Washington – Taxability of Packaging Materials for Prescription Drugs

SALT Report 2803 – A Washington Department of Revenue Appeals Judge issued a ruling regarding the taxability of packaging materials used to repackage prescription drugs that are provided to prison inmates.  The Taxpayer in this case provides health care services in county jails throughout the State.  As part of its services, the Taxpayer dispenses prescription drugs and over-the-counter drugs to the inmates.

In 2011, the Taxpayer was advised by the Department that its purchases of prescription drugs were exempt from retail sales tax.  In addition, the Taxpayer was told that the packaging materials, which include containers, vials, cellophane, paper, and labels, were also exempt as they are an integral part of the prescription and the drugs could not be dispensed without them.

In that same year, the Taxpayer requested a binding ruling from the Department regarding the taxability of these items.  In that ruling, the Taxpayer was told that the drugs were exempt under RCW 82.08.0281.  However, the Taxpayer was told that the packaging materials did not qualify for any exemptions from retail sales tax.

The Taxpayer filed an appeal of this ruling, claiming that the packaging materials should qualify for the retail sales tax exemption for sales of drugs and “other substances,” as defined by WAC 458-20-18801, because the packaging materials are used to deliver the drugs to the inmates.

Further, the Taxpayer argued that the packaging materials are similar to the Department’s examples of exempt “other substances” such as needles, tubing, bags of intravenous solution, catheters, and infusion pumps. The taxpayer also asserts that the packaging materials are included in the sale of the drug because without them, the drugs could not be dispensed to the inmates.

In its decision, the Appeals Judge stated that the definition of “drug” in RCW 82.08.0281 does not include materials used to package a “compound, substance, or preparation for human use.”  The plain language of the statute limits the exemption to the sale of drugs for human use dispensed pursuant to a prescription. No other items are referenced and terms may not be read into a statute.  Additionally, the Judge stated “if the legislature intended to provide an exemption for the sale of packaging materials related to the dispensing of the prescription drugs, as it did for the specified devices used to deliver prescription drugs, it would have done so.”

The Judge also clarified that the exemption for disposable delivery devices does not apply in this case because the definition of a device is limited to items such as “syringes, tubing, or catheters.”  Specifically, the definition restricts the exemption to “single use items” or devices that perform similar functions.  The judge noted that the packaging materials are not in any way similar to the listed items, as the listed items are those that are inserted into the body and used to deliver prescribed medications.

Based on the above, the Judge ruled that the packaging materials used to repackage drugs prior to dispersal to prison inmates are subject to sales tax because the materials are not included within the exemption for prescription drugs or disposable delivery devices.

For Further Information

Washington Department of Revenue – Tax Determination #12-0320