We buy medical devices and implants in bulk from manufacturers and use them per a doctor's prescription for surgery -- does that qualify for Virginia's durable medical equipment sales tax exemption without a signed consignment contract?

Plain-English summary

This ruling is a reconsideration request -- a second look at an earlier determination, P.D. 22-70, which upheld a Virginia sales/use tax assessment against a healthcare provider for the period November 2011 through October 2017. In P.D. 22-70, the Department had denied the sales tax exemption for durable medical equipment and prosthetic devices under Va. Code § 58.1-609.10 10 because the provider's invoices showed bulk inventory purchases, and the provider hadn't shown the items were supplied on a consignment basis (meaning no money changes hands until a specific unit is pulled from inventory for a specific patient's prescription).

Asking for reconsideration, the provider offered a new characterization of the facts: it said the "bulk purchase" invoices were actually post-procedure billing statements from the manufacturer, and that it had really obtained the devices only after a physician issued a prescription or work order for a specific surgical implantation -- with the manufacturer billing periodically afterward for the devices used.

The new evidence still fell short. For the Department to verify a genuine consignment arrangement, it needs to see actual contracts or agreements spelling out the legally binding terms between the provider and its vendors -- specifically, confirmation that no consideration was exchanged until a device was removed from inventory pursuant to a physician's work order or prescription (a standard set out in an earlier ruling, P.D. 16-85). Instead of contracts, the provider submitted generic letters from vendors that simply stated, in general terms, that each vendor "sold consignment inventory" to the provider. The Department found these letters didn't provide the specific, objective evidence needed to show that a purchase was actually triggered by a doctor's order for a particular patient, rather than being a bulk purchase billed later.

Strict construction cut against the taxpayer. The Department invoked a longstanding Virginia Supreme Court rule from Commonwealth v. Community Motor Bus Co., Inc., 214 Va. 155, 157 (1973): where there's any doubt about whether an exemption applies, that doubt is resolved against the party claiming the exemption. Sales tax exemptions in Virginia are strictly construed. Because the provider still hadn't supplied contracts or agreements offering clear and cogent proof of a true consignment relationship, the Department upheld the original assessment -- with interest continuing to accrue unless paid within 60 days -- and stated this would be the final time it would revisit the matter absent that documentation.

What this means for you

Healthcare providers claiming the durable medical equipment/prosthetic devices exemption on consignment inventory

Keep actual signed contracts or agreements with your vendors that spell out the consignment terms -- specifically, that no payment is due until a specific unit is removed from inventory pursuant to a doctor's prescription or work order for a named patient. A generic letter asserting "we sell on consignment" isn't a substitute for the contract itself.

Anyone reconsidering how invoices are billed after the fact

If your manufacturer bills you periodically for devices already used in procedures, be prepared to document the entire chain -- the physician's original order, the specific device pulled from inventory, and the billing tied back to that specific use -- not just a recharacterized invoice description.

Taxpayers who've already lost once on an exemption claim and are asking for reconsideration

This ruling shows the Department will look at genuinely new evidence, but it applies the same strict-construction standard the second time around -- and it can decline to consider the matter further if the taxpayer doesn't bring qualitatively better proof than before.

Common questions

Q: What counts as proof of a "consignment" arrangement for Virginia's durable medical equipment sales tax exemption?
A: Based on this ruling and the P.D. 16-85 standard it applies, you need actual contracts or agreements establishing that no consideration was exchanged until a specific item was removed from inventory pursuant to a physician's prescription or work order -- not a generic letter from a vendor asserting that a consignment relationship exists.

Q: Why didn't the vendor letters submitted here satisfy the Department?
A: They were generic statements that a vendor sold "consignment inventory," without objective evidence tying a specific purchase to a specific patient's prescription at the time of the transaction -- not the kind of clear, cogent proof required when a taxpayer bears the burden of establishing an exemption.

Q: Does Virginia give taxpayers the benefit of the doubt on sales tax exemptions?
A: No. Per Commonwealth v. Community Motor Bus Co., Inc., 214 Va. 155 (1973), any doubt about whether an exemption applies is resolved against the taxpayer claiming it.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-609.10 10 -- sales tax exemption for prosthetic devices and other durable medical equipment
• Commonwealth v. Community Motor Bus Co., Inc., 214 Va. 155, 157 (1973) -- sales tax exemptions are strictly construed against the taxpayer

Prior rulings referenced (described here, not linked): P.D. 22-70 (4/13/2022) -- the original determination upholding the assessment for lack of proof of a consignment arrangement; P.D. 16-85 (5/17/2016) -- sets the documentation standard for verifying a consignment arrangement (contracts showing no consideration exchanged prior to removal from inventory pursuant to a physician's work order or prescription).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 23-130

Original ruling text

December 7, 2023

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 a reconsideration of the Tax Commissioner’s determination, issued as Public Document (P.D.) 22-70 (4/13/2022) for the period November 2011 through October 2017. I apologize for the delay in responding to your letter.

FACTS

In P.D. 22-70, the Taxpayer appealed an audit assessment that imposed tax on durable medical equipment and prosthetic devices. The Tax Commissioner determined that the inventory was purchased in bulk and that the Taxpayer had not shown that the equipment and devices were provided on a consignment basis. Accordingly, the sales tax exemption for prosthetic devices and other durable medical equipment pursuant to Virginia Code § 58.1-609.10 10 was denied and the assessment was upheld.

The Taxpayer requests reconsideration of this determination, contending that the bulk purchase invoices are actually post-procedure billing by the manufacturer. Further, the Taxpayer now asserts that it obtained the durable medical equipment and prosthetic devices after being ordered pursuant to a prescription or work order from a licensed physician or other licensed practitioner to be surgically implanted into a patient. Subsequently, the Taxpayer is billed by the manufacturer periodically for a number of devices used in the medical procedures.

DETERMINATION

In the determination issued to the Taxpayer, the Department’s reasons for upholding the assessment were based on 1) invoices that indicated purchases of bulk inventory, and 2) the fact that payment was made at the time of billing and not upon issuance of a physician’s work order. Under these circumstances, contracts stipulating the legally binding and specific terms of the consignment agreement between the vendors and the Taxpayer would be available in order to allow the Department to verify that the items of durable medical equipment purchased were provided on consignment with no exchange of consideration prior to removal from inventory pursuant to a physician’s work order of prescription. See P.D. 16-85 (5/17/2016).

While the Taxpayer has indicated that it would provide the necessary documentation, as of this date, contract documents have not been provided. Instead, letters from vendors have been submitted that make a generic statement that each vendor sold consignment inventory to the Taxpayer. The Taxpayer believes these letters show that the purchase of the items at issue meet the requirements for exemption. None of these documents, however, provide sufficient objective evidence to show that the purchase of the durable medical equipment took place when a purchase order was issued by the doctor on the prescription or work order for a specific patient. Accordingly, the Department is unable to verify that the durable medical equipment and prosthetic devices were purchased in accordance with P.D. 16-85 or pursuant to specific prescriptions or work orders issued by licensed physicians or practitioners for individual patients.

In Commonwealth v. Community Motor Bus Co., Inc ., 214 Va. 155, 157 (1973), the Virginia Supreme Court ruled that “where there is any doubt as to the application of an exemption, the doubt is resolved against the one claiming the exemption.” As a result, sales and use tax exemptions are strictly construed against the taxpayer. Unless the Taxpayer provides contracts or agreements that provide clear and cogent evidence that it is entitled to the sales tax exemption under Virginia Code § 58.1-609.10 10, this will be the final time that I address this matter.

The assessment is upheld. Updated bills, 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 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 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 (804) ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4199.Y

Related Documents

16-85

22-70