Was a dissolving steroid-releasing sinus implant exempt as medical equipment, a prosthetic device, or medicine?

Plain-English summary

Virginia ruled that a dissolving steroid-releasing implant used after sinus surgery was generally taxable. It was single-use and had to be implanted by a medical practitioner, so it could not withstand repeated use and was not appropriate for home use—two requirements for durable medical equipment.

The product also did not qualify as a prosthetic device because it enhanced post-surgery healing rather than replacing a missing body part or function. Although it released corticosteroids, the FDA classified it as a medical device, and the Department did not treat it as exempt medicine or drugs.

Physicians, for-profit hospitals, and surgery centers were consumers of the product. Qualifying nonprofit hospitals or clinics could buy it exempt with a Department-issued exemption letter. The out-of-state manufacturer had to register if its representatives' Virginia activities created nexus; otherwise the taxable buyer owed consumer use tax.

Common questions

Did a physician's prescription make the device exempt? No. The ruling says prescription-only status and FDA approval were not dispositive.

Could any hospital purchase be exempt? A qualifying nonprofit hospital or clinic could purchase exempt after providing its Department-issued exemption documentation.

Citations and references

• Va. Code §§ 58.1-609.10 9 and 10, 58.1-609.11, and 58.1-612
• 23 VAC 10-210-940 B and G
• 23 VAC 10-210-2060 B

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-99

Original ruling text

May 22, 2018

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter in which you request a ruling on behalf of * (the “Taxpayer”) regarding the application of the Virginia retail sales and use tax to the sale of a medical device manufactured by the Taxpayer. I apologize for the delay in responding to your request.

FACTS

The medical device at issue (the “Product”) is classified by the federal Food and Drug Administration (FDA) as a Class Ill medical device. The Product is a spring-like steroid-releasing implant that offers localized drug delivery to the sinus passage. The Product is implanted by a physician at the completion of sinus surgery to maintain an opening in the sinus passageway and gradually releases corticosteroids with anti-inflammatory properties directly to the sinus lining. The Product acts as a stent to open the sinus passageway and eventually dissolves. The Product basically replaces the gauze packing traditionally used in sinus surgery, while at the same time dispensing steroids to reduce swelling and scar tissue.

The implant is stored in a “delivery system” and sold as a bundle that is labeled to be dispensed only on the prescription or order of the licensed practitioner, and is intended for a one-time use on a single patient. The implant and the delivery system are sold as one product and cannot be purchased separately. The Taxpayer sells the Product to hospitals, ambulatory surgery centers, and doctor offices for specific scheduled surgeries and/or for inventory stocking. The Taxpayer requests a ruling regarding the application of the Virginia retail sales and use tax to sales of the Product in Virginia.

RULING

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 or 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.

In order to qualify as exempt durable medical equipment, the product must meet the four criteria provided above and the product must be purchased by or on behalf of an individual for use by such individual. Title 23 of the Virginia Administrative Code (VAC) 10-210-940 G addresses purchases on behalf of an individual and states, “In order to be deemed a purchase on behalf of an individual, the item must be specifically bought for the individual. If items are purchased in bulk and then dispensed to individual patients, no exemption is applicable even if the item is modified or fitted for a specific individual.” The fact that an item is purchased from a medical equipment supplier or is purchased on a physician's prescription is not dispositive of its exempt status. The fact that the Product is approved by the Federal Food and Drug Administration does not, in and of itself, afford the Product the retail sales and use tax exemption set forth in Virginia Code § 58.1-609.10.10. Further, the fact that the Product is to be dispensed only by the prescription or order of a licensed practitioner is not dispositive in determining the sales tax application to the Product.

Based on the information provided, the Product does not meet criteria (i) and (iv) in the statute to qualify as durable medical equipment because it cannot withstand repeated use and is not appropriate for use in the home, as the device must be implanted by a trained medical practitioner.

Title 23 VAC 10-210-940 B defines “prosthetic devices” to mean devices that replace a missing part or function of the body and shall include any supplies physically connected to such device.” The Product does not qualify as an exempt prosthetic device because the Product does not meet the definition provided in the regulation. The Product does not serve a replacement purpose, but merely enhances the post-surgery healing process.

Medicines and Drugs

Virginia Code § 58.1-609.10 9 provides an exemption from the retail sales and use tax for:

Medicines [and] drugs . . . dispensed by or sold on prescriptions or work orders of licensed physicians . . . controlled drugs purchased for use by a licensed physician, dentist, optometrist, licensed nurse practitioner, or licensed physician assistant in his professional practice, regardless of whether such practice is organized as a sole proprietorship, partnership, or professional corporation, or any other type of corporation in which the shareholders and operators are all licensed physicians, optometrists, licensed nurse practitioners, or licensed physician assistants engaged in the practice of medicine, optometry, or nursing; medicines and drugs purchased for use or consumption by a licensed hospital, nursing home, clinic, or similar corporation not otherwise exempt under this section . . . . "

While the Product may contain elements of medication to enhance the healing process, i.e. , corticosteroids to reduce swelling and scar tissue, the Product is classified by the federal Food and Drug Administration as a medical device for use by medical practitioners following sinus surgery and does not qualify for the exemption in Virginia Code § 58.1-609.10 9.

Physicians

Title 23 VAC10-210-2060 B provides that “physicians, surgeons and other “practitioners of the healing arts” are the consumers of all tangible personal property used in performing their professional services.

Based on all of the above, the Product is for the use and consumption of licensed medical practitioners in performing their professional services. Therefore, sales of the Product in Virginia to hospitals, ambulatory surgery centers, and medical practitioners would be subject to the Virginia retail sales and use tax.

Nonprofit Organizations

Virginia Code § 58.1-609 11 provides an exemption that includes the sale of tangible personal property to nonprofit hospitals and nonprofit clinics (including nonprofit surgery centers). The Taxpayer may sell the Product to these entities exempt of the tax upon the Taxpayer's receipt of a Department issued Sales and Use Tax Certificate of Exemption letter. This letter verifies the entity's exempt status and includes the tax exempt number necessary for making tax exempt sales to such an entity.

Nexus

The Department has no authority to require out-of-state dealers to register for the collection and remittance of the retail sales and use tax unless they have sufficient nexus with the state. Virginia Code § 58.1-612 provides the criteria for determining whether a dealer has sufficient activity with Virginia to require registration. The statute provides in part that a dealer shall be deemed to have sufficient activity within the state to require registration if he “[s]olicits business in this State by employees, independent contractors, agents or other representatives.”

You represent that the Taxpayer is located outside Virginia and does not have a physical business location in Virginia. The Taxpayer does have sales representatives who occasionally travel to Virginia or reside in Virginia. It is not clear if the sales representatives solicit business in Virginia. If the Taxpayer has sufficient nexus in Virginia, the Taxpayer is required to register for the collection and remittance of the retail sales and use tax. If the Taxpayer does not have sufficient activity to require registration, the physician, for-profit hospital and surgery centers must pay the tax directly to the Department on a Consumer's Use Tax Return, Form ST-7.

This response is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia and regulation sections 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 concerning this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/636.T