Were pathology-laboratory proficiency-testing subscriptions and the included test kits subject to Florida tax?

Plain-English summary

The laboratory's subscription payment was not taxable, but the program provider owed Florida use tax on the cost of the test kits sent into the state. The transaction's true object was evaluating laboratory proficiency for accreditation, not selling specimens.

The laboratories received test materials, analyzed them, reported results, and discarded the materials. They paid one subscription amount with no separate kit charge. Because the kits were incidental to the service and had no independent value to the laboratories, the service charge was exempt while the company was treated as the consumer.

The medical exemption for test kits used to diagnose or treat human disease did not apply because these specimens tested laboratory performance, not patients. Florida allowed credit only for tax lawfully imposed and paid to the state from which materials were shipped.

What this means for you

A nontaxable service can still create use-tax liability for materials consumed in providing it. Document kit cost, shipment into Florida, and any valid tax paid to another state.

Common questions

Q: Were participation charges taxable? No.

Q: Who was treated as the kit consumer? The program provider.

Q: Did the medical test-kit exemption apply? No.

Q: Was credit available for another state's tax? Yes, only when that tax was lawfully imposed and paid.

Citations and references

• Fla. Stat. § 212.02(20) — use of tangible personal property
• Fla. Stat. § 212.06(7) — credit for lawfully paid other-state tax
• Fla. Stat. § 212.08(2)(a) and (7)(v)1. — medical kits and service transactions
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 99A-078

Original ruling text

SUMMARY

QUESTION: Are a company's charges for participation in a
proficiency-testing program for pathology laboratories
subject to sales tax?

ANSWER - Based on Facts Below: The charges are not subject
to tax but the company is deemed to be the consumer of the
materials in the test kits used for the proficiency testing
and is liable for use tax in Florida on the cost of the
test kits. The exemption in the statute for "chemical
compounds and test kits used for the diagnosis or treatment
of human disease, illness or injury" is not relevant to the
facts of this case because the testing is for proficiency,
not diagnosis. The company is subject to use tax on
specimens shipped to Florida laboratories by common carrier
from outside Florida, but is entitled to a credit for tax
lawfully paid to the state from which such materials were
shipped.

Dec 30, 1999

Re: Technical Assistance Advisement (99A-078)
XXX ("Company")
Sales and Use Tax - Test Kits for Laboratory Proficiency
Tests
Section 212.02(20), 212.06(7), 212.08(2)(a) and (7)(v)1.
F.S.

Dear :

This is in response to your letter to the Florida Department of
Revenue dated July 21, 1999. You have asked for a technical
assistance advisement indicating that the proficiency testing
materials, hereafter "test kits," described in your letter and
accompanying documentation would qualify for tax-exempt
treatment when provided as part of an overall proficiency
testing procedure for laboratories.

Facts

The Company is a not for profit organization, exempt from the
payment of federal income tax under section 501(c)(6) of the
Internal Revenue Code of 1986. It has no office or other
facility in Florida. Company is registered with the Department
to collect use tax pursuant to a voluntary disclosure agreement
reached through the XXX.

The proficiency testing program, titled XXX, consists of testing
the performance of XXX laboratories to determine whether the
laboratories meet certain standards required by federal law
administered XXX. In order to obtain accreditation, the
laboratory must participate in a proficiency-testing program,
which evaluates the ability of participating laboratories to
perform diagnostic testing on XXX accurately.

The proficiency testing program involves transfer to a
participating laboratory of a specimen in the form of a test
kit, analysis of the specimen, transmission of the laboratory's
findings to Company, and processing and evaluation of the
laboratory's findings by Company. Federal law, XXX, requires
that the kit must be furnished to the laboratory by a government
agency or a not-for-profit agency.

Most of the test kits consist of XXX or biologic base that is
"spiked" with the analytes for which each participating
laboratory must test. Company purchases the test kit materials
from various manufacturers, which deliver them by common carrier
to a third party repackager retained by Company or which ship
the test kits directly to the participating laboratories by
common carrier. At the time of shipment, the manufacturers
invoice Company for the test kits.

The laboratories have no independent use for the test kits other
than participating in the proficiency-testing program. The
materials from the test are discarded once the test is
completed. The laboratory sends a report of its analysis to
Company for review and evaluation. Company provides its findings
to the laboratory and the accreditation organization designated

by the laboratory. Company provides to the laboratory relevant
statistics from the testing program.

Company charges a single subscription amount for participating
in the proficiency-testing program. No separate charge is made
for the test kit and the testing service. XXX. Replacement
materials are available to laboratories that have lost or broken
materials during a test. XXX.

Different laboratories require different test modules, depending
on the complexities of their operations. Each testing module is
priced separately.

Requested Advisement

You are requesting advisement that:

I. The "true object" of Company's proficiency testing program
is the administration of a proficiency testing service
rather than the provision of the proficiency testing
materials; therefore, Company's charges for participation
in the proficiency testing program are not subject to sales
or use tax, and Company is deemed to be the consumer of the
materials in the test kits.

II. Neither the sales nor use tax applies to the proficiency
testing materials under Section 212.08(2)(a), F.S., which
exempts "chemical compounds and test kits used for the
diagnosis or treatment of human disease, illness or
injury."

III. Company is not subject to use tax on specimens shipped to
Florida laboratories by common carrier from outside
Florida.

IV. If Company is subject to use tax on specimens shipped to
Florida laboratories by common carrier outside Florida,
Company is entitled to a credit for tax paid to the state
from which such materials were shipped.

Law, Discussion, Analysis and Conclusion

With respect to the service transaction, Section 212.08(7)(v)
1., F.S., provides:

Professional services.--

1. Also exempted are professional, insurance, or personal
   service transactions that involve sales as inconsequential
   elements for which no separate charges are made.

There are no separate charges made for the test kits. The test
kits are inconsequential because the laboratories are receiving
a service and do not retain or re-use test kits. The kits are
disposed of once the data from them is obtained. The test kits
have no value apart from the test evaluating the laboratories.
The purpose of the transaction is to receive certification, not
to obtain the test kits. If Company used means other than the
test kits to test the laboratories' proficiency, such as
retesting actual biological samples or personal inspection, the
certification process would be just as well served.

With respect to the liability of Company for use tax, as set
forth above, the personal service tax exemption applies to the
provision of the test kits to the laboratories. Under that
exemption, the service provider is deemed not to be selling
tangible personal property in a taxable transaction. Rather,
Company is using the test kits in providing a service. Section
212.02(20), F.S. states where relevant:

"Use" means and includes the exercise of any right or power
over tangible personal property incident to the ownership
thereof, or interest therein....

Company controls shipment of the test kits into Florida and
directs their use while in Florida. It is not relevant that they
were not in Company's possession when in use. See Sharper Image
Corporation v. Florida Department of Revenue, 704 So.2d 657
(Fla.1st D.C.A.1997). In that case, a San Francisco based
catalogue sales company challenged use tax levied on its
catalogues delivered to Florida residents. In rejecting the
company's argument that mere distribution of the catalogues was

not a taxable event, the court found that any use to which
tangible personal property is put in this state constitutes
"use" sufficient to trigger tax.

Nor is use tax avoided on any theory that the test kits are
purchased for resale within the meaning of Chapter 212, Florida
Statutes. They are simply used as part of the testing
activities.

With respect to any medical exemption claimed, regardless of
whether the tax fell as use tax on Company or as sales tax on
the laboratories, if there were a medical exemption, there would
be no tax. Section 212.08(2)(a), F.S., which exempts from tax
"chemical compounds and test kits used for the diagnosis or
treatment of human disease, illness, or injury," is not relevant
to the test kits. They are not used for the diagnosis or
treatment of human disease, illness or injury. They are used to
test the proficiency of laboratories.

With respect to credit sought from Florida for use tax paid
elsewhere, if another state lawfully taxes Company's purchase of
the test kits and Company pays the tax, Company is entitled to a
credit for such tax paid tax. See Section 212.06(7), F.S.
However, the United States Constitution limits the states'
powers to tax items in interstate commerce. Therefore, there
must be a taxable sale that is validly taxed by another state
for such credit to be available to Company.

Advisement

Company's charges for participation in the proficiency testing
program are not subject to sales tax, but Company is deemed to
be the consumer of the materials in the test kits and is liable
for use tax in Florida on the cost of the test kits.

Section 212.08(2)(a), F.S., which exempts "chemical compounds
and test kits used for the diagnosis or treatment of human
disease, illness or injury," is not relevant to the facts of
this case.

Company is subject to use tax on specimens shipped to Florida

laboratories by common carrier from outside Florida.

Company is entitled to a credit for tax lawfully paid to the
state from which such materials were shipped.

This response constitutes a Technical Assistance Advisement
under section 213.22, F.S., which is binding on the Department
only under the facts and circumstances described in the request
for this advice, as specified in Section 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., and are subject to disclosure to the public under the
conditions of Section 213.22, F.S. Confidential information must
be deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material, and this response, deleting names,
addresses, and any other details which might lead to
identification of the taxpayer. Your response should be received
by the Department within 15 days of the date of this letter.

Sincerely,

Karen Kugell
Senior Attorney
Technical Assistance and Dispute Resolution
(850) 922-4834

KK/
Control #: 38527