Revenue Administrative Bulletin 1993-3

Approved: April 15, 1993

SALES AND USE TAXATION OF PRESCRIPTION DRUGS

(Replaces Revenue Administrative Bulletin 1992-12)

RAB-93-3. This bulletin updates Revenue Administrative Bulletin (RAB) 1992-12 by discussing the effects of Public Acts 266 and 267 of the Public Acts of 1992 which amended the General Sales Tax Act and the Use Tax Act.

In all other respects, this bulletin restates the discussion contained in RAB 1992-12. It announces the Treasury Department's acquiescence in the recent Court of Appeals decision in Syntex Laboratories, Inc v Michigan Department of Treasury, 188 Mich. App 383; 470 NW2d 665 (1991) and describes the refund procedure. For sales of oxygen, the bulletin announces the amendments to section 4g of the General Sales Tax Act [MCL 205.54g(2); MSA 7.525(7)(2)] and section 4d of the Use Tax Act [MCL 205.94 d (2); MSA 7.555 4d (2)] by Act Nos. 266 and 267 of the Public Acts of 1992 (effective December 14, 1992).

Law

In 1974, article 9, section 8, of the Michigan Constitution was amended by referendum to provide that "[n]o sales tax or use tax shall be charged or collected from and after January 1, 1975 on the sale or use of prescription drugs for human use . . . ."

The General Sales Tax Act provides that no sales tax is due on "[s]ales of prescription drugs for human use . . . ." [MCL 205.54g(l)(a); MSA 7.525(7)(1)(a)] The Use Tax Act contains a similar provision, stating, "[t]he tax levied under this act shall not apply to a purchase of a prescription drug for human use . . . ." [MCL 205.94d(l); MSA 7.555(4d)(1)]

Both the General Sales Tax Act and the Use Tax Act had defined a prescription drug as "insulin or drugs dispensed by a licensed pharmacist to fill individual prescriptions prescribed by a licensed physician or other licensed practitioner of the healing arts solely for the use of a designated person." (See the General Sales Tax Act, MCL 205.54g(2); MSA 7.525(7)(2), and the Use Tax Act, MCL 205.94d(2); MSA 7.555(4d)(2).)

Discussion of Syntex

The issue before the Court in Syntex was whether the phrase "prescription drugs" appearing in article 9, section 8, of the state constitution included drug samples distributed gratuitously by the taxpayer's sales representatives to licensed physicians in Michigan.

The taxpayer manufactured drugs intended for human use and available to consumers only with a prescription. As part of its marketing plan, the taxpayer provided free samples of its products to Michigan physicians. The Department of Treasury imposed a use tax on these samples because they did not meet the definition of prescription drugs contained in the Sales and Use Tax Acts. [MCL 205.54g(2); MSA 7.525(7)(2), and MCL 205.94d(2); MSA 7.555(4d)(2), respectively]

The Court interpreted the constitutional phrase "prescription drugs" by looking to the commonly understood meaning of the words. The Court found that "prescription drugs" are drugs that can be dispensed only as prescribed by a physician. Thus, the determination of whether a drug is a "prescription drug" depends upon its nature. If it is dispensable only pursuant to a prescription, it is a "prescription drug." If it can be lawfully obtained without a prescription, it is not. Because the drugs at issue in Syntex could be lawfully dispensed only pursuant to a physician's prescription, they were "prescription drugs" and exempt from sales or use taxes pursuant to article 9, section 8, of the state constitution.

The Court held that the imposition of sales or use taxes on sample drugs that can be dispensed only as prescribed by a physician is unconstitutional.

Department Position

Department of Treasury Sales and Use Tax Rule 1979 AC, R 205.111, states, in pertinent part, that "[s]ales of drugs, medications, instruments, equipment and other tangible personal property to such persons for use in rendering professional services or in connection with their office, laboratory or other similar quarters are taxable." The Treasury Department's acquiescence in the Syntex decision makes this portion of the rule erroneous as it applies to prescription drugs and, to that extent, the rule should not be relied upon.

Oxygen

Because oxygen can be purchased without a prescription, it was not considered a "prescription drug" as defined in the Syntex decision. Subsequent to the Syntex decision, therefore, the Department of Treasury held in RABs 1992-4 and 1992-12 that oxygen was not considered to be a prescription drug or constitutionally exempt from tax. These RABs in their application of the Syntex decision revoked the conclusion of the Department of Treasury Letter Ruling 89-43 dated August 4, 1989, which was based on Attorney General Opinion No. 5601 dated November 30, 1979. This conclusion that oxygen prescribed by licensed physicians is constitutionally exempt from tax was no longer the Department's position after the Syntex decision.

PA 266 and 267 of 1992 have now amended section 4g of the General Sales Tax Act [MCL 205.54g; MSA 7.525(7)] and section 4d of the Use Tax Act [MCL 205.94d; MSA 7.555(4d)], specifically in their definition of "prescription drugs for human use." The definition is amended to include:

oxygen dispensed pursuant to a written prescription or order issued by a licensed physician or other health professional as defined in section 21005 of Act No. 368 of the Public Acts of 1978.

Thus, a purchase of oxygen with a prescription will not be subject to tax. This amendment is effective December 14, 1992.

As discussed above, RAB 1992-4 revoked Letter Ruling 89-43 and announced the taxability of oxygen effective July 1, 1992. RAB 1992-12 extended the effective date to March 31, 1993. Neither effective date was reached; therefore, oxygen will be considered exempt for the interim period between Syntex and the date of the amendatory acts, December 14, 1992.

Refunds

The Court held that the constitutional exemption from sales and use tax for "prescription drugs" applied to the taxpayer's use of drug samples in its marketing activities. Therefore, the imposition of the use tax on the plaintiff's use of sample drugs was unconstitutional.

Section 30(2) of the Revenue Act [MCL 205.30(2); MSA 7.657(30)(2)] provides that a taxpayer may petition the Department of Treasury for a refund of tax paid within the time specified by the statute of limitations in Section 27a of the Revenue Act [MCL 205.27a; MSA 7.657(27a)]. Section 27a(6) provides that a claim for refund based upon a constitutional challenge to the validity of a tax statute must be made within 90 days from the date set for filing the original return.

Therefore, refunds of tax paid on prescription drugs will be honored only when requested within 90 days from the date set for filing the original return and when the tax paid has been refunded to the consumer if actually billed to the consumer.