If our pharmaceutical company gives free prescription and nonprescription drug samples to physicians and hospitals in Texas, do we owe sales or use tax on them?

Subject

Drugs Samples — Prescription And Nonprescription Samples Given To Physicians And Hospitals By Pharmaceutical Manufacturers

Plain-English summary

A pharmaceutical manufacturer asked the Comptroller how sales and use tax applies to free drug samples it gives to physicians and hospitals. The Comptroller's answer draws a line based on both the type of drug and who receives it.

Prescription and nonprescription drug samples given free to physicians, to be dispensed to patients, are exempt from tax. Prescription drug samples given to hospitals are also exempt, because (as the Comptroller understood the facts) prescription drugs may only be dispensed by a physician -- so a sample handed to a hospital still ends up being dispensed by a physician. However, nonprescription drug samples -- or the components used to make them -- given free to hospitals are treated differently: the manufacturer owes use tax on its own purchase price for those items, since a hospital (not a physician) is the one distributing them.

What this means for you

Pharmaceutical manufacturers

When you give away free drug samples in Texas, check both (1) whether the sample is prescription or nonprescription, and (2) whether the recipient is a physician or a hospital. Samples to physicians are exempt regardless of prescription status. Prescription samples to hospitals are exempt. Nonprescription samples (or their components) given to hospitals trigger use tax based on your purchase price.

Hospitals and physicians receiving samples

This ruling addresses the manufacturer's tax obligation, not the hospital's or physician's -- the tax liability described here falls on the pharmaceutical manufacturer giving away the samples, not on the healthcare provider receiving them.

Accountants and tax professionals

Note the ruling's own caveat: it is based on the facts presented, and different facts -- even if similar -- may lead to a different answer.

Common questions

Q: Do we owe tax on prescription drug samples given free to a doctor's office?
A: No. Per this letter, prescription and nonprescription drug samples given to physicians to be dispensed to patients are exempt from tax.

Q: What about prescription samples given to a hospital instead of a physician directly?
A: Also exempt, per this letter, because prescription drugs may only be dispensed by a physician.

Q: What about nonprescription drug samples given to a hospital?
A: Those are taxable -- the manufacturer owes use tax on its purchase price of the nonprescription drugs (or the components used to make them).

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9604L1411D02

Original ruling text

April 10, 1996

Dear*****:

Thank you for your letter dated April 5, 1996,
concerning the taxability prescription and nonprescription drug samples given
to hospitals and physicians by pharmaceutical manufacturers.

Prescription and nonprescription drug samples are
exempt from tax when given to physicians to be dispensed to patients.

Prescription drug samples are exempt when given to
hospitals to be dispensed by physicians. (It is our understanding that
prescription drugs may only be dispensed by a physician.)

The pharmaceutical manufacturer owes use tax on their
purchase price of nonprescription drugs (or components to make the drugs) given
to hospitals.

This opinion is based on the facts presented and
current law. Different facts although similar, may result in different
answers.

If you have any questions or need more information, you
may call me toll free at 1-800-531-5441, ext. 50330. The direct line is
512/475-0330. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Bettie Peterson
Tax Policy Division

NOTE: Previous Accession Number 9604236L