Were diagnostic test kits, calibration and control materials, and qualifying research products exempt from Florida sales tax?

Plain-English summary

A biotechnology company planned laboratory research and clinical studies, followed by production of disposable diagnostic kits for identifying bacteria and selecting antibiotics. The kits would use calibration and control samples, contain items such as needles, syringes, tubing, reservoirs, filters, cannulas, and blood-processing assemblies, and carry the required prescription-use warning.

Florida found diagnostic test kits, calibration and control materials, and related chemical compounds or substances exempt when used to diagnose or treat human disease, illness, or injury. The required calibrators and controls were a necessary part of validating patient-specific test results, so they qualified as diagnostic chemical compounds.

The ruling also recognized an exemption for qualifying consumable medical supplies carrying Rx labeling. Separately, section 212.052 exempted the cost of a product the taxpayer manufactured, produced, compounded, processed, or fabricated for its own direct and sole use in research or development.

What this means for you

The medical exemption turned on the item's diagnostic role, including mandatory quality-control materials used before patient results could be reported. The research-and-development provision was narrower: it covered the cost of a product the taxpayer itself made or processed for direct and sole R&D use, not every purchase merely associated with research.

Common questions

Were diagnostic test kits exempt? Yes, under section 212.08(2)(a) on the stated facts.

Why did calibrators and controls qualify? Federal and Florida laboratory rules required them to validate patient-test runs, making them a necessary part of the diagnostic procedure.

Were Rx-labeled consumable medical supplies exempt? Yes. The ruling's summary expressly included qualifying consumable supplies carrying Rx labeling.

What did the R&D exemption cover? The cost of a product the taxpayer itself manufactured, produced, compounded, processed, or fabricated for direct and sole use in research or development.

Did ordinary quality-control testing count as research or development? No. The statute quoted in the ruling excludes ordinary testing or inspection for quality control from its R&D definition.

Citations and references

• Fla. Stat. § 212.08(2)(a) (medical products, supplies, diagnostic test kits, and chemical compounds)
• Fla. Admin. Code r. 12A-1.020(7) (diagnostic chemical compounds and test kits)
• Fla. Stat. § 212.052(1), (2) (research-and-development definitions and product-cost exemption)
• Fla. Admin. Code r. 59A-7.029(7)(b) and 42 C.F.R. § 493.1218 (control and calibration materials cited in the ruling)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 07A-007

Original ruling text

March 20, 2007

Re:

Technical Assistance Advisement 07A-007
XXXX. ("Taxpayer")
Sales and Use Tax
Diagnostic Test Kits and Related Medical Products
Sections 212.08(2) and 212.052, Florida Statutes (F.S.)
Rule 12A-1.020, Florida Administrative Code (F.A.C.)

Dear
This response is in regard to your letter requesting the Department's issuance of a Technical
Assistance Advisement pursuant to s. 213.22, F.S., and Chapter 12-11, F.A.C., regarding the
above referenced matter.
In your letter of January 24, 2007, you are seeking guidance on the sales tax applications related
to your company’s use of chemical compounds, test kits, and related supplies.
ISSUE
What is the taxable of status of chemical compounds and test kits used by the taxpayer in
research and development (and subsequent sale) of a product designed to diagnose human
disease or injury?
TAXPAYER PROVIDED FACTS
Your letter provides in part:
...
[Taxpayer] will conduct research, development, and clinical studies for new medical
technology. The company also has an expanded mission to supply rapid diagnostic
capabilities to hospitals for non-defense applications.
(I)

For business reasons [Taxpayer] will perform extensive laboratory tests over
the next three years that will include the clinical study (research/validation)
on humans to produce results that will be published in medical journals.
[Taxpayer] will purchase chemical compounds to be used directly and solely
in research and development to advance knowledge and technology in the
biotech field or to develop a new product. [Taxpayer] is financially supported
by a U.S. Congressional Appropriation to conduct this research. Taxpayer
will also work closely with [a Florida university], Florida Department of
Health and the U.S. Army during the laboratory testing.

(II)

Upon completion of the research, for business reasons, [Taxpayer] will

develop a disposable non-reusable diagnostic test kit to be used by the U.S.
Military, Hospitals, and licensed physicians around the world. Taxpayer will
fabricate these consumable diagnostic test kits to determine the type of
bacteria present and the proper antibiotic to administer within a much shorter
time period than present technology. The licensed physicians will take blood
from patients suspected of having an infection and process the blood so that
the infecting organism can be identified. The test kits will enhance the
sensitivity of the detection process thereby providing information that will
provide clinically useful and timely benefits to the patient. These tests kits
will follow Florida Rule 59A-7.029(7) (b) and federal rule 493.1218
regulations by requiring the control samples used in the testing report patient
specific results that shall include at least two samples of either calibration
materials or control materials not less frequently than once each run of patient
samples in order to assess the accuracy and precision of patient test results in
the same manner as the patient specimens. The regulations also will require
that a batch of patient results be validated by the use of a calibration material
or a control sample. The kits will contain the federal warning restricting their
sale by or on the order of a licensed physician. Examples of materials in the
non-reusable medical kits are hypodermic needles and syringes, tubing,
reservoirs, filters, cannulas, suction lines, and assemblies for blood
management, processing, and testing.
APPLICABLE AUTHORITY
Section 212.08(2)(a), F.S., provides in part:
(2) EXEMPTIONS; MEDICAL.
(a) There shall be exempt from the tax imposed by this chapter any medical
products and supplies or medicine dispensed according to an individual prescription or
prescriptions written by a prescriber authorized by law to prescribe medicinal drugs;
hypodermic needles; hypodermic syringes; chemical compounds and test kits used for the
diagnosis or treatment of human disease, illness, or injury; . . . . (Emphasis Supplied)
Rule 12A-1.020, F.A.C., provides in part:
(7)(a) The chemical compounds and test kits specified in this paragraph which are used for
the diagnosis or treatment of disease, illness or injury are specifically exempt. Examples of
chemical compounds and test kits include, but are not limited to the following: Albustix
reagent strips and tablets; blood pressure units; cholesterol tests; clinistix reagent strips;
clinitest tablets; combistix reagent strips; dextrostix, reagent strips; dextrotest kit and refills;
diabetic test kits; galatest; ictotest reagent tablets; sugar test tablets for diabetics;
thermometers for human use; tuberculin patch test; urine testing kits; urograph test.
(b) Likewise exempt is any chemical compound and test kit used for the diagnosis or
treatment of disease, illness, or injury, ordered and dispensed in a retail establishment by a

pharmacist licensed by the State of Florida, according to an individual prescription or
prescriptions written by a duly licensed practitioner authorized by the laws of the state to
prescribe medicinal drugs.
Section 212.052, F.S., titled “Research or development costs; exemption,” provides in part:
(1) For the purposes of the exemption provided in this section:
(a) The term "research or development" means research which has one of the following
as its ultimate goal:

1. Basic research in a scientific field of endeavor.
2. Advancing knowledge or technology in a scientific or technical field of endeavor.
3. The development of a new product, whether or not the new product is offered for sale.
4. The improvement of an existing product, whether or not the improved product is
   offered for sale.
5. The development of new uses of an existing product, whether or not a new use is
   offered as a rationale to purchase the product.
6. The design and development of prototypes, whether or not a resulting product is
   offered for sale.
   The term "research or development" does not include ordinary testing or inspection of
   materials or products used for quality control, market research, efficiency surveys,
   consumer surveys, advertising and promotions, management studies, or research in
   connection with literary, historical, social science, psychological, or other similar
   nontechnical activities.
   (b) The term "costs" means cost price as defined in s. 212.02(4).
   (c) The term "product" means any item, device, technique, prototype, invention, or
   process which is, was, or may be commercially exploitable.
   (2) Notwithstanding any provision of this chapter to the contrary, any person, including
   an affiliated group as defined in s. 1504 of the Internal Revenue Code of 1954, as
   amended, who manufactures, produces, compounds, processes, or fabricates in any
   manner tangible personal property for such taxpayer's own use directly and solely in
   research or development shall not be subject to the tax imposed by this chapter upon the
   cost of the product so manufactured, produced, compounded, processed, or fabricated.
   DISCUSSION
   Section 212.08(2)(a), F.S., exempts from tax chemical compounds and test kits which are used
   for the diagnosis or treatment of human disease, illness, or injury. The term "chemical
   compound" is not defined for purposes of this statutory exemption, so the plain and ordinary

meaning of the words must be considered. The term "chemical" is defined as "a substance ...
obtained by a chemical process, prepared for use in chemical manufacturing or used for
producing a chemical effect." Webster's Third New International Dictionary of the English
Language, Unabridged (hereafter referred to as "Webster's"), page 384. The term "compound" is
defined as "composed of or produced by the union of several elements, ingredients, parts or
things." Webster's at page 466. A chemical compound would be a mixture or product, comprised
of various components and prepared via a chemical process, having as a purpose the production
of a chemical effect.
Controls are reagents which are used for quality control of the particular test being done.
Calibrators contain reagents that are used to calibrate the particular test. Therefore, the controls
and calibrators in question fit the description of "chemical compounds" under s. 212.08(2)(a),
F.S.
It then must be determined whether these reagents or chemical compounds are used for the
diagnosis or treatment of human disease, illness, or injury. Federal Regulation section 493.1218
requires that, for quantitative testing, testing laboratories that report patient specific results must
include at least two samples of either calibration materials or control materials not less frequently
than once each run of patient samples in order to assess the accuracy and precision of patient test
results.
In Rule 59A-7.029(7)(b), F.A.C., implemented by the Agency for Health Care Administration, it
states that control samples must be included at least once with each run of patient specimens;
must be tested in the same manner as patient specimens; must be processed through each step of
patient testing; and must meet the laboratory's criteria for acceptability prior to reporting patient
test results. Since the Federal regulations and the Florida regulations both require that a batch of
patient test results must be validated by the use of calibration material or a control sample, before
the test results can be reported to the prescribing physician, these calibrators and controls are a
necessary part of the procedure that is used in the diagnosis or treatment of human disease,
illness, or injury. As such, they would be exempt from tax as chemical compounds used for the
diagnosis of human disease pursuant to section 212.08(2)(a), F.S.
SUMMARY
Pursuant to Section 212.08(2)(a), F.S., diagnostic test kits, calibration and control materials, and
the related chemical compounds and substances would be exempt from tax. Additionally, an
exemption is provided for consumable medical supplies which carry the “RX” labeling, such as
the test kits. Finally, when performing research and development, an exemption is provided for
under Section 212.052, F.S., on the “cost of the product so manufactured, produced,
compounded, processed, or fabricated.”
CLOSING STATEMENT
This response constitutes a Technical Assistance Advisement under s. 213.22, F.S. which is
binding on the department only under facts and circumstances described in the request for this
advice as specified in s. 213.22, F.S. Our response is predicated on those facts and the specific

situation summarized above. You are advised that subsequent statutory or administrative rule
changes or judicial interpretations of the statutes or rules upon which this advice is based may
subject similar future transactions to a different treatment than expressed in this response.
You are further advised that this response, your request and related backup documents are public
records under Chapter 119, F.S., which are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department before disclosure. In an effort to
protect the confidentiality of such information, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement, backup material and response
within fifteen days of the date of this advisement.
Sincerely,
Jonathan E. Swift
Tax Law Specialist
Technical Assistance and Dispute Resolution
(850) 922-4840
Control #29160