Did a hospital's specialty beds remain patient-specific exempt equipment under a flat monthly CAP pricing program?

Plain-English summary

Virginia treated leased specialty beds as exempt durable medical equipment when the hospital could identify the specific patient who used each bed. The beds came from supplier inventory under an Acute Care Expense Limitation program that charged a flat monthly amount based on historical use.

The Department found that the pricing formula did not control the exemption. A licensed physician issued a work order naming the patient, and monthly invoicing reflected the beds and days of patient use. Supported patient-specific leases were removed from the audit even though the supplier maintained bulk inventory.

The hospital also sought a refund or credit for use tax it had accrued and paid. The submitted records did not prove payment on the listed invoices, and three invoices lacked patient information. The Department allowed 45 days to supply both payment and patient support before a refund or credit would be issued.

Two maintenance-agreement invoices were separately adjusted so that one-half of each invoice amount remained in the audit.

What this means for you

• A volume or flat-pricing program does not necessarily defeat a patient-specific durable-equipment exemption.
• Physician work orders, patient names, usage days, invoices, and proof of tax payment should reconcile.
• Removing an item from an assessment and obtaining a refund of previously paid tax require different proof.
• Maintenance agreements may have a separate taxable percentage from the underlying equipment.

Common questions

Q: Did CAP pricing make the specialty beds taxable?
A: No. The Department said pricing had no bearing when the lease records showed specific patients.

Q: Was the requested use-tax refund granted immediately?
A: No. The hospital had 45 days to prove patient use and that tax was paid on the invoices.

Q: How were the two maintenance invoices adjusted?
A: The audit was to reflect one-half of each invoice amount.

Citations and references

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

Subject

Durable medical equipment lacking exemption documentation.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-78

Original ruling text

May 29, 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 July 2006 through July 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a for-profit hospital 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. In addition, the Taxpayer request a refund of the use tax accrued and paid to the Department on specialty beds that the Taxpayer claims qualifies for exemption. Lastly, the Taxpayer notes that the auditor agreed to adjust the audit for two maintenance contracts listed in the exceptions to reflect 50% of the total cost for each contract.

DETERMINATION

Durable Medical Equipment

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.

The Taxpayer indicates that the auditor denied a refund for the erroneous payment of sales or use tax on the lease of specialty beds. The Taxpayer presents invoices claiming that the specialty beds qualify for the durable medical equipment exemption and that use tax was erroneously accrued and paid on such items. The information provided, however, is inadequate to verify that the use tax was accrued and paid on the specific invoices listed. I would also note that no patient information has been provided for invoice numbers 1964566, 2071475, and 2175206 in support of the Taxpayer's claim that these items were leased on behalf of specific patients. Without such documentation, there is no basis to issue a refund/credit. If the Taxpayer provides supportive patient information and documentation that the use tax has been paid on the invoices in question, a refund/credit will be issued. Lastly, the audit will be adjusted to reflect one-half of the invoice amounts on invoice numbers 825611 and 825610 for the purchase of maintenance agreements.

CONCLUSION

The audit will be adjusted based on this determination. I will allow the Taxpayer 45 days from the date of this letter to provide the auditor documentation that support the refund/credit for the tax accrued and paid on the specialty beds in question. 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

Department's Office of Tax Policy, Appeals and Rulings at *.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4999175328.T