Was VSL#3 medical food exempt from Virginia sales and use tax as a prescription drug, nonprescription medicine, or reduced-rate food?

Subject

The medical food product does not quantify for exemption.

Plain-English summary

Virginia ruled that VSL#3 medical food was taxable at the full 5% sales-and-use-tax rate then in effect. The product contained live freeze-dried lactic acid bacteria in powder or capsule form and was used under physician supervision for dietary management of ulcerative colitis, irritable bowel syndrome, or an ileal pouch.

It did not qualify for the prescription medicine and drug exemption because the cited state and federal drug definitions specifically excluded food. It also failed the nonprescription-drug test because it did not contain a medicine or drug and its labeling did not claim to diagnose, cure, treat, or prevent disease.

Finally, the taxpayer did not provide information showing that the product qualified as food for home consumption under the federal food-stamp definition incorporated by Virginia's Food Tax Reduction Program. The Department therefore denied both exemption and reduced-rate treatment.

What this means for you

• Physician supervision does not by itself turn a medical food into an exempt drug.
• Virginia examined the product's legal classification and labeling claims, not only its intended health use.
• A seller or purchaser claiming a reduced food rate must show that the product fits the incorporated federal definition.
• The 5% rate stated here was the rate applied in this 2011 ruling, not a statement of today's rate.

Common questions

Did the ruling say the product had no medical purpose?

No. It described dietary management for chronic gastrointestinal needs. The issue was whether the product fit specific tax exemptions.

Why did the nonprescription-drug exemption fail?

The product did not contain a medicine or drug, and its labeling did not make disease diagnosis, cure, treatment, or prevention claims.

Citations and references

• Va. Code § 58.1-609.10(9) and (14).
• Va. Code § 54.1-3401.
• 21 U.S.C. § 321.
• Va. Code § 58.1-611.1; 7 U.S.C. § 2012.
• Virginia Tax Bulletin 98-4, Virginia Tax Bulletin 05-78, and P.D. 99-32.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-68

Original ruling text

May 11, 2011

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you (the "Taxpayer") request an exemption from the retail sales and use tax on the purchase of a medical food product. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer purchases a medical food product (VSL#3) that is used for the dietary management of patients with ulcerative colitis, irritable bowel syndrome or an ileal pouch. The medical food product consists of live freeze dried lactic acid bacteria in powder or capsule form and is intended for use under the supervision of a physician. The medical food product is used to maintain adequate and balanced functioning of the human gastrointestinal tract of a patient who, because of chronic medical needs, cannot achieve such by the modification of the normal diet alone.

The supplier ships the medical food product directly to the Taxpayer and charges the applicable Virginia use tax on the invoice. The Taxpayer believes that the medical food product qualifies for exemption from the retail sales and use tax.

RULING

Medicine and Drug Exemption

Virginia Code § 58.1-609.10 9 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.

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 in Va. Code § 54.1-3401 and the federal Food Drug and Cosmetic Act in 21 U.S.C. § 321, the definition of the term "drug" specifically excludes food. Based on these authorities, the medical food product would not qualify for the exemption in Va. Code § 58.1-609.10 9.

Nonprescription Drug Exemption

Virginia Code § 58.1-609.10 14 provides, in pertinent part, that the retail sales and use tax shall not apply to "(i) any nonprescription drugs and proprietary medicine purchased for the cure, mitigation, treatment, or prevention of disease in human beings." Virginia Tax Bulletin (VTB) 98-4 (5/15/98) provides that nonprescription drugs include "any substances or mixture of substances containing medicines or drugs for which no prescription is required and which are generally sold for internal or topical use in the cure, mitigation, treatment, or prevention of disease in human beings." VTB 98-4 defines "proprietary medicines" as "any nonprescription drug sold to the general public under the brand name or trade name of the manufacturer and which does not contain any controlled substance or marijuana."

In P.D. 99-32 (3/18/99), the Department set out three factors to determine if a product falls within the scope of tine exemption: (1) whether the item is a nonprescription drug ( i.e. , is the product a substance or mixture of substances containing medicines or drugs for which no prescription is required); (2) whether the product is for topical or internal use; and (3) whether the product is for the cure, mitigation, treatment, or prevention of a disease in human beings. To determine if a product contains a nonprescription drug or medicine, the Department considers the federal Food and Drug Administration's (FDA) guidelines in the classification of products for purposes of the exemption. Based on information from the FDA, dietary supplements are prohibited from making claims that the products diagnose, treat, cure, or prevent disease in human beings

The medical food product at issue does not meet the first and third prongs of the test in P.D. 99-32. It is not a substance that contains a medicine or drug and based on the product labeling, it does not claim to diagnose, cure, treat, or prevent disease in human beings. Accordingly, the exemption for nonprescription drugs and proprietary medicines does not apply to the Taxpayer's purchase of the medical food product.

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 federal Food Stamp Act of 1977, 7 U.S.C. § 2012. This definition includes most staple grocery food items and cold prepared foods that are packaged for home consumption as discussed in VTB 05-78 (5/31/05). The information provided by the Taxpayer does not indicate that the medical food product falls under the definition of food for home consumption by humans as defined by the federal Food Stamp Program. Therefore, the medical food product does not qualify for the reduced sales and use tax rate and is taxable in Virginia at the 5% retail sales and use tax rate.

I hope this responds to your inquiry. 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, tax bulletins and public document 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

Tax Commissioner

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