Were specialty beds leased under a flat CAP pricing program exempt when physician records identified each patient?

Plain-English summary

Virginia removed the hospital's contested specialty beds from the sales-tax audit because the leases were documented for specific patients. The supplier maintained inventory at a warehouse and possibly at the hospital, while the Acute Care Expense Limitation program charged a flat monthly amount based on historical use.

The Department said that pricing arrangement did not decide the exemption. A licensed physician issued a prescription work order naming the patient, and monthly invoices reflected the beds and number of days each patient used them.

Those records showed that the qualifying durable medical equipment was leased on behalf of individual patients. Audit staff were directed to revise the assessment, with any remaining balance and interest billed afterward.

What this means for you

• CAP or volume pricing does not automatically make patient-specific equipment taxable.
• Keep physician orders, patient names, lease dates, and invoice details linked together.
• Supplier-owned inventory can still produce exempt leases when each placement is made for an identified individual.
• The exemption is transaction-specific, not a blanket rule for every hospital bed.

Common questions

Q: Did flat monthly pricing defeat the exemption?
A: No. The Department said pricing had no bearing on the patient-specific requirement.

Q: What records supported exemption?
A: Physician work orders naming patients and monthly leases showing the beds and patient-use days.

Q: What happened to the audit?
A: The contested specialty beds were removed and the assessment was adjusted.

Citations and references

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

Subject

Taxpayer leases specialty beds and mattresses.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-80

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 healthcare provider that operates 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 audit will be revised to remove the contested specialty beds from the audit.

CONCLUSION

The audit will be adjusted based on this determination. After the audit is revised 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/1-5226051761.T