Which CAP-program specialty-bed leases qualified for Virginia's patient-specific medical-equipment exemption?

Plain-English summary

Virginia exempted CAP-program specialty-bed leases when the healthcare provider documented the specific patient, but kept three unsupported invoices in the audit. The supplier used flat monthly pricing based on historical bed use and maintained inventory at a warehouse or hospital location.

The Department said pricing and inventory did not control the exemption. Physician work orders named patients, and monthly invoices could show the beds and days of use. Those records established that supported beds were leased on behalf of individuals.

Invoices 41644, 1863967, and 342315 lacked patient information and remained assessed. The provider received 45 days to supply the missing records, after which unsupported items would remain taxable.

What this means for you

• Patient identity and usage records are essential for each specialty-bed lease.
• CAP or flat pricing does not disqualify a supported patient-specific lease.
• Bulk supplier inventory can still produce exempt individual leases when the paper trail is complete.
• Missing invoice-level records preserve the assessment unless cured within the allowed period.

Common questions

Q: Did CAP pricing make the beds taxable?
A: No. The Department treated it only as a pricing method.

Q: Which invoices remained in the audit?
A: 41644, 1863967, and 342315.

Q: How long did the provider have to submit patient records?
A: 45 days from the determination date.

Citations and references

• Va. Code § 58.1-609.10 10.
• Virginia Public Documents 89-178 and 01-19.

Subject

Usage of the specialty beds did not meet the exemption criteria

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-67

Original ruling text

May 10, 2013

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

Dear *:

This is in response to your letter in which you seek correction of a retail sales and use tax assessment issued to * (the "Taxpayer"), for the period April 2006 through March 2009. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a healthcare provider that operates for-profit hospitals in Virginia. Through a contractual agreement with the supplier, the Taxpayer leases specialty beds and mattresses used in the prevention and treatment of various pulmonary and wound conditions. At issue is the tax assessed on specialty beds leased under an Acute Care Expense Limitation ("CAP") program. The CAP program provides the Taxpayer preferred pricing on the lease of specialty beds contingent upon the Taxpayer satisfying a minimum leasing commitment with the supplier. The pricing is based on actual usage of specialty beds, which is evaluated at pre-determined periods during the contract period to determine future CAP amounts. The CAP program provides the Taxpayer the ability to pay a flat amount each month based upon its historical leasing levels of acute care beds. The auditor held the specialty beds in the audit because the pricing based on historical usage of the specialty beds did not meet the criteria of being purchased by or on behalf of an individual.

The Taxpayer claims that the lease of the specialty beds under the CAP program is for specific patients and qualifies as exempt durable equipment under Va. Code § 58.1-609.10 10. The Taxpayer cites two Public Documents (P.D.) 89-178 (5/31/89) and 01-19 (3/16/01) as the authorities for exempting the specialty beds.

DETERMINATION

Virginia Code § 58.1-609.10 10 provides, in pertinent part, that the retail sales and use tax does not apply to:

Wheelchairs and parts therefor, braces, crutches, prosthetic devices. . . 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. Durable medical equipment is equipment that (i) can withstand repeated use, (ii) is primarily and customarily used to serve a medical purpose, (iii) generally is not useful to a person in the absence of illness or injury, and (iv) is appropriate for use in the home. (Emphasis added.)

In P.D. 89-178, the taxpayer designed, manufactured, and leased specialized hospital beds that were prescribed by physicians for specific patients. The beds were installed and monitored by the taxpayer's nurses and medical technicians. The beds met the four criteria stated above and were deemed exempt durable medical equipment when purchased or leased by or on behalf of a specific individual.

In P.D. 01-19, the taxpayer sold and leased specialized hospital beds and related products to acute care patients located in hospital intensive care units, medical and surgical floors, skilled nursing facilities, and their homes. The beds were provided for specific patients on the prescription order of the patient's physician. The Tax Commissioner ruled that the beds and related products provided by the Taxpayer constitute exempt durable medical equipment.

While the fact pattern in this case is materially different from the fact patterns in the cited PDs, the documents are instructive in applying the cited exemption. In this instance, the supplier (who also provides its specialty beds to healthcare providers similar to the Taxpayer) maintains an inventory of the beds at a local warehouse facility and may also maintain a supply of the beds at the Taxpayer's hospital location. When the Taxpayer needs a specific type of bed for a patient, a prescription work order is issued by a licensed physician. The work order includes the name of the patient. The bed is provided from either the supplier's inventory at its warehouse or its supply at the Taxpayer's hospital location. The Taxpayer is invoiced on a monthly basis for the lease of the specialty beds based on the CAP pricing and the number of days the patient(s) used the bed(s). The fact that the CAP program is used for pricing purposes has no bearing on the criteria governing the exemption and the requirement that a purchase must be made by or on behalf of an individual. While the beds are provided from a bulk inventory owned by the supplier, the leasing documentation provided by the Taxpayer clearly indicates that the beds are leased for specific patients.

As such, the specialty beds for which the Taxpayer provides patient information to support the exemption will be removed from the audit. Invoice numbers 41644, 1863967 and 342315 will remain in the audit because no specific patient information has been provided to support that the items are leased on behalf of an individual. If the Taxpayer provides patient information for these leases, such items will be removed from the audit.

CONCLUSION

The audit will be adjusted based on this determination. In addition, I will allow the Taxpayer 45 days from the date of this letter to provide the auditor documentation that supports the removal of the remaining contested items from the audit. If the Taxpayer does not provide the requested information within 45 days, the assessment will be considered correct regarding the assessment of these items. After the audit is revised based on this determination and the assessment is adjusted by the Department's audit staff, an updated bill with accrued interest will be issued to the Taxpayer for the outstanding balance on the bill, if any. The bill should be paid within 30 days to avoid the accrual of additional interest.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4999175328.T