Are physician-targeted 'drug sample plus prescription pad' promotional mailers exempt from sales tax as promotional materials mailed free of charge to customers, even though the physicians who receive them don't buy the drug themselves?

Plain-English summary

Promex Medical builds "Medi-Script Starter Units" for pharmaceutical company clients: a blister pack holding a drug sample plus a prescription form pre-printed with a specific physician's name, address, and DEA/license numbers, sometimes with other printed promotional literature about the drug. Because federal law requires a signed sample-request form before sending drug samples to a physician, Promex first solicits physicians (often by telemarketing) to get that authorization, then assembles and mails the finished units directly to the targeted physicians, at no charge to the physicians, via common carrier. Promex bills the pharmaceutical company separately for the telemarketing, the design/printing/assembly of the units, and shipping. Promex asked whether these mailings qualify for New York's exemption for promotional materials mailed free to a company's customers or prospective customers.

The printed components here -- the packaging, patient-education literature, and the personalized prescription pad (a specialized order form) -- are genuinely "promotional materials" as New York defines the term, and they're mailed free of charge by common carrier, which is exactly the delivery method the exemption requires. So on the surface this looks like the same setup that qualifies for the exemption in other rulings involving mailed catalogs or promotional flyers. But the exemption has one more requirement that trips this arrangement up: the materials have to be mailed to the purchaser's own customers or prospective customers -- and physicians aren't that. A pharmaceutical company can't sell prescription drugs directly to the public; physicians prescribe drugs, but it's the patient who ultimately buys the drug from a pharmacy. Physicians are the target of the marketing message, but legally they're not the customer or prospective customer of the pharmaceutical company for purposes of this exemption. Because the recipients of the mailing (physicians) aren't the pharmaceutical company's customers or prospective customers, the exemption doesn't apply, and Promex's sales of the Medi-Script Starter Units to the pharmaceutical company are taxable.

What this means for you

Pharmaceutical marketing and direct-mail companies

The promotional-materials exemption isn't just about the format of what you mail or whether it's free -- it also requires the recipient to be the purchaser's own actual or prospective customer. When your mailing targets an intermediary (like a prescribing physician, a referral source, or a distributor) rather than the end buyer of the product being promoted, the exemption can fail even though everything else about the mailing looks like classic promotional material.

Companies marketing through gatekeepers or professional intermediaries

This ruling is a cautionary example for any marketing model where the person you mail to isn't the person who ultimately buys your product -- doctors, brokers, referral partners, or other professional intermediaries. Check who your exemption certificate and mailing list actually target before assuming the promotional-materials exemption applies.

Accountants and tax professionals

This is a useful contrast to the more typical "free mailed catalog to a retailer's own customer list" promotional-materials rulings already in this corpus -- here, every other element of the exemption test is satisfied (genuine promotional materials, free mailing, common carrier delivery) except the customer-identity requirement, which is enough on its own to defeat the exemption. Always separately verify who the recipient legally is relative to the seller claiming the exemption.

Common questions

Q: Are drug samples and educational literature normally considered promotional materials under New York law?
A: Yes -- the packaging and patient literature qualify as printed promotional materials, and the personalized prescription form counts as a specialized order form, both squarely within the statutory definition.

Q: Why doesn't the exemption apply here if the materials are free and mailed by common carrier?
A: Because the exemption also requires the mailing to go to the purchaser's own customers or prospective customers, and physicians -- who prescribe but don't buy the drug themselves -- don't meet that definition; patients who purchase the drug do.

Q: Would the answer change if the pharmaceutical company mailed similar materials directly to patients?
A: This ruling doesn't address that scenario, but the reasoning suggests materials mailed free to actual or prospective drug purchasers (patients) would have a stronger claim to the exemption, since they'd be the pharmaceutical company's real customers or prospective customers.

Citations and references

Statutes:

• Tax Law § 1101(b)(12) (definition of promotional materials)
• Tax Law § 1105(a) (tax on retail sales of tangible personal property)
• Tax Law § 1115(n)(4) (exemption for promotional materials mailed free to customers/prospective customers)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a99_23s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(23)S
Sales Tax
April 8, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S980401A

On April 1, 1998, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Promex Medical, Inc., 1001 Buffalo Avenue, Niagara Falls, New York, 14303.
The issue raised by Petitioner, Promex Medical, Inc., is whether Petitioner’s sales of MediScript Starter Units, which are mailed to physicians in New York, qualify for the exemption
provided in Section 1115(n)(4) of the Tax Law.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is a corporation organized and existing under the laws of the State of New Jersey
and qualified to do business in the State of New York. Petitioner is in the business of providing
direct mail advertising services and materials to pharmaceutical companies.
Under federal law, pharmaceutical drugs may not be purchased without a prescription from
a licensed physician. Physicians may prescribe these drugs either for their own use or for that of
their patients. While pharmaceutical companies may now lawfully advertise directly to patients, they
continue to focus substantial portions of their advertising campaigns on the physicians who are
empowered to prescribe these drugs. Such advertising often consists of the distribution of drug
samples, as well as the use of printed promotional materials.
A Medi-Script Starter Unit consists of a blister pack which contains a sample of the drug
being promoted and a prescription form personalized for use by the physician to whom it is
addressed. Each Medi-Script Starter Unit is customized by Petitioner in order for it to properly
enclose and display the drug sample provided by the pharmaceutical company. It is assembled so
that the prescription blank is placed in front to enable the physician to inscribe on the form the
information required (e.g. the patient’s name and address) in order for a pharmacy to fill the
prescription. The Medi-Script Starter Unit enables the patient to use the samples of the drug
included in the pack until the prescription can be filled by a pharmacy. The Medi-Script Starter Unit
may also contain other printed promotional materials pertaining to the use of the drug or to other
products available from the pharmaceutical company. These units are sent in packets of 24.
In promoting pharmaceutical products, one of the primary objectives is targeting the
physicians who potentially, or currently, use or dispense the product. To accomplish this Petitioner
may use its own database or the resources of the pharmaceutical company. Since this promotional
package will include a drug sample, under the Federal Prescription Drug Marketing Act Petitioner

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Sales Tax
April 8, 1999

is required to obtain signed sample request forms from the targeted physicians. The solicitation of
these physicians is often accomplished by a telemarketing campaign.
After obtaining the required sample request form from a physician, Petitioner assembles the
items which make up the Medi-Script Starter Unit. The drug samples being promoted are provided
by Petitioner’s client, the pharmaceutical company. The prescription blank is then customized with
the personal information of the targeted physician required by State law (i.e., the physician’s name,
address, DEA and license numbers). Both the personalized prescription form, as well as any other
printed promotional materials included in the blister pack, are provided by Petitioner. Such printed
materials are either created in house or purchased for resale by Petitioner from its subcontractors.
Petitioner’s charge to its clients for the services and materials that it provides is broken down
as follows. There is a separate charge for the telemarketing services employed in the solicitation of
physicians and obtaining the signed request forms; a separate charge, at a stated price per unit, to
cover the design, printing and assembling of the Starter Units; and a separate charge for the cost of
mailing or shipping the Starter Units. There is no charge to the physicians for the Medi-Script
Starter Units or for the cost to deliver the units to them. When Petitioner enters into an agreement
to produce the Medi-Script Starter Unit for delivery to physicians in New York, it obtains a properly
completed Certificate of Exemption for Purchase of Promotional Materials (Form ST 121.2) from
the pharmaceutical company purchasing the promotional material.
Petitioner ships the Medi-Script Starter Unit by common carrier to the targeted physician.
A sample Medi-Script Starter Unit was provided with the Petition for Advisory Opinion.
Applicable Law and Regulations
Section 1101(b)(12) of the Tax Law defines promotional materials as:
Any advertising literature, other related tangible personal property (whether
or not personalized by the recipient’s name or other information uniquely related to
such person) and envelopes used exclusively to deliver the same. Such other related
tangible personal property includes, but is not limited to, free gifts, complimentary
maps or other items given to travel club members, applications, order forms, and
return envelopes with respect to such advertising literature, annual reports,
promotional displays and Cheshire labels but does not include invoices, statements
and the like.
Section 1105(a) of the Tax Law imposes sales tax on the receipts from every retail sale of
tangible personal property, except as otherwise provided.

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Sales Tax
April 8, 1999

Section 1115(n)(4) of the Tax Law provides:
Notwithstanding any contrary provisions of paragraph one of this subdivision,
promotional materials which are printed materials and promotional materials upon
which services described in paragraph two of subdivision (c) of section eleven
hundred five have been directly performed shall be exempt from tax under this article
where the purchaser of such materials mails or ships such promotional materials, or
causes such promotional materials to be mailed or shipped to its customers or
prospective customers, without charge to such customers or prospective customers,
by means of common carrier, United States postal service or like delivery service.
Opinion
Petitioner produces Medi-Script Starter Units under contract from pharmaceutical companies
to promote the sale of prescription drugs to potential customers. Since a pharmaceutical company
cannot sell a prescription drug directly to the general public, these drugs are marketed to potential
users by Petitioner through physicians. The pharmaceutical company works in conjunction with
Petitioner to obtain the proper authorization to distribute drug samples and promotional literature
directly to the physicians who prescribe them.
The packaging and patient education literature are printed materials. The prescription forms
constitute a specialized type of order form. These materials are printed promotional materials which,
when shipped by or caused to be shipped by the purchaser to its customers or prospective customers
via common carrier, without charge to the customers or prospective customers, would be exempt
from sales and use tax under Section 1115(n)(4) of the Tax Law. The pharmaceutical company
purchases these materials from Petitioner who ships them on behalf of the pharmaceutical company
via common carrier to physicians, without charge to the physicians, within New York State. The
physicians are not the customers or prospective customers of the pharmaceutical company for
purposes of Section 1115(n)(4). Physicians prescribe the pharmaceutical company’s drugs to
patients who then purchase the drugs, but the prescribing physician is not the purchaser of the drugs.
Since the physicians are not the customers or prospective customers of the pharmaceutical company,
Petitioner’s sales of the Medi-Script Starter Units in this instance are not exempt from sales and
compensating use tax under Section 1115(n)(4).

DATED: April 8, 1999

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.