Do FDA-licensed blood-testing reagents used by hospitals qualify for Tennessee's prescription drug sales tax exemption when ordered by a physician?

Plain-English summary

A company sells FDA-licensed in-vitro diagnostic reagents to Tennessee hospitals and healthcare facilities. These reagents are used in lab tests to identify properties of a patient's blood — blood type, blood group, antibodies, antigens, and crossmatching — before a transfusion, which the FDA requires to prevent a potentially life-threatening reaction. The reagents themselves don't require a prescription, but they may be used in a test that's ordered by a licensed physician. The seller asked: if a test using the reagents is only performed under a physician's order, does that make the reagents exempt from Tennessee sales tax as a prescription drug? The Department said no — the reagents are taxable either way.

The three-part exemption test. Tennessee exempts "any drug, including over-the-counter drugs, for human use dispensed pursuant to a prescription" (Tenn. Code Ann. § 67-6-320(a)). To qualify, an item must be: (1) a drug; (2) for human use; and (3) dispensed pursuant to a prescription. The Department skipped the "is it a drug" question entirely, because the reagents clearly failed the other two requirements.

Why the reagents aren't "for human use." Neither the statute nor Tennessee courts define "for human use," but the Department has long interpreted it to require direct use or consumption by a particular individual — tracing back to an older version of the exemption that covered drugs "for the use of a human being." The reagents don't meet that bar: they're used in a laboratory test on a blood sample, not directly consumed, applied, ingested, or otherwise used by a human being. The fact that the test is performed in connection with treating a patient doesn't change that the reagent itself never touches or enters the patient.

Why the reagents aren't "dispensed pursuant to a prescription." A "prescription" under Tennessee law is an order issued by a licensed practitioner (§ 67-6-102(69)). Here, the physician's order is for the laboratory test — it's the test that's prescribed, not the reagent. The reagent is simply a product used to perform that test; no prescription dispenses the reagent itself to the patient.

Bottom line. Because the reagents fail both the "for human use" and "dispensed pursuant to a prescription" requirements, and no other exemption applied on these facts, retail sales of the reagents are subject to Tennessee sales and use tax.

What this means for you

Sellers of lab/diagnostic supplies, reagents, and testing materials

Don't assume that an item used in patient care, or used only under a doctor's order, automatically qualifies for the prescription drug exemption. The exemption is narrow: it requires the item itself to be directly used by, or applied to, a human being, AND to be the thing actually dispensed under the prescription — not just used to perform a prescribed test or procedure.

Hospitals and healthcare facilities purchasing diagnostic supplies

Expect to pay Tennessee sales tax on diagnostic reagents, testing kits, and similar lab consumables that aren't directly administered to or consumed by a patient, even when a physician orders the underlying test.

Accountants and tax professionals

This is a useful contrast to the prosthetic-device "worn in or on the body" line drawn in LR 12-09 — here the Department applies a parallel "direct use by a human" gloss on the SEPARATE prescription drug exemption (§ 67-6-320(a)), reinforced by comparative citations to Michigan, Alabama, and Arkansas exemption statutes using similar "for human use"/"human consumption" language. Standard burden-of-proof doctrine applies (Steele; Am. Airlines; Tibbals Flooring; United Canners).

Common questions

Q: Are diagnostic reagents used to test blood before a transfusion exempt as a prescription drug in Tennessee?
A: No. The Department ruled they fail the "for human use" and "dispensed pursuant to a prescription" requirements of § 67-6-320(a), regardless of whether the underlying test is physician-ordered.

Q: What does "for human use" mean under Tennessee's prescription drug exemption?
A: Direct use or consumption by a particular individual — an item used in a lab test on a blood sample, rather than applied to or ingested by a patient, doesn't qualify.

Q: Does a physician's order for a lab test count as a "prescription" for the reagent used in that test?
A: No. The order is for the test itself; it's the test that's prescribed, not the reagent, so the reagent isn't "dispensed pursuant to a prescription."

Q: Can I rely on this letter ruling?
A: No. A Tennessee letter ruling binds the Department only as to the specific taxpayer and facts it was issued to, and it can be revoked or modified. Confirm your own situation with a tax professional.

Citations and references

Tennessee statutes (Tenn. Code Ann.; 2011 codification):

• § 67-6-101 et seq. (Retailers' Sales Tax Act)
• § 67-6-320(a) (prescription drug exemption — drug, for human use, dispensed pursuant to a prescription; excludes grooming/hygiene products); § 67-6-320(a) (2006) (prior version requiring drugs "for the use of a human being," cited to show no change in the human-use requirement)
• § 67-6-102(35) (definition of "drug"); § 67-6-102(69) (definition of "prescription")

Cases cited by the ruling:

• Steele v. Indus. Dev. Bd. of the Metro. Gov't of Nashville & Davidson Cnty., 950 S.W.2d 345 (Tenn. 1997); Am. Airlines, Inc. v. Johnson, 56 S.W.3d 502 (Tenn. Ct. App. 2000); Rogers Grp., Inc. v. Huddleston, 900 S.W.2d 34 (Tenn. Ct. App. 1995); Tibbals Flooring Co. v. Huddleston, 891 S.W.2d 196 (Tenn. 1994); United Canners, Inc. v. King, 696 S.W.2d 525 (Tenn. 1985) (taxpayer bears the burden of proving an exemption; well-founded doubt defeats the claim)
• Birchwood Manor, Inc. v. Comm'r of Revenue, 680 N.W.2d 504 (Mich. Ct. App. 2004) (cited as comparative authority on "for human use" exemption language in another state's statute)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/12-21.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
LETTER RULING # 12-21

WARNING
Letter rulings are binding on the Department only with respect to the individual taxpayer
being addressed in the ruling. This presentation of the ruling in a redacted form is
informational only. Rulings are made in response to particular facts presented and are not
intended necessarily as statements of Department policy.
SUBJECT
The application of the Tennessee sales and use tax prescription drug exemption to the sale of in-vitro
diagnostic reagents.
SCOPE
This letter ruling is an interpretation and application of the tax law as it relates to a specific set of
existing facts furnished to the Department by the taxpayer. The rulings herein are binding upon the
Department, and are applicable only to the individual taxpayer being addressed.
This letter ruling may be revoked or modified by the Commissioner at any time. Such revocation or
modification shall be effective retroactively unless the following conditions are met, in which case
the revocation shall be prospective only:
(A) The taxpayer must not have misstated or omitted material facts involved in the
transaction;
(B) Facts that develop later must not be materially different from the facts upon
which the ruling was based;
(C) The applicable law must not have been changed or amended;
(D) The ruling must have been issued originally with respect to a prospective or
proposed transaction; and
(E) The taxpayer directly involved must have acted in good faith in relying upon the
ruling; and a retroactive revocation of the ruling must inure to the taxpayer’s
detriment.
FACTS
[TAXPAYER] (the “Taxpayer”) sells in-vitro diagnostic reagents (the “Diagnostic Reagents”) to
hospitals and other healthcare facilities in Tennessee. The Diagnostic Reagents are licensed by the
United States Food and Drug Administration (the “FDA”) and are used to identify certain properties
of blood or blood components for the purpose of determining compatibility in transfusions. For
example, the Diagnostic Reagents are used to identify blood groups, blood type, red cell antibodies,
red cell antigens, platelet antibodies, and for crossmatching. The accurate testing of blood and blood
components prior to transfusion is required by the FDA in order to prevent a potentially lifethreatening reaction. The Diagnostic Reagents do not require a prescription, but may be used in a test
performed under the orders of a licensed physician.

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RULING
If tests using the Diagnostic Reagents are performed only under the orders of a licensed physician,
will the reagents be exempt under TENN. CODE ANN. § 67-6-320(a) (2011)?
Ruling: No. The Diagnostic Reagents are not exempt from the Tennessee sales and use tax
under TENN. CODE ANN. § 67-6-320(a) (2011), regardless of whether tests using the reagents
are performed under the orders of a licensed physician. Retail sales of the Diagnostic
Reagents are accordingly subject to the Tennessee sales and use tax.
ANALYSIS
Under the Retailers’ Sales Tax Act, TENN. CODE ANN. §§ 67-6-101 to -907 (2011), the retail sale in
Tennessee of tangible personal property, including prescription and over-the-counter drugs and other
substances, is subject to the Tennessee sales and use tax unless an exemption from taxation applies.
TENN. CODE ANN. § 67-6-320(a) (2011) provides an exemption for “any drug, including over-thecounter drugs, for human use dispensed pursuant to a prescription.”1 Thus, the Diagnostic Reagents
will be exempt for purposes of the Tennessee sales and use tax under TENN. CODE ANN. § 67-6320(a) if the reagents are 1) a drug; 2) for human use; and 3) dispensed pursuant to a prescription.
Because the Diagnostic Reagents do not meet the second and third requirements for exemption under
TENN. CODE ANN. § 67-6-320(a), this letter ruling will not address whether the reagents are a drug.2
The Diagnostic Reagents do not satisfy the second requirement because they are not for human use.
Neither the Retailers’ Sales Tax Act nor the Tennessee courts have defined the phrase “for human
use” for purposes of the sales and use tax. However, the Tennessee Department of Revenue has
historically interpreted TENN. CODE ANN. § 67-6-320(a) to require the drug in question to be directly
used by a human. Prior to 2007,3 the exemption applied to sales of “any prescription drug or
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Note, however, that the exemption does not apply to grooming and hygiene products. TENN. CODE ANN. § 67-6320(a).
2

The term “drug” is defined as “a compound, substance or preparation, and any component of a compound,
substance or preparation, other than food and food ingredients, dietary supplements or alcoholic beverages” that is
(A) Recognized in the official United States Pharmacopoeia, official Homeopathic Pharmacopoeia of the United
States, or official National Formulary, and supplement to any of them;
(B) Intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease; or
(C) Intended to affect the structure or any function of the body.
TENN. CODE ANN. § 67-6-102(35) (2011). Some diagnostic reagents may be considered a drug. For example, the
Streamlined Sales Tax Project’s Compliance Review and Interpretations Committee has issued a recommendation
whereby a chemical reagent contained in an infectious disease test kit would be properly considered a drug.
STREAMLINED SALES TAX GOVERNING COMMITTEE, INTERPRETIVE OPINION RECOMMENDATION 2007-01 (May 23,
2007).
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In 2007, Tennessee adopted the prescription drug exemption language found in the Streamlined Sales and Use Tax
Agreement. The State of Tennessee has been an associate member of the Streamlined Sales Tax Project since 2005.
Since that time, the state has amended the Retailers’ Sales Tax Act to adopt the definitions and certain other
provisions found in the Streamlined Sales and Use Tax Agreement.
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medicine issued by a licensed pharmacist in accordance with an individual prescription written for
the use of a human being” by a licensed practitioner of the healing arts. TENN. CODE ANN. § 67-6320(a) (2006) (emphasis added). The phrase “for the use of a human being” indicates that the
exemption requires direct use or consumption by a particular individual. Because Tennessee’s
amendment of the prescription drug exemption in 2007 was not intended to change the requirements
regarding human use, this historical interpretation is still valid under the current version of the
exemption.
Tennessee’s long-standing interpretation of the exemption is supported by the wording of other state
prescription drug exemptions. For example, Michigan’s version of the exemption formerly applied to
drugs dispensed pursuant to a prescription “for the use of a designated person.” See Birchwood
Manor, Inc. v. Comm’r of Revenue, 680 N.W.2d 504, 510 (Mich. Ct. App. 2004) (discussing
exemption along with a section of the Michigan state constitution exempting prescription drugs
dispensed “for human use”). Michigan has since amended this statutory phrase to read “for human
use.” See MICH. COMP. L. ANN. § 205.94d(1)(a) (West, Westlaw through P.A. 2012, No. 297, of the
2012 Regular Session, 96th Legislature). Also informative is Alabama’s version of the exemption,
which applies to prescription drugs for “human consumption or intake.” ALA. CODE § 40-23-4.1(a)
(West, Westlaw through the end of the 2012 Regular and 1st Special Sessions). Likewise, Arkansas’
statute exempts drugs prescribed by physicians “for human use,” ARK. CODE ANN. § 26-52-406(a)
(West, Westlaw current through 2012 Fiscal Session), where “physician” is defined as a licensed
medical practitioner authorized to prescribe drugs “that are used for human consumption.” ARK.
ADMIN. CODE 006.05.212-GR-38(B)(2).
In this case, the Diagnostic Reagents are not for human use. Rather, the Diagnostic Reagents are used
in a laboratory test to identify certain properties of blood or blood components. While such use may
occur in conjunction with the treatment of a human, the reagents are not directly consumed, applied,
ingested, or otherwise used by a human. Thus, the Diagnostic Reagents do not satisfy the second
requirement under TENN. CODE ANN. § 67-6-320(a).
The Diagnostic Reagents also fail to satisfy the third requirement, because they are not dispensed
pursuant to a prescription.
TENN. CODE ANN. § 67-6-102(69) (2011) defines the term “prescription” as “an order, formula or
recipe issued in any form of oral, written, electronic, or other means of transmission by a duly
licensed practitioner authorized by the laws” of Tennessee.
The Taxpayer has stated that the Diagnostic Reagents may be used in a test performed under the
orders of a licensed physician. While such orders may be properly considered a prescription, the
orders are for a laboratory test used to identify certain properties of blood or blood components. In
other words, it is the laboratory test that is prescribed by the physician. The Diagnostic Reagents are
simply a product used to perform that test; the physician does not issue any prescription whereby
Diagnostic Reagents are dispensed to the patient. Thus, the Diagnostic Reagents do not satisfy the
third requirement under TENN. CODE ANN. § 67-6-320(a).
The burden is on the taxpayer to establish entitlement to an exemption from taxation. The Tennessee
Supreme Court has stated that “exemptions are strictly construed against the taxpayer, who has the
burden of proving entitlement to the exemption.” Steele v. Indus. Dev. Bd. of the Metro. Gov’t of
Nashville & Davidson Cnty., 950 S.W.2d 345, 348 (Tenn. 1997); see also Am. Airlines, Inc. v.
Johnson, 56 S.W.3d 502, 506 (Tenn. Ct. App. 2000) (quoting Rogers Grp., Inc. v. Huddleston, 900
S.W.2d 34, 36 (Tenn. Ct. App. 1995)) (“Although the rule is well-established that taxing legislation
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should be liberally construed in favor of the taxpayer and strictly construed against the taxing
authority, it is an equally important principle of Tennessee tax law that ‘exemptions from taxation are
construed against the taxpayer who must shoulder the heavy and exacting burden of proving the
exemption.’”). The Tennessee Supreme Court has also recognized that any well-founded doubt is
sufficient to defeat a claimed exemption from taxation. See Tibbals Flooring Co. v. Huddleston, 891
S.W.2d 196, 198 (Tenn. 1994); United Canners, Inc. v. King, 696 S.W.2d 525, 527 (Tenn. 1985)).
With respect to the Diagnostic Reagents, a well-founded doubt exists sufficient to defeat a claimed
exemption from taxation under TENN. CODE ANN. § 67-6-320(a).
Accordingly, the Diagnostic Reagents are not exempt from the Tennessee sales and use tax under
TENN. CODE ANN. § 67-6-320(a). Because no other exemption applies under the facts provided, retail
sales of the Diagnostic Reagents are subject to the Tennessee sales and use tax.

Kristin Husat
General Counsel

APPROVED:

Richard H. Roberts
Commissioner of Revenue

DATE:

10-15-12

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