Did a Virginia orthopaedic-implant seller owe use tax on instrument kits removed from resale inventory and provided free to hospitals?

Subject

Instrument kits donated to § 501(c)(3) hospitals were exempt

Plain-English summary

Virginia ruled that an orthopaedic-implant seller did not owe sales or use tax on instrument kits donated from resale inventory to hospitals qualifying under IRC § 501(c)(3). The kits were specialized tools used to implant joint-replacement systems and were provided at no separately stated charge.

The result changed for hospitals without § 501(c)(3) status. When a kit bought tax-free for resale was withdrawn from inventory and provided free to a nonqualifying hospital, the seller owed use tax on the kit's cost price.

The ruling therefore turned on the recipient's qualification, not simply on whether the recipient was a hospital or nonprofit healthcare institution.

What this means for you

• Confirm and document the recipient's § 501(c)(3) status before treating an inventory donation as exempt under this ruling.
• Providing an item free of charge does not automatically avoid Virginia use tax.
• If the donation exemption does not apply, use tax is measured by the seller's cost price of the withdrawn property.
• A resale purchase can become taxable when the property is removed from inventory for a purpose other than sale.

Common questions

Were all instrument kits supplied to hospitals exempt?

No. The exemption applied to kits donated to organizations with § 501(c)(3) status.

What happened when the hospital lacked that designation?

The seller owed use tax on the cost price of the kit withdrawn from resale inventory and provided free.

Did the ruling address replacement kits sold to customers?

The facts noted that replacement kits could be sold, but the requested ruling and conclusion addressed kits withdrawn from inventory and provided without charge.

Citations and references

• Va. Code § 58.1-609.10(15).
• 23 VAC 10-210-490.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-138

Original ruling text

July 13, 2010

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of your client (the "Taxpayer"), in which you request a ruling on the application of the retail sales and use tax to tangible personal property withdrawn from inventory and donated to nonprofit healthcare institutions. I apologize for the delay in responding to your correspondence.

FACTS

The Taxpayer is a company that markets and sells orthopaedic implants to hospitals and other surgical facilities nationwide. Many of the Taxpayer's customers are nonprofit healthcare institutions. When the Taxpayer sells a joint replacement system, it provides the customer with a kit of specialized instruments required for use in implanting the orthopaedic devices. The instrument kits are provided to the Taxpayer's customers at no extra charge. The Taxpayer sells the instrument kits to its customers in instances where a customer loses or damages the instrument kit and needs to replace the one that had been provided when the joint replacement system was purchased. The Taxpayer does not state a charge for the instrument kits on the invoices issued to its customers when the joint replacement systems are sold.

The Taxpayer indicates that it purchases the instrument kits exempt of the tax for resale. Relying on Va. Code § 58.1-609.10 15, the Taxpayer contends that the provision of the instrument kits to its customers is exempt of the retail sales and use tax. The Taxpayer requests a ruling confirming its contention.

RULING

Pursuant to Va. Code § 58.1-609.10 15, the retail sales and use tax does not apply to "[t]angible personal property withdrawn from inventory and donated to (i) an organization exempt from taxation under § 501(c)(3) of the Internal Revenue Code or (ii) the Commonwealth, any political subdivision of the Commonwealth, or any school, agency, or instrumentality thereof."

Title 23 of the Virginia Administrative Code (VAC) 10-210-490 states, in pertinent part, "Any person who withdraws an item of tangible personal property for his own use from an inventory of property on which no tax has been paid must report tax on the cost price of all property withdrawn for purposes other than sale ....unless such gift or donation is otherwise exempt."

Based on the information provided, and in accordance with Va. Code § 58.1­609.10 15, the Taxpayer would not be liable for the retail sales and use tax on instrument kits that are removed from its resale inventory and donated to a § 501(c)(3) organization. Pursuant to Title 23 VAC 10-210-490, if the hospitals do not have § 501(c)(3) designation, the Taxpayer would be liable for the use tax on the cost price of the property withdrawn from its inventory and provided free of charge.

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 and regulation 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,

Craig M. Burns

Acting Tax Commissioner

AR/1-3650806178.P