My surgery center buys durable medical equipment and prosthetic devices in bulk from a vendor and only pays for items once they're withdrawn for a specific patient's procedure -- does that consignment arrangement qualify for Virginia's medical equipment sales tax exemption?

Plain-English summary

Virginia exempts durable medical equipment and prosthetic devices from sales and use tax, but only when the purchase itself is made "by or on behalf of an individual for use by such individual" (Va. Code § 58.1-609.10 10). This ruling is the latest in a well-established line holding that bulk-purchasing that equipment and later dispensing it to individual patients does NOT qualify -- even if every item can eventually be traced back to a specific patient's chart.

An ambulatory surgery center was assessed use tax on durable medical equipment and prosthetic devices it bought during the audit period. The center argued the items came from a consignment inventory -- the equipment sat on its premises, but title stayed with the manufacturer until a doctor issued a prescription or work order pulling a specific item for a specific patient's surgery, at which point a "sale" occurred and the exemption should apply.

The Department explained the controlling regulation, 23 VAC 10-210-940 G: the exemption only reaches a purchase that is genuinely made on behalf of, and specifically for, an individual. Bulk purchases that are later dispensed and even fitted to particular patients don't count, regardless of whether the provider can trace the item to that patient afterward -- the Department has rejected exactly that argument twice before, in a bulk purchase of braces and collars (P.D. 00-215) and a bulk purchase of orthopedic implants (P.D. 01-137). The only carve-out from the bulk-purchase rule is for nonprofit hospitals and licensed nonprofit nursing homes buying under Va. Code § 58.1-609.7 4, which requires a Department-issued Sales and Use Tax Certificate of Exception -- and the surgery center here wasn't a nonprofit hospital or nursing home.

The Department has recognized a genuine consignment exception in the past (P.D. 16-85): when a manufacturer ships equipment to a provider, stores it on the provider's premises with title staying with the manufacturer, and NO consideration changes hands until a doctor's prescription or work order for a specific patient triggers the actual sale -- at that point, the transfer is treated as a purchase specifically for that patient, and the exemption applies.

The surgery center said its arrangement worked the same way, but its own audit records didn't back that up. Invoices showed the center was billed and paid for inventory in bulk, at the time of billing -- not triggered by a physician's work order as in P.D. 16-85 -- and it never produced vendor contracts establishing that the items were genuinely held on consignment with no consideration paid before being pulled from inventory. Without that proof, the Department treated the purchases as ordinary bulk purchases, not exempt consigned sales, and upheld the assessment.

What this means for you

Any medical provider claiming the durable medical equipment/prosthetic devices exemption

The exemption only covers items bought specifically for an individual patient at the time of purchase -- not equipment stocked in bulk and dispensed later, even if you can trace every item to a patient afterward. If your billing and purchase records show you pay a vendor in bulk (rather than per patient, per work order), the exemption likely won't apply.

Providers using a consignment arrangement to try to qualify for the exemption

A real consignment defense requires proof: vendor contracts showing title stays with the manufacturer, no consideration paid until a doctor's prescription or work order pulls a specific item for a specific patient, and invoicing that actually reflects that per-patient trigger -- not bulk invoices paid on a regular billing cycle.

Nonprofit hospitals and nursing homes

You have a separate, broader exemption path under Va. Code § 58.1-609.7 4 for bulk purchases, but you need a Department-issued Sales and Use Tax Certificate of Exception to use it -- this route isn't available to for-profit or non-hospital providers like an ambulatory surgery center.

Common questions

Q: We buy medical equipment in bulk and later assign specific items to specific patients -- does that qualify for Virginia's medical equipment exemption?
A: No. The exemption requires the purchase itself to be made on behalf of a specific individual. Bulk purchases dispensed later don't qualify even if you can trace the item to a patient afterward.

Q: What if our vendor arrangement is a true consignment, where we don't pay until a doctor's work order pulls an item for a specific patient?
A: That can qualify -- the Department has recognized this exact structure as exempt in P.D. 16-85 -- but you need actual proof: vendor contracts confirming no consideration is paid until the work-order trigger, and invoicing that reflects a per-patient (not bulk) billing pattern.

Q: We're a nonprofit hospital -- is there an easier path to the exemption for bulk purchases?
A: Yes, under Va. Code § 58.1-609.7 4, but you need a Sales and Use Tax Certificate of Exception issued by the Department verifying your nonprofit hospital or nursing home status. That path isn't available to non-hospital providers.

Q: Does it help that we can eventually trace every bulk-purchased item to the specific patient who received it?
A: No -- the Department has rejected that argument in multiple prior rulings (P.D. 00-215, P.D. 01-137). Traceability after the fact doesn't satisfy the requirement that the purchase itself be made specifically for an individual.

Citations and references

• Va. Code § 58.1-609.10 10 (exemption for prosthetic devices, durable medical equipment, and related parts/supplies purchased by or on behalf of an individual for that individual's use)
• 23 VAC 10-210-940 (defines prosthetic devices; subsection G requires the purchase to be specifically for a particular individual, not a bulk purchase later dispensed)
• Va. Code § 58.1-609.7 4 (separate exemption for nonprofit hospitals/licensed nonprofit nursing homes, requiring a Department Certificate of Exception)
• P.D. 00-215 (12/7/2000) (bulk purchase of braces and collars, later traced to patients, not exempt)
• P.D. 01-137 (9/19/2001) (bulk purchase of orthopedic implants, later traced to patients, not exempt)
• P.D. 16-85 (5/17/2016) (genuine consignment arrangement -- title retained by manufacturer, no consideration until a physician's work order for a specific patient -- qualifies for the exemption)

Subject

Exemption : Durable Medical Equipment - On Behalf of Individual, Bulk Purchases, Nonprofit Medical Facilities, Consignment

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-70

Original ruling text

April 13, 2022

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the “Taxpayer”), in which you seek correction of the retail sales and use tax assessment issued for the period November 2011 through October 2017. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, an ambulatory and surgery center providing out-patient non-emergency services, was audited for the period at issue. As a result of the audit, an assessment was issued for untaxed purchases of certain durable medical equipment and prosthetic devices. The Taxpayer appeals, contending the durable medical equipment and prosthetic devices were provided on a consignment basis and should be exempt of the tax.

DETERMINATION

Virginia Code § 58.1-609.10 10 provides an exemption for “prosthetic devices and . . . 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.” Prosthetic devices are defined in Title 23 of the Virginia Administrative Code (VAC) 10-210-940 to mean “devices which replace a missing part or function of the body and shall include any supplies physically connected to such devices.”

The tangible personal property at issue in this appeal qualifies as durable medical equipment under Virginia Code § 58.1-609.10 10. At issue, however, is whether the purchase of such equipment by the Taxpayer falls within the purview of Title 23 VAC 10-210-940 G. Under this regulation, purchases of such property only qualify for the exemption if the transaction is deemed to be a purchase on behalf of an individual and is required to be specifically bought for that individual. Durable medical equipment and devices purchased in bulk and then dispensed to individual patients are not eligible for the exemption even if the device is modified or fitted for a specific individual.

The only exception to the “bulk purchase” rule is set out in Virginia Code § 58.1-609.7 4, which authorizes the exempt sale of tangible personal property to nonprofit hospitals and licensed nonprofit nursing homes. In order for nonprofit hospitals to make exempt purchases, such nonprofit hospitals and nursing homes must be able to provide a Sales and Use Tax Certificate of Exception letter issued by the Department of Taxation, verifying the entity’s tax-exempt status. Here, it does appear the Taxpayer was not a nonprofit hospital or nursing home.

The Department has previously addressed this issue in Public Documents (P.D.) 00-215 (12/7/2000) and P.D. 01-137 (9/19/2001). While the discussion in P.D. 00-215 centers on the bulk purchase of braces and collars, and P.D. 01-137 deals with the bulk purchase of orthopedic implants, in both cases, the medical service provider purchased the items in bulk for use on an “as needed” basis. After the purchases, each service provider was able to trace the items to specific patients. Consistent with the regulation, however, the Department ruled that the purchase of the items did not qualify as exempt purchases on behalf of specific patients, regardless of the fact the taxpayers could trace the items to specific patients.

The Department has permitted the exemption to apply when purchases are made under a consignment agreement. In P.D. 16-85 (5/17/2016), the Department considered a scenario wherein a manufacturer of durable medical equipment shipped the equipment to a taxpayer, and stored it on the taxpayer’s premises. No consideration would be exchanged and therefore title to the equipment would remain with the manufacturer. A sale of the equipment takes place when a purchase order is issued by the doctor on the prescription or work order for a specific patient. At this point, the equipment is transferred and consideration exchanged. Under these circumstances, the Department determined that the transaction would qualify as an exempt sale based on the fact that the product is purchased on the prescription or work order of a licensed physician or medical practitioner for a specific patient.

The Taxpayer contends that it obtained the durable medical equipment and prosthetic devices that it provides to patients on consignment and only withdraws the durable medical equipment or prosthetic devices from its consignment inventory pursuant to a prescription or work order from a licensed physician or other licensed practitioner to be surgically implanted into a patient. The Taxpayer argues that, because they were withdrawing the items from its consignment inventory for a specific patient, the sale qualifies for the exemption under Virginia Code § 58.1-609.10 10.

The Department disagrees. Invoices examined during the audit show that the inventory was purchased in bulk, with consideration being paid at the time of billing and not based on a work-order as outlined in P.D. 16-85. The Taxpayer has not provided contracts with vendors to confirm that the items were provided on a consignment basis with no consideration prior to taking the items out of inventory.

Based on the information provided and the cited authorities, the assessment is upheld. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No further interest will accrue provided the outstanding assessment is paid within 60 days from the date of this letter.

The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this response, you may contact * in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/2028.A

Related Documents

01-137

00-215

16-85