Did CAP pricing and supplier inventory prevent specialty-bed leases from qualifying as patient-specific exempt equipment?

Plain-English summary

Virginia exempted the hospital's specialty-bed leases when the records identified the specific patients who used them. The supplier maintained beds at a warehouse and at the hospital, while an Acute Care Expense Limitation program charged a flat monthly amount based on historical leasing levels.

The Department said that CAP pricing did not control the exemption. Licensed physicians issued work orders naming patients, and the hospital was invoiced based on the beds and days each patient used them. That documentation satisfied the requirement that durable medical equipment be leased by or on behalf of an individual.

Supported leases were removed from the audit. Invoice 4605679 remained because no patient information accompanied it, but the hospital received 45 days to provide the missing support. If it did not, that item would remain assessed.

What this means for you

• A flat or volume-based contract can coexist with a patient-specific equipment exemption.
• The decisive records are the physician order, patient identity, lease usage, and invoice trail.
• Supplier inventory at the hospital does not make every later lease a bulk purchase when each use is documented for a patient.
• Unsupported invoices remain taxable unless the missing patient records are produced on time.

Common questions

Q: Did CAP pricing make all beds taxable?
A: No. The Department treated it as a pricing method, not a bar to exemption.

Q: Why did invoice 4605679 remain?
A: The hospital had not provided specific patient information for that lease.

Q: How long did the hospital have to cure the missing record?
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

Durable medical equipment lacking exemption documentation.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-79

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 April 2006 through March 2009. 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.

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 number 4605679 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 this lease, such item 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/1-5226051739.T