When could two bone-repair medical devices be sold exempt from Virginia sales tax?

Plain-English summary

Virginia allowed the medical-device exemption only for products purchased specifically for an identified individual, unless the buyer independently qualified as an exempt nonprofit medical facility. Bulk inventory later dispensed to patients did not satisfy the patient-specific rule.

Device B already had FDA Class II clearance for prescription use and could be sold exempt with patient identification on the purchase documentation. Bulk Device B sales remained taxable.

Device A's FDA Class III approval was still pending. Until approval arrived, the seller had to charge tax. After approval, it could use the same patient-specific exemption and documentation rule; bulk sales would still be taxable.

Qualified nonprofit hospitals, clinics, and surgery centers could buy either product exempt, including in bulk, after giving the seller a Department-issued exemption letter with the tax-exempt number.

What this means for you

• Confirm the product's current FDA classification before applying Virginia's device exemption.
• Put patient identification on purchase records at the time of sale.
• Do not treat bulk hospital inventory as purchased on behalf of an individual.
• Separately verify whether a nonprofit facility has a current Department exemption letter.
• Keep the exemption number with the sales records.

Common questions

Q: Was Device A exempt while FDA approval was pending?
A: No. Virginia required tax until Class III approval was received.

Q: Could Device B be sold exempt in bulk to a taxable facility?
A: No. The patient-specific exemption required purchase for an identified individual.

Q: Could a qualifying nonprofit hospital buy in bulk?
A: Yes, after providing the Department-issued exemption letter.

Citations and references

• Va. Code §§ 58.1-609 11 and 58.1-609.10 10.
• 23 VAC 10-210-940 G.
• Virginia Public Documents 00-215, 03-01, and 09-6.

Subject

Drug-device products that promote healing of musculoskeletal injuries and diseases.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-26

Original ruling text

March 5, 2013

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 two products for sale to hospitals and surgery centers in Virginia. I apologize for the delay in responding to your request.

FACTS

The Taxpayer specializes in the development of innovative drug-device products that promote the healing of musculoskeletal injuries and diseases, including orthopedic, spine and sports injury applications. The Taxpayer requests a ruling on the application of the retail sales tax to two products, * and *** ("Device A and "Device B"). Device A is a combination device/drug product for use in bone repair and regenerative procedures of foot and ankle fusions. Device A is pending approval by the federal Food and Drug Administration (FDA) as a Class III medical device. Device B is a synthetic mineral-collagen bone graft matrix for bone void filling and fracture repair. The Taxpayer indicates that Device B has been cleared by the FDA as a Class II medical device for prescription use only. The Taxpayer will sell Device A and Device B to hospitals and surgical centers in the Commonwealth. The Taxpayer requests a ruling on whether it is required to collect and remit the sales tax on the sale of these medical devices.

RULING

Virginia Code § 58.1-609.10 10 provides an exemption from the retail sales and use tax 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. [Emphasis added].

Title 23 of the Virginia Administration Code 10-210-940 G addresses purchases on behalf of an individual and states, "In order to be deemed a purchase on behalf of an individual, the item must be specifically bought for the individual. If items are purchased in bulk and then dispensed to individual patients, no exemption is applicable even if the item is modified or fitted for a specific individual."

Device A

The Department relies on the FDA classification of an item to determine the application of the retail sales and use tax. See Public Document (P.D.) 09-6 (2/4/09) and P.D. 03-01 (1/15/03). In this instance, the application submitted to the FDA for pre-marketing approval of Device A as a Class III medical device is pending approval. Provided the FDA approves Device A as a Class III medical device, the Taxpayer may sell Device A exempt of the tax when such product is purchased by or on behalf of an individual for use by such individual. Pursuant to Public Document 00-215 (12/7/00), a taxpayer's purchase documentation must include patient identification information at the time of purchase in order for the purchase to be deemed made on behalf of an individual. The sale of Device A in bulk and not purchased on behalf of an individual for use by such individual is subject to the tax. The Taxpayer should take note that, until the FDA approval is received, the Taxpayer must charge the retail sales and use tax on the sale of Device A.

Device B

Based on the information provided, Device B is deemed a medical device. The Taxpayer may sell Device B exempt of the tax when such product is purchased by or on behalf of an individual for use by such individual. The patient identification information as set out above must be included on the purchase documentation at the time of purchase in order for the purchase to be deemed made on behalf of an individual. The sale of Device B in bulk and not purchased on behalf of an individual for use by such individual is subject to the tax.

Nonprofit Medical Facilities

Virginia Code § 58.1-609 11 provides an exemption that includes the sale of tangible personal property to nonprofit hospitals and nonprofit clinics (including nonprofit surgery centers). The Taxpayer may sell Device A and Device B to these entities exempt of the tax, regardless if the product is sold in bulk, upon the Taxpayer's receipt of a Department issued Sales and Use Tax Certificate of Exemption letter. Such a letter verifies the entity's exempt status and includes the tax exempt number necessary for making tax exempt sales to such an entity.

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, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this ruling, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5095894827.T