Did an Acute Care Expense Limitation pricing arrangement prevent patient-specific specialty-bed leases from being exempt?

Plain-English summary

Virginia ruled that the Acute Care Expense Limitation pricing program did not prevent the hospital's specialty beds from qualifying as exempt durable medical equipment. The supplier charged a flat amount based on historical leasing levels and supplied beds from warehouse or hospital inventory.

When a bed was needed, however, a licensed physician issued a prescription work order that named the patient. Monthly invoices then reflected CAP pricing and the number of days each patient used the bed.

Those records established that the beds were leased on behalf of specific individuals. The Department directed audit staff to remove the contested specialty beds and adjust the assessment.

What this means for you

• Contract pricing and inventory location do not replace the statutory patient-specific test.
• Prescription work orders and usage invoices should identify the individual receiving the equipment.
• Maintain records linking each hospital placement to the named patient and lease period.
• The ruling applies to the supported leases, not automatically to every item under a CAP contract.

Common questions

Q: Was CAP pricing itself disqualifying?
A: No. The Department said it had no bearing on the patient-specific exemption criteria.

Q: Did supplier bulk inventory make the leases taxable?
A: No, because the hospital's records tied each lease to a specific patient.

Q: What relief was granted?
A: The contested specialty beds were removed from the audit.

Citations and references

• Va. Code § 58.1-609.10 10.
• Virginia Public Document 89-178.

Subject

Acute Care Expense Limitation

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-81

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 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 Public Document (P.D.) 89-178 (5/31/89) as the authority 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.

While the fact pattern in this case is materially different from the fact pattern in the cited PD, the document is 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 document 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/1-5226051773.T