Must a manufacturer accrue Kansas compensating use tax on free prescription-drug samples given to practitioners?

Plain-English summary

A pharmaceutical manufacturer asked whether free prescription-drug samples given to practitioners are subject to Kansas consumers' compensating use tax. The Department ruled they are exempt.

The general rule taxes advertising giveaways. "As a general rule, the purchaser or manufacturer of advertising items that are given away is required to accrue sales or use tax on the cost of the advertising materials." That rule reaches "pens, coffee cups, calendars, non-prescription drugs, and other advertising items that pharmaceutical companies heap on doctors and pharmacists."

But prescription drugs get special treatment. Sales of prescription-only drugs to practitioners are exempt. Under Revenue Ruling 19-87-1, K.S.A. 79-3606(q) exempts "the sale of prescription only drugs, as defined by K.S.A. 65-1626, dispensed pursuant to a prescription order . . . by a licensed practitioner," and the Department has determined that sales of such drugs to a person licensed to practice the healing arts, dentistry, or optometry - for inventory or professional use - fall within that exemption.

Because the sale is exempt, the gift is exempt. The Department applied K.S.A. 79-3704(d), which provides that the compensating use tax act does not apply to the use, storage, or consumption of tangible personal property that "would not have been subject to tax under the provisions of the retailers' sales tax act . . . if purchased within this state." Since a sale of prescription drugs to a practitioner would be exempt, the gift of samples is exempt too - so "manufacturers are not required to accrue use tax when they give prescription drug samples to practitioners. This rule controls regardless of any advertising benefits that the pharmaceutical manufacturer receives."

Bottom line: unlike ordinary advertising giveaways, free prescription-drug samples given to practitioners are not subject to Kansas compensating use tax, because the underlying sale of prescription drugs to practitioners is exempt.

What this means for you

Pharmaceutical manufacturers and distributors

You generally must accrue Kansas use tax on the cost of ordinary promotional giveaways - pens, mugs, calendars, and even non-prescription drugs. But free samples of prescription-only drugs given to practitioners are exempt, so no use tax accrues on them.

The exemption tracks the prescription-drug rule

The result follows from the prescription-drug sales exemption in K.S.A. 79-3606(q): if a sale of the item to a practitioner would be exempt, the compensating-use-tax "reciprocity" rule in K.S.A. 79-3704(d) exempts the corresponding gift or use.

Advertising benefit doesn't change it

The exemption for prescription-drug samples "controls regardless of any advertising benefits." So even though the samples promote the product, they are not taxed like other advertising materials.

Common questions

Q: Are free prescription-drug samples subject to Kansas use tax?
A: No. Manufacturers are not required to accrue compensating use tax on prescription-drug samples given to practitioners.

Q: Why are they treated differently from pens or calendars?
A: Because sales of prescription-only drugs to practitioners are exempt under K.S.A. 79-3606(q); under K.S.A. 79-3704(d), if the sale would be exempt, the gift/use is exempt too. Ordinary advertising items are not.

Q: Does it matter that the samples are advertising?
A: No. The Department said the rule controls "regardless of any advertising benefits" to the manufacturer.

Citations and references

• K.S.A. 79-3606(q) - exempts from Kansas sales tax the sale of prescription-only drugs (as defined by K.S.A. 65-1626) dispensed pursuant to a prescription order by a licensed practitioner; the Department applies it to sales of such drugs to persons licensed to practice the healing arts, dentistry, or optometry (Revenue Ruling 19-87-1).
• K.S.A. 65-1626 - defines "prescription-only drugs" and "prescription order" for purposes of the exemption.
• K.S.A. 79-3704(d) - provides that the Kansas compensating (use) tax act does not apply to the use, storage, or consumption of tangible personal property that would not have been subject to the retailers' sales tax if purchased in Kansas; because sales of prescription drugs to practitioners are exempt, gifts of prescription-drug samples are also exempt, and no use tax accrues.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-019

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

March 12, 2001

XXXX
XXXX
XXXX

RE: Your e-mail

Dear XXXX:

Thank you for your recent e-mail. You ask if prescription drug samples are subject to consumers compensating use tax. As a general rule, the purchaser or manufacturer of advertising items that are given away is required to accrue sales or use tax on the cost of the advertising materials. This is because they are purchasing and using the items for advertising. While this rule applies to pens, coffee cups, calendars, non-prescription drugs, and other advertising items that pharmaceutical companies heap on doctors and pharmacists, it does not apply to prescription drugs. These drugs receive special treatment under the Kansas sales and use tax law.

Revenue Ruling 19-87-1 provides that sales of prescription drugs to practitioners are tax exempt:

REVENUE RULING 19-87-1

Kansas Sales Tax - Sales of Prescription Drugs to a Person
Licensed to Practice the Healing Arts, Dentistry, and Optometry

K.S.A. 79-3606(q) provides an exemption from the Kansas sales tax for the sale of prescription only drugs, as defined by K.S.A. 65-1626, dispensed pursuant to a prescription order, as defined by K.S.A. 65-1626, by a licensed practitioner.

The Department of Revenue has determined that sales of prescription only drugs to a person licensed to practice the healing arts, dentistry, or optometry for said person's inventory or for use in the performance of his or her professional services would fall within the exemption under K.S.A. 79-3606(q). Therefore, such sales would be exempt from Kansas state and local sales tax.

This Revenue Ruling supersedes all previous Department of Revenue Rulings, opinions, and decisions, and shall be effective on and after April 1, 1987.

Approved:
Harley T. Duncan
Secretary of Revenue

Because Revenue Ruling 19-87-1 provides that sales of prescription drugs to practitioners are exempt from sales and use tax, gifts of free samples of prescription drugs to practitioners are also tax exempt. K.S.A. 79-3704(d) states: "The provisions of this [compensating use tax]act shall not apply: . . . (d) In respect to the use, storage or consumption of any article of tangible personal property brought into or used within the state of Kansas if such article of tangible personal property would not have been subject to tax under the provisions of the retailers' sales tax act of this state if purchased within this state.”

Since the Revenue Ruling effectively provides that the sale of prescription drugs to practitioners is exempt from sales and use tax, the gift of samples of prescription drugs is also exempt. This means that manufacturers are not required to accrue use tax when they give prescription drug samples to practitioners. This rule controls regardless of any advertising benefits that the pharmaceutical manufacturer receives.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts that you provided. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially effects this private letter ruling. Please call me at (785) 296-3081 if you have any additional questions.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 03/21/2001 Date Modified: 10/10/2001

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