, a for-profit family medical practice qualified under the 2006 amendment that extended the exemption to nursing homes, clinics, and similar corporations — but that practice treated patients. A diagnostic lab is not similar to it.

Because Virginia strictly construes sales-tax exemptions — any doubt is resolved against the claimant (Commonwealth v. Community Motor Bus, Commonwealth v. Research Analysis Corp., Golden Skillet Corp. v. Commonwealth) — the refund denial was upheld.

A four-ruling series. This decision is one of four materially identical rulings issued within days of each other — P.D. 25-54 (this one, February 2017–December 2018), P.D. 25-60 (January 2014–December 2015), P.D. 25-61 (2016), and P.D. 25-62 (January 2017) — same facts, same analysis, same result, differing only in the refund period covered.

What this means for you

Medical diagnostic laboratories

The medicines and drugs exemption turns on what your business does with the product, not just what the product is. Even if your reagents, kits, or biologicals are classifiable as drugs under the Drug Control Act, purchases are taxable if you use them to perform testing services rather than consume or administer them in treating patients. Independent labs that serve providers — rather than providing inpatient or outpatient care themselves — are not "similar corporations" under § 58.1-609.10 9 on this reasoning.

Hospitals, clinics, and medical practices

The entities that do qualify are those whose medicines and drugs are consumed or administered in their role as care providers — hospitals, nursing homes, clinics, and (per P.D. 15-242) entities like a family medical practice. If your organization treats patients directly, your medicine and drug purchases can qualify; document that role.

Anyone claiming a Virginia sales-tax exemption

Exemptions are strictly construed — doubt counts against you. Read every element of the exemption statute: here the taxpayer won the "is it a drug?" argument and still lost, because it couldn't satisfy the separate requirement about who the purchaser must be.

Common questions

Q: The Department agreed the reagents might be drugs — why was the refund still denied?
A: Because the exemption in Va. Code § 58.1-609.10 9 also restricts who can claim it: a licensed hospital, nursing home, clinic, or similar corporation. The lab tests specimens and reports results to medical providers; it does not treat patients, and its reagents are never consumed by or administered to a person. That made it not "similar" to the listed entities, so the purchases were taxable regardless of the reagents' drug status.

Q: What makes an entity a "similar corporation" under the exemption?
A: The qualifying entities — hospitals, nursing homes, clinics — consume or administer medicines and drugs in their roles as providers of medical and surgical treatment, nursing care, and outpatient services. An entity is "similar" when it likewise provides direct medical treatment and care to patients, like the for-profit family medical practice in P.D. 15-242. A testing laboratory serving providers does not fit that mold.

Q: Are there really four versions of this ruling?
A: Yes. P.D. 25-54, 25-60, 25-61, and 25-62 are materially identical decisions issued days apart, each covering a different refund period (spanning 2014 through December 2018). Reading this one tells you what all four say.

Q: Does it matter that the reagents help diagnose disease?
A: Not by itself. Diagnostic purpose helped the reagents fit the Drug Control Act's definition of "drug" (substances intended for use in the diagnosis of disease), but the exemption still failed because the purchaser was not a qualifying medical-care entity.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-1821 — administrative appeal (application for correction) to the Tax Commissioner
• Va. Code § 58.1-203 — the Department's authority to interpret and enforce the tax laws
• Va. Code § 58.1-609.10 9 — exemption for medicines and drugs purchased for use or consumption by a licensed hospital, nursing home, clinic, or similar corporation
• Va. Code § 54.1-3401 — the Virginia Drug Control Act's definition of "drug"
• 23 VAC 10-210-940 — the sales-tax regulation on medicines, drugs, and related items

Authorities the Department relied on (described here, not linked): Commonwealth v. Community Motor Bus Co., 214 Va. 155 (1973), Commonwealth v. Research Analysis Corp., 214 Va. 161 (1973), and Golden Skillet Corp. v. Commonwealth, 214 Va. 276 (1973) (strict construction of exemptions); P.D. 89-254 (9/21/1989) (borrowing the Drug Control Act and federal FDCA definitions); P.D. 01-52 (4/30/2001) (biological and allergy products classified as Schedule VI controlled drugs qualified as drugs); and P.D. 15-242 (12/23/2015) (a for-profit family medical practice qualified for the exemption after the 2006 statutory expansion).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 25-54

Original ruling text

April 25, 2025

Re: § 58.1-1821 Refund Appeal: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”) in which you dispute the denial of a retail sales and use tax refund for the period February 2017 through December 2018.

FACTS

The Taxpayer, an operator of medical diagnostic laboratories in Virginia, timely submitted a refund request for the period at issue and received a refund for tax paid on several transactions because tax was either accrued or remitted on exempt transactions, or use tax was paid on transactions for which the vendor charged sales tax on the invoice. The auditor denied the Taxpayer a refund for tax accrued on reagents used in testing human blood, urine, and other bodily specimens because the auditor questioned whether the reagents qualified for the medicines and drugs exemption. The Taxpayer filed an application for correction contending the reagents meet the definitional requirements of the medicines and drugs exemption.

ANALYSIS

Strict Construction of Exemptions

The Department has the authority to interpret and enforce the laws of the Commonwealth governing taxes in accordance with Virginia Code § 58.1-203. With regard to such interpretations, court precedent requires strict construction of sales and use tax exemptions. Where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption. See Commonwealth v. Community MotorBus , 214 Va. 155 (1973); Commonwealth v. Research Analysis Corporation , 214 Va. 161 (1973); and Golden Skillet Corp. v. Commonwealth , 214 Va. 276 (1973).

Medicines and Drugs Exemption

Virginia Code § 58.1-609.10 9 provides exemptions related to sales and purchases of medicines and drugs. At issue in this case is the exemption for “medicines and drugs purchased for use and consumption by a licensed hospital, nursing home, clinic or similar corporation not otherwise exempt under this section.” The Taxpayer believes its business operation was a “similar corporation” and, therefore, its purchases of reagents as drugs should qualify for the exemption. In addition to the exemption statute, the Taxpayer cites Public Document (P.D.) 15-242 (12/23/2015) in support of its claims.

The reagents in question are chemical compounds that consist of drugs and other substances. The reagents are used to react with other chemical or biological substances to promote a reaction that can help diagnose potential diseases or medical deficiencies.

Virginia Drug Control Act

The terms “medicines” and “drugs” are not defined for retail sales and use tax purposes. In order to consistently and equitably administer the medicine and drug exemption, the Department has relied on definitions included in the Virginia Drug Control Act (Chapter 34 of Title 54.1 of the Code of Virginia ) and the federal Food Drug and Cosmetic Act (Title 21, Chapter 9 of the United States Code). See P.D. 89-254 (9/21/1989). Specifically, Virginia Code § 54.1-3401 defines “drug” to mean:

(i) articles or substances recognized in the official United States Pharmacopoeia National Formulary or official Homeopathic Pharmacopoeia of the United States, or any supplement to any of them; (ii) articles or substances intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or animals; (iii) articles or substances, other than food, intended to affect the structure or any function of the body of man or animals; (iv) articles or substances intended for use as a component of any article specified in clause (i), (ii), or (iii); or (v) a biological product.

This definition is consistent with the definition set forth in Title 23 of the Virginia Administrative Code (VAC) 10-210-940. The Taxpayer cites (ii) to support its claim that the reagents are drugs.

In P.D. 01-52 (4/30/2001), the Department determined that the biological and allergy products at issue qualified as drugs pursuant to the Virginia Drug Control Act based on the Virginia Pharmacy Board’s classification of the products as Schedule VI controlled drugs for use by licensed physicians and prescriber practitioners. As the products in P.D. 01-52 may be similar to the reagents in this case, the Department does not dispute that the reagents may be defined as controlled drugs. However, in order for the reagents to be purchased exempt (or to qualify for a refund credit of tax), the Taxpayer’s business operation must be similar to that of the qualifying entities stated in medicines and drugs exemption statute. See Virginia Code § 58.1-609.10 9.

Hospitals, Clinics, Nursing Homes, and Similar Corporations

The medical entities cited in Virginia Code § 58.1-609.10 9 qualify for the exemption because their purchases of medicines and drugs are consumed or administered in their roles as providers of (1) medical and surgical treatment to patients, (2) nursing home care for sick or injured persons, and (3) outpatient medical treatment and patient services, respectively. The Taxpayer, however, was engaged in providing diagnostic testing and analytical services in a laboratory setting for the purpose of testing human specimens to obtain information for medical providers (such as the stated entities) to use in the diagnosis, treatment, and care of their patients. The Taxpayer did not provide direct medical treatment and care to individuals on an inpatient and outpatient basis. In addition, the reagents were not consumed by or administered to individuals by the Taxpayer. Rather they were used by the Taxpayer to perform diagnostic and analytical services. Based on these differences, the Taxpayer was not a “similar corporation” to a licensed hospital, nursing home, or clinic.

Regarding P.D. 15-242, the Department determined that a for-profit family medical practice qualified for the medicines and drugs exemption regarding purchases of medicines and drugs for use in the medical practice. This decision was made in accordance with the 2006 statutory amendment that expanded the exemption to include purchases of medicines and drugs by nursing homes, clinics, and similar corporations. In this instance, the Taxpayer is not similar to a family medical practice engaged in providing medical care and treatment to patients. Therefore, P.D. 15-242 is not applicable to this case.

DETERMINATION

In accordance with Virginia Code § 58.1-609.10 9, the Taxpayer’s purchase of reagents used for diagnostic testing did not qualify for the medicines and drugs exemption. Accordingly, the auditor properly denied the refund of taxes requested by the Taxpayer on its purchases of biological and chemical reagents used in providing diagnostic testing and analytical services.

The Code of Virginia sections and regulation cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at or **@tax.virginia.gov.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/5089.Z

Related Documents

89-254

01-52

15-242

22-132

23-22