Were the initial card charge and annual fee for a prescription savings club subject to Virginia sales tax?

Subject

Prescription savings club card and annual fees were nontaxable

Plain-English summary

Virginia found that the drug store did not need to collect sales tax on either the initial prescription-club card charge or the annual enrollment fee. Customers paid to join and remain in a program offering discounts on selected prescription drugs.

Members could also receive a 10% rebate or credit when buying the store's private-label items. But enrollment itself did not entitle a member to receive tangible personal property.

The Department deemed the club's discount and rebate benefits intangible. The ruling therefore treated both program charges as nontaxable under the described facts.

What this means for you

• A paid discount program may be nontaxable when membership itself conveys only intangible benefits.
• A physical program card did not change the result under these facts.
• The ruling addressed enrollment charges, not the tax treatment of later purchases.
• A program that includes tangible property or other taxable benefits may require a different analysis.

Common questions

Was the initial card charge taxable?

No.

Was the annual renewal fee taxable?

No.

Did members receive any merchandise just for enrolling?

No. The ruling says membership did not entitle them to tangible personal property.

Citations and references

• Va. Code §§ 58.1-602 and 58.1-603.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-168

Original ruling text

October 23, 2009

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you request a ruling on the application of the retail sales and use tax to the sale of the Taxpayer's prescription savings club cards.

FACTS

The Taxpayer is a retail drug store and offers a prescription savings club to customers. The customers purchase a program card for a fee and also pay an annual fee for continued enrollment in the program. The members use the cards when making purchases at the Taxpayer's retail locations. The program entitles members to discounts on cash prices for select prescription drugs. Program members can also receive a 10% rebate or a credit on any purchase when private label items (store branded items) are purchased. The Taxpayer requests a ruling on whether the retail sales and use tax applies to the initial purchase of the card and to the annual fee.

RULING

Virginia Code § 58.1-603 imposes a tax "upon every person who engages in the business of selling at retail or distributing tangible personal property in this Commonwealth, or who rents or furnishes any of the things or services taxable under this chapter, or who stores for use or consumption in this Commonwealth any item or article of tangible personal property as defined in this chapter, or who leases or rents such property within this Commonwealth . . . ."

Virginia Code § 58.1-602 defines sale as "any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration . . . ."

In this instance, membership in the prescription savings club does not entitle the members to receive tangible personal property. Based on the information provided, the benefits from enrolling in the program are deemed intangible. Accordingly, the Taxpayer would not be required to charge, collect or remit the retail sales and use tax on the initial purchase of the prescription savings card or on the annual fee charged to remain enrolled in the program.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3551112387P