200807135L



July 23, 2008

Via Fax

**********
**********
**********


RE:  08168869 – skin care products
**********
**********

Dear **********:

Thank you for your letter of June 12, 2008 and your follow-up letter dated July 
3, 2008 regarding a skin care service line sold by your client, an obstetrics 
and gynecology practice.  

You stated in your letter that besides operating an obstetrics and gynecology 
practice, your client also offers skin care services (under a sub-entity named 
**********) such as laser hair removal and sells skin care products.  These 
services are provided to patients of the practice that have been seen by 
clinical personnel and are not open to the general public.  You also stated 
that access to these skin care services is to take care of some medical or 
aesthetic issue of the patient.  According to the facts presented, 
approximately one half of the products sold by your client contain Drug Facts 
panels as required by the FDA and the remainder contain chemical formulations 
that are stronger than products sold over the counter.  Thank you for including 
information on both the Obagi and SkinCeuticals product lines.

There was some question as to whether the products can be sold over the counter 
due to concentrations of various chemicals in the formulations.  I researched 
the Obagi, SkinCeuticals, and Kinerase product lines on the internet. I found 
that I was able to purchase all items from all product lines on several 
internet sites without a prescription.  In addition to the various sites 
allowing me to purchase the items, SkinCeuticals allowed me to purchase most of 
their skin care items directly through their website.  The SkinCeuticals site 
did encourage me to find a “skincare professional” prior to checking out, but 
again, SkinCeuticals would allow me to directly purchase most of their products 
though their website.  The SkinCeuticals items I was not able to purchase 
through the SkinCeuticals website, I was able to purchase on other web sites.  

In your letter, you asked if sales tax must be collected on the sales of skin 
care products to the patients of your client’s practice.  You stated that you 
believe the products are non-taxable sales under Rule 3.284.

Response: Rule 3.284 “Drugs, Medicines, Medical Equipment, and Devices” states 
that sales or use tax is not due on the sale of drugs or medicines that are 
prescribed or dispensed on the oral or written prescription of licensed 
practitioners of the healing arts.  The rule also defines a drug or medicine as 
something that is:

*  applied to the human body and 

*  intended for use in the diagnosis, cure, mitigation, treatment, or 
prevention of disease, illness, injury, or pain.  

Therefore, if you can demonstrate that a product sold by your client is 
intended for use in the diagnosis, cure, mitigation, treatment, or prevention 
of a disease, illness, injury, or pain, it would be exempt when prescribed or 
dispensed by a physician.  “Prescribing” means that the physician would either 
have to give the patient a written prescription to purchase the items elsewhere 
or sell the item to the patient under a written or oral prescription. An “oral 
prescription” means that the course of treatment is noted on a patient’s 
medical records and that the qualifying drug or medicine is applied during the 
course of treating the medical condition presented by the patient. To 
“dispense” the product means to apply the product to the patient during the 
course of treating the medical condition presented by the patient or to give 
the product to the patient during the course of treating the medical condition 
presented by the patient.

Sales of items that merely treat an aesthetic issue (and do not meet the  
definition of a drug or medicine) would not qualify for exemption even if 
prescribed or dispensed by a physician during a course of treatment.  Instead, 
they are considered a supply item provided as part of the medical service 
performed by the physician.  Rule 3.284(d)(11)(C) states the following:

“Health care providers, such as doctors, clinics, hospitals, nursing homes, or 
other institutions providing health care or medical services to individuals owe 
tax on therapeutic appliances, devices, and related supplies they use in 
providing nontaxable health care and medical services.  Unless the health care 
provider qualifies as an exempt organization under Tax Code, sec. 151.309 or 
sec. 151.310, sales or use tax must be paid by the health care provider on the 
purchase, lease, or rental of all therapeutic appliances, devices, and related 
supplies.”  

Therefore tax is due on the initial purchase of products that are dispensed by 
your client for aesthetic purposes that are not required to be labeled with a 
"Drug Facts" panel.  A health care provider is not reselling the item even if a 
separate line item appears on the bill for medical treatment for the item. Your 
client would not be required to collect tax on the separated charge for the 
supply item that appears on the bill covering medical treatment.  The 
practitioner would be required to pay sales tax to the vendor on taxable items 
at the time of purchase or accrue and report the tax on purchases made from 
out-of-state vendors.  A licensed practitioner of the healing arts is not 
required to hold a sales tax permit to collect tax from patients on items 
prescribed or dispensed as part of a medical procedure.  But the practitioner 
is required to hold a sales tax permit if he maintains separate books and 
records or has established a separate profit center for any line of business 
that is separate and apart from his medical practice.  It is important to note 
that this provision applies only to sales of products made through medical 
practices and does not extend to any other businesses a physician may own or 
operate, such as a spa, fitness club or retail outlet.   

Rule 3.284 also exempts an over the counter drug or medicine (i.e., one that is 
not prescribed or dispensed by a physician) when it is labeled or required to 
be labeled with a "Drug Facts" panel in accordance with regulations of the 
federal Food and Drug Administration (FDA).  However, legislation passed during 
the 80th Legislative Session in 2007 revised that provision.  Tax Code Section 
151.313 (a) (3) was amended effective September 1, 2007 to limit the exemption 
to only over-the-counter medications that are required by the FDA to be labeled 
with a “Drug Facts” panel. A product, such as sunscreen, that is not required 
by the FDA to have a Drug Facts panel no longer qualifies for the exemption – 
even if the product is so labeled.  Rule 3.284 is in the process of being 
revised to reflect that change in the law. 

Therefore, if any product your client sells is required by the FDA to be 
labeled with a “Drug Facts” panel, then that product is exempt from sales tax 
without a prescription.  If any product your client sells is not required by 
the FDA to be labeled with a “Drug Facts” panel, it would be taxable when sold 
to anyone without a prescription or when not dispensed by the physician.  

I would like to make the following clarification.   If the skin care products 
are available in your client’s office for the general public or other walk-in 
traffic to purchase, they will only be exempt from sales tax if they are 
required by the FDA to be labeled with a “Drug Facts” panel.  If a product is 
not required by the FDA to be labeled with a “Drug Facts” panel, it is not 
exempt from sales tax simply because a doctor is on, owns or operates the 
premises where the product is being sold.  For example, if someone comes in for 
an OBGYN appointment and in the course of conversation the nurse tells them 
about the skin care products for sale at the front desk, that would not be an 
exempt sale. If someone is checking out and happens to see the products for 
sale and purchases them, that would not be an exempt sale.  Again, the 
physician must either dispense the item under an oral prescription or give the 
patient a written prescription for the item in order to qualify for an 
exemption.  

In your inquiry, you also stated that your client is considering moving this 
service line to a separate legal entity.  You asked if that move would create a 
difference in the taxability opinion.  The same guidelines stated above would 
apply even if the service line would be moved to a separate legal entity.  

The entire text of the Tax Code, a complete set of rules, and a wealth of other 
information can be found on our Window on State Government Web site by going to 
http://www.window.state.tx.us/taxinfo/sales/ .

You may also wish to utilize our State Tax Automated Research (STAR) system, 
which provides access to numerous letter rulings, policy decisions, hearings 
and other documents on this subject as well as other subjects related to Texas 
taxes.  This site may be found at http://cpastar2.cpa.state.tx.us/index.html .

If you need more information, please e-mail tax.help@cpa.state.tx.us, or call 
toll-free (800) 531-5441.

This opinion is based on the information presented.  Other information, though 
similar, may provide a different result.

Our goal is to provide you with prompt, professional service.  Please take a 
moment to complete our on-line survey at 
http://aixtcp.cpa.state.tx.us/surveys/tpsurv2/index.html

Sincerely,


Melissa Brogan
Tax Policy Division




ACCESSION NUMBER: 200807135L  
SUPERSEDED: N  
DOCUMENT TYPE: L  
DATE: 07/23/2008  
TAX TYPE: SALES