Are diagnostic test kits sold to hospitals, labs and physicians exempt as 'drugs and medicines,' even though they're used on body fluids rather than on the body itself?

Plain-English summary

Pharmacia, Inc., an out-of-state vendor, sold diagnostic products — normally sold as kits of chemical solutions (including substances like insulin, digoxin and ragweed extracts), glass tubes and glass plates — to New York hospitals, clinical laboratories and physicians. The kits are used to test a patient's body fluids (blood, urine, amniotic fluid) to help diagnose diabetes and metabolic diseases, allergies, and hormonal levels in pregnancy. Pharmacia noted the FDA classifies them as "in vitro diagnostic products for human use." It asked whether these sales are exempt.

The Department held the kits are taxable medical supplies, not exempt drugs and medicines — and taxability then turns on the buyer.

• The drugs-and-medicines exemption is for things used on the body. Section § 1115(a)(3) exempts drugs and medicines used internally or externally in curing, treating or preventing human illness. The regulation illustrates this with a diagnostic substance "used internally or externally on a human," such as a barium product for gastric X-rays (20 NYCRR 528.4(b)).
• These kits are used on fluids, not on the body. Pharmacia's kits are used externally on a human's body fluids — in vitro — not internally or externally on the human body itself. So they are classified as medical supplies, not "drugs and medicines," despite containing some drug substances.
• Medical supplies are taxable to compensated medical providers. Medical supplies are not exempt when purchased by a person performing medical or similar services for compensation (20 NYCRR 528.4(g)(2)), and that includes a private physician, a clinical laboratory and a hospital (20 NYCRR 528.4(h)).
• So the buyer determines the tax. Pharmacia must collect tax on sales to customers who provide medical services for compensation — unless the customer is exempt under § 1116(a) and provides documentation: an Exempt Organization Certification (Form ST-119.1) for a nonprofit, or a contract/purchase order in its name for a government buyer. Sales to customers not providing medical services for compensation are exempt under § 1115(a)(3).

What this means for you

"In vitro" diagnostics are medical supplies, not exempt drugs. The § 1115(a)(3) exemption is for substances used on the human body. Products used to test body fluids in the lab don't qualify as drugs and medicines, even if they contain drug ingredients.

Who buys the supply decides the tax. Medical supplies lose the exemption when the buyer is a physician, lab or hospital providing services for compensation — so sales to those providers are taxable.

Collect exemption documentation for exempt buyers. A nonprofit needs to give you Form ST-119.1; a government agency's contract or purchase order in its name suffices. Keep the documentation to support the exemption.

Common questions

Q: My diagnostic kits contain insulin and other drugs. Aren't they exempt drugs and medicines?
A: No. Because they're used on body fluids in vitro — not on the human body — they're classified as medical supplies, not drugs and medicines (20 NYCRR 528.4(b)).

Q: Are sales to hospitals, labs and physicians taxable?
A: Yes, because those buyers provide medical services for compensation — unless the buyer is exempt under § 1116(a) and gives proper documentation.

Q: Are any sales of these kits exempt?
A: Yes. Sales to customers who are not providing medical services for compensation are exempt under § 1115(a)(3).

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1115(a)(3) — drugs-and-medicines exemption; medical-supplies-for-compensation exclusion
• 20 NYCRR 528.4(b) — diagnostic substance used on a human is an exempt drug
• 20 NYCRR 528.4(g)(2), 528.4(h) — medical supplies not exempt when bought by a person performing medical services for compensation
• Tax Law § 1116(a) — exempt purchasers; Form ST-119.1 (Exempt Organization Certification)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_58s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81(58)S
Sales Tax
November 27, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810810B

On August 10, 1981 a Petition for Advisory Opinion was received from Pharmacia, Inc., 800
Centennial Avenue, Piscataway, New Jersey 08854.
The issue raised is whether Petitioner's sales of certain diagnostic products to hospitals,
clinical laboratories and physicians are exempt from sales tax.
Petitioner, an out-of-state vendor, sells and delivers certain diagnostic products to hospitals,
clinical laboratories, and physicians located in New York State. These diagnostic products are
normally sold in kits which consist of chemical solutions, glass tubes, and glass plates. The chemical
solutions include substances which are commonly used as medicines, such as insulin, digoxin, and
ragweed extracts. These chemical solutions are used to test the body fluids of a patient, such as
blood, urine, and amniotic fluid. The tests are performed only by or upon the order of a physician,
and are used to determine the presence and amount of certain chemical and biological properties.
This determination is used in the diagnosis and treatment of three types of medical conditions: (1)
diabetes and other metabolic and pancreatic diseases; (2) allergies, such as asthma, eczema, and hay
fever; and (3) hormonal levels in pregnancy.
Petitioner states that the Food and Drug Administration has classified these products as "in
vitro diagnostic products for human use" which are further classified as drugs. Petitioner's diagnostic
products are used externally on a human being's body fluids to identify biochemical conditions
within the human body.
Section 1105(a) of the Tax Law imposes a tax on "the receipts from every retail sale of
tangible personal property, except as otherwise provided by this article."
Section 1115(a)(3) exempts receipts from the retail sale of: "Drugs and medicines intended
for use, internally or externally, in the cure, mitigation, treatment or prevention of illnesses or
diseases in human beings, medical equipment . . . and supplies for such use . . . but not including .
. . medical equipment and supplies, other than such drugs and medicines, purchased at retail for use
in performing medical and similar services for compensation."
The terms "drugs and medicines" are illustrated in the Sales and Use Tax Regulations as
follows:

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-81(58)S
Sales Tax
November 27, 1981

"Example 6. Any diagnostic drug, chemical or other substance which is used internally or
externally on a human, such as a barium product for gastric X-rays, is exempt." (Emphasis
added) 20 NYCRR 528.4(b).
The Sales and Use Tax Regulations further provide that "medical supplies are not exempt
if purchased by a person performing medical or similar services for compensation." 20 NYCRR
528.4(g)(2). Medical services for human beings include the practice of medicine by a private
practitioner, a clinical laboratory and a hospital, whether the services are paid for by the patient or
another source. 20 NYCRR 528.4(h).
Section 1116(a) of the Tax Law exempts certain purchasers from payment of tax on
purchases of taxable property or services. Such exemption is granted to the State of New York and
its agencies and municipalities, the Federal government and its agencies and certain non-profit
organizations (i.e. religious, charitable, educational organizations) and veterans groups.
The diagnostic kits sold by Petitioner are classified as medical supplies rather than drugs and
medicines within the meaning and intent of Section 1115(a)(3) of the Tax Law, notwithstanding the
presence of certain drugs or medicines as components of the kits. Petitioner's kits are not used
internally or externally on a human as contemplated in Regulation 528.4(b).
Accordingly, Petitioner is required to collect sales tax on its sales of diagnostic kits to
customers who provide medical or similar services for compensation unless such customer is entitled
to exemption pursuant to section 1116(a) of the Tax Law and furnishes Petitioner with a properly
completed exemption certificate or other documentary evidence of its exempt status. Where the
customer is the State of New York or one of its agencies or municipalities or the Federal government
or one of its agencies, a contract or purchase order issued in its name is satisfactory documentation
of its exempt status. A non-profit organization must issue a properly completed Exempt Organization
Certification (ST-119.1) to Petitioner to establish its exempt status. Petitioner's sales of diagnostic
kits to customers who are not engaged in providing medical or similar services for compensation are
exempt from sales tax. Tax Law §1115(a)(3) and 20 NYCRR 528.4(g).

DATED: November 12, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau