The Virginia Department of Taxation (DOT) issued a letter ruling upholding the denial of a sales and use tax refund for chemical reagents used by a provider of medical diagnostic testing and analytical services. The taxpayer’s services range from blood tests to gene-based and molecular testing that aid in the diagnosis or detection of diseases. An auditor had denied the taxpayer a refund credit for tax paid on reagents used in testing human blood, urine and other bodily specimens because the auditor questioned whether the reagents qualified for Virginia’s sales tax exemption on medicines and drugs. The taxpayer contested the auditor, claiming that the reagents meet the definitional requirements of a drug. In the letter ruling, the DOT agreed that the reagents are consistent with the definition of “drug” in the Virginia Administrative Code. However, the DOT notes that for the reagents to be purchased exempt or to qualify for a tax refund credit, the taxpayer’s business operation must be similar to that of the qualifying entities in the applicable tax code. The taxpayer provides diagnostic testing and analytical services in a laboratory setting to test human specimens in order to obtain information for medical providers to use in the diagnosis, treatment and care of their patients. The taxpayer does not provide direct medical treatment and care to individuals on an inpatient and outpatient basis. Additionally, the reagents are not consumed by or administered to individuals by the taxpayer. Rather, they are used by the taxpayer to perform its diagnostic and analytical services. As a result, the taxpayer cannot be considered a similar corporation to a licensed hospital, nursing home or clinic and therefore does not qualify for the exemption (or refund, in this case) in question.
(Letter Ruling 22-132, Virginia Department of Taxation, January 3, 2023)