Sales Tax State Activity Update - April 2004

Doctor Prescribed Over-the-Counter Drugs now Exempt in Michigan

In September 2003 the Michigan Court of Appeals, bound by a previous decision, ruled in the case of Birchwood Manor, Inc. v. Commissioner of Revenue that purchases of over-the-counter (nonlegend) drugs dispensed to nursing home residents by licensed pharmacists pursuant to physicians’ written prescriptions were not exempt from use tax. The Court ruled as such with the recommendation that this case be submitted to a special conflict panel because of their disagreement with the previous decision with which it was forced to uphold. (Note: This case was reported on by this publication in November 2003.)

The previous decision in question was the ruling in CompuPharm, LTC v. Department of Treasury, 225 Mich App 274; 570 NW2d 476 (1997). In the CompuPharm case, the Court focused on the nature of the drug, rather than on the method in which it was obtained. They noted the commonly understood definition of a prescription drug to be a drug that can only be purchased pursuant to physician’s prescription. Conversely, a nonlegend drug is one that can be sold legally without a physician’s prescription. Thus, the Court concluded that statutory exemption for prescription drugs provided by MCL 205.94d did not apply.

The special panel convened by The Michigan Court of Appeals has now reversed the Tax Tribunal’s original judgment against Birchwood Manor, Inc. because it concluded that the CompuPharm case was wrongly decided. The main point of contention involved the definition of “prescription drug”. The CompuPharm panel erred in their construction of the definition of “prescription drug" by not using the principles of statutory interpretation. The CompuPharm panel concluded that a prescription drug is one that can only be purchased pursuant to a physician’s prescription. However, looking at the plain language of the statute, the non-legend drugs at issue in the Birchwood Manor Inc. case are prescription drugs as per MCL 205.94d simply because they are drugs, and they were dispensed by a licensed pharmacist, pursuant to a prescription issued by a licensed physician, for a designated person. The special panel also noted that if the Legislature wished to exempt only those drugs that can be purchased only with a doctor's prescription, it could have easily said so in the statute. They also pointed to the definition of prescription drugs in the Public Health Code in support of their opinion.

(Birchwood Manor, Inc. v. Commissioner of Revenue, Michigan Court of Appeals, Nos. 236646, 236698, and 236699, March 16, 2004) 5/04

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