Were Nepro, Jevity, Glucerna, and Ensure purchased for inmates exempt from Virginia sales and use tax as medicines or medical supplies?

Subject

Medical nutrition products received an individual-use exemption or the reduced food rate

Plain-English summary

Virginia split the medical-food purchases into different tax categories rather than granting a blanket exemption. The healthcare provider bought Nepro, Jevity, Glucerna, and Ensure for inmates who needed nutritional replacements, sometimes by mouth and sometimes through feeding tubes.

The Department rejected the argument that these products were exempt medicines, drugs, or dialysis supplies. The applicable drug definitions excluded food, and the products were not drugs or supplies used directly in actual dialysis treatment.

An exemption did apply when enteral or parenteral nutritional products were purchased for a specific inmate under a physician's prescription or work order and used with qualifying feeding equipment. Those items were removed from the audit. Products that did not meet that individual feeding-equipment exemption but substituted wholly or partly for food in an ordinary diet qualified for the reduced sales-tax rate for food rather than the full rate.

What this means for you

• Calling a product a medical food does not make it a tax-exempt medicine or drug in Virginia.
• The individual-use exemption required a specific patient and use with enteral or parenteral feeding equipment under the facts described.
• Specialty dietary products such as Ensure could qualify for the reduced food rate even when they did not qualify for a full medical exemption.
• A service provider generally remains the user or consumer of products bought to perform its services and must pay sales or use tax unless a specific exemption applies.

Common questions

Were all four nutritional products exempt?

No. Only purchases satisfying the specific-individual and feeding-equipment conditions were removed from the audit.

Did a physician's prescription alone make the products exempt drugs?

No. The ruling treated the items as food, which the cited drug definitions excluded from the medicines-and-drugs exemption.

What rate applied to the remaining qualifying products?

Products intended to substitute wholly or partly for food in an ordinary diet received Virginia's reduced food-tax rate rather than the full sales-tax rate.

What happened to the paid assessment?

The audit was returned for adjustments, and the taxpayer was to receive a refund of tax, penalty, and interest consistent with those adjustments, plus refund interest.

Citations and references

• Va. Code §§ 58.1-609.10(9), (10), and (11), and 58.1-611.1.
• 23 VAC 10-210-940.
• 7 U.S.C. § 2012.
• Virginia Tax Bulletin 05-07.
• Virginia Public Documents 90-61, 91-17, and 91-24.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-171

Original ruling text

October 23, 2009

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you seek correction of the retail sales and use tax assessment issued by the Department for the period May 2003 through June 2006. The Taxpayer has paid the audit assessment and seeks a refund of the tax, penalty and interest assessed on the contested items. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer provides managed healthcare services to correctional facilities in Virginia and throughout the United States. The Taxpayer was audited and assessed tax on bulk purchases of medical foods. The medical foods at issue are Nepro, Jevity, Glucerna and Ensure. These are used as nutritional replacements for inmates that are unable to obtain enough nutrients in their diet. They are taken by mouth or through a feeding tube and are used by the body for energy and to form substances needed for normal body functions. The Taxpayer contests the tax assessed and maintains that it makes no bulk purchases of medical foods. The Taxpayer represents that the medical foods are purchased for specific inmates pursuant to a physician's work order or prescription, and that any unused portions are returned to the vendor for refund.

The Taxpayer states that the Food and Drug Administration defines "medical foods" as foods intended to treat and manage a disease or disorder. In addition, the Webster's Dictionary defines "medicine" as a substance or preparation used in treating disease. Based on these authorities, the Taxpayer believes the contested medical foods are considered medicines and qualify for exemption under Va. Code § 58.1-609.10 11 (formerly Va. Code § 58.1-609.7 3) and Title 23 of the Virginia Administrative Code (VAC) 10-210-940 A and C1.

DETERMINATION

Hemodialysis and Peritoneal Dialysis

The Taxpayer contends that the medical foods qualify for exemption under Virginia Code § 58.1-609.10 11.

Virginia Code § 58.1-609.10 11 provides an exemption for "[d]rugs and supplies used in hemodialysis and peritoneal dialysis." Title 23 VAC 10-210-940 E 2 explains that the exemption for hemodialysis and peritoneal drugs and supplies is applicable regardless of the nature of the purchaser. The exemption extends to all drugs, supplies and equipment that are purchased for and used in the actual treatment of patients. Medical foods such as those at issue do not constitute drugs or supplies used directly in the actual treatment of dialysis patients and do not qualify for the exemption under Va. Code § 58.1-609.10 11.

Medicines and Drugs

The Taxpayer contends that the contested medical foods are considered medicines and qualify for exemption under VAC 10-210-940 A and C1.

Virginia Code § 58.1-609.10 9 (formerly Va. Code § 58.1-609.7 1) provides an exemption from the retail sales and use tax for medicines and drugs dispensed by or sold on prescriptions or work orders of licensed physicians and other licensed practitioners. Title 23 VAC 10-210-940 A interprets the above statute and states, "The tax does not apply to medicines, drugs, dispensed by or sold on prescriptions or work orders of licensed physicians. . . ," Section C1 of the regulation states, "Sales of medicines or drugs . . . on written prescriptions of physicians . . . are exempt from the tax."

The terms medicines and drugs are not defined for purposes of the Virginia Retail Sales and Use Tax Act. However, under the Virginia Drug Control Act and the Federal Food Drug and Cosmetic Act, the definition of the term "drug" specifically excludes food.

Based on the information provided by the Taxpayer, the contested medical foods are enteral nutrition products. The Taxpayer's purchases of these medical foods are not exempt from the tax as medicines or drugs within the meaning of Va. Code § 58.1-609.10 9. This determination is consistent with the policy set forth in Public Documents (P.D.) 91-17 (2/21 /91) and 90-61 (4/12/90).

Enteral and Parenteral Nutritional Products

Virginia Code § 58.1-609.10 10 provides an exemption for "prosthetic devices... and other durable medical equipment and devices, and related parts and supplies specifically designed for those products... when such items or parts are purchased by or on behalf of an individual for use by such individual."

In P.D. 91-24 (3/11/91), the Tax Commissioner ruled that enteral and parenteral nutritional products qualify for exemption when sold specifically for use with enteral or parenteral feeding equipment purchased by or on behalf of a specific individual, in accordance with Va. Code § 58.1-609.10 10 (formally Va. Code § 58.1-609 7 2).

Based on the information provided, I agree that the Taxpayer's purchases of medical foods for use with enteral or parenteral feeding equipment are for specific inmates and pursuant to a physician's prescription or work order. Accordingly, such items will be removed from the audit.

Food Tax Reduction Program

The Food Tax Reduction Program set out in Va. Code § 58.1-611.1 applies a reduced sales and use tax rate to sales of food purchased for home consumption as defined under the Food Stamp Act of 1977, 7 U.S.C. § 2012. The reduced tax rate applies regardless of whether the food is sold to an individual or a business.

Virginia Tax Bulletin 05-07 (5/31/05) discusses in detail foods that qualify for the reduced sales tax rate. Foods that are diabetic or dietetic in nature and enriched or fortified food products intended to substitute in whole or in part for food in an ordinary diet qualify for the reduced sales tax rate. The Tax Bulletin specifically lists Ensure and other similar products as "specialty dietary food" items qualifying for the reduced sales tax rate. Effective July 1, 2005, the tax rate on food for human consumption was reduced to 2'/2 percent. Prior to this date, the reduced sales tax rate on food for human consumption was 4 percent.

The auditor assessed the tax on purchases of medical foods at the full sales tax rate. Any medical foods that do not qualify for the exemption under Va. Code § 58.1-609.10 10 but are intended to substitute in whole or in part for food in an ordinary diet will be taxed at the reduced sales tax rate.

Future Compliance

In the prior audit, the Taxpayer was deemed a service provider. As such, the Taxpayer is considered the user and consumer of all items purchased for use in providing its services. Unless specifically exempted, the Taxpayer must either pay the tax on medical foods to its suppliers at the time of purchase or remit the use tax directly to the Department based on the cost price of such items.

CONCLUSION

Based on this determination, the audit will be returned to the audit staff to make the necessary adjustments to the audit. The Taxpayer will receive a refund of the tax, penalty and interest paid, plus refund interest, in accordance with the adjustments.

The Code of Virginia sections, regulations and public documents 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 determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2241676760.T