Cardinal Health 110 v. State Bd. of Equaliziation

Filed 1/18/08 Cardinal Health 110 v. State Bd. of Equaliziation CA1/1

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FOUR

This appeal raises the question of whether sales to hospitals of insulin syringes, glucose test strips, and skin puncture lancets are exempt from sales and use taxes under Revenue and Taxation Code[1] section 6369. The trial court ruled they were exempt, and granted summary judgment in favor of Cardinal Health 110, Inc., (Cardinal) in its tax refund action against the California State Board of Equalization (the Board). We conclude the sales of syringes are exempt from taxation, but the sales of glucose test strips and skin puncture lancets are not. We also conclude that Cardinal should not have been awarded its attorney fees. Accordingly, we affirm in part, reverse in part, and remand for further proceedings.

I. BACKGROUND

Cardinal (formerly known as Whitmire Distribution Corporation) sells medical supplies to various customers. Among other things, it sells insulin syringes, blood glucose test strips, and skin puncture lancets (the diabetic supplies) to hospitals and other health facilities. The Board audited Cardinals tax returns and informed Cardinal that it owed sales and use taxes for the period of July 1, 1993, through September 30, 1996 (the audit period). Cardinal paid the taxes. After exhausting its administrative remedies, it filed this action seeking a refund.[2]

As the parties stated in their joint stipulation of facts below: Cardinal sold insulin syringes to California hospitals and health facilities (hereinafter collectively hospitals) during the audit period. [] During the audit period, the subject insulin syringes were furnished by the hospitals registered pharmacists to the hospitals labs that in turn provided the insulin syringes [to] the hospitals medical personnel to administer insulin to patients for the treatment of diabetes, as directed by a physician. [] Cardinal sold blood glucose test strips and skin puncture lancets to hospitals during the audit period. [] During the audit period the subject blood glucose test strips and skin puncture lancets were furnished by the hospitals registered pharmacists to the hospitals labs that in turn provided the blood glucose test strips and skin puncture lancets to the hospitals medical personnel to monitor diabetic patients blood sugar level for treatment of diabetes in accordance with physicians instructions. [] During the audit period, the hospitals diabetic in-patients typically did not self-administer insulin or self-monitor their sugar levels while in the hospital but upon written order of their physician may have been permitted to do so under medical personnel supervision. [] During the audit period the hospitals charged diabetic in-patients for insulin syringes, blood glucose test strips and skin puncture lancets and for the use of the subject items in treating patients diabetes. Cardinal does not contend that the hospitals resold the subject items to their patients during the audit period.

Both Cardinal and the Board moved for summary judgment. The trial court granted Cardinals motion, denied the Boards motion, and entered judgment for Cardinal for $525,387.64 for the taxes and interest paid for the audit period, plus interest. Cardinal moved for attorney fees pursuant to section 7156, and the trial court granted the motion, awarding Cardinal $92,718.75 for its attorney fees. The court entered an amended judgment, which incorporated the attorney fee award. The Board appealed separately from the judgment and from the amended judgment, and the two appeals were consolidated.

II. DISCUSSION

A. Standard of Review

The primary issue before this court is whether section 6369 and a regulation adopted by the Board (Cal. Code Regs., tit. 18, 1591.1 (reg. 1591.1)) exempt from Californias sales and use tax Cardinals sales of the diabetic supplies to hospitals. As stated in Purdue Frederick Co. v. State Bd. of Equalization (1990) 218 Cal.App.3d 1021, 1026, where the issue before the court is a question of law, the construction of a statute, the Boards interpretation of section 6369 . . . is subject to broad judicial review. In interpreting a statute, our goal is to determine the probable intent of the Legislature. (Hale v. Southern Cal. IPA Medical Group, Inc. (2001) 86 Cal.App.4th 919, 924 (Hale).) In doing so,  we first look to the words of the statute and try to give effect to the usual, ordinary import of the language, at the same time not rendering any language mere surplusage.  (California Ins. Guarantee Assn. v. Workers Comp. Appeals Bd. (2006) 136 Cal.App.4th 1528, 1534.) If the language of the statute is plain, there is no need for statutory construction or resort to legislative history; rather,  the sole function of the courts is to enforce [the statute] according to its terms.  (Leroy T. v. Workmens Comp. Appeals Bd. (1974) 12 Cal.3d 434, 438 (Leroy T.); Hale, supra, 86 Cal.App.4th at p. 924.)

However, [w]hen the validity of a formal regulation is attacked, . . . a more limited standard of judicial review applies. [I]n reviewing the legality of a regulation adopted pursuant to a delegation of legislative power, the judicial function is limited to determining whether the regulation (1) is within the scope of the authority conferred [citation] and (2) is reasonably necessary to effectuate the purpose of the statute [Citation.] [Citation.] These issues do not present a matter for the independent judgment of an appellate tribunal; rather, both come to this court freighted with [a] strong presumption of regularity . . . . [Citation.] Our inquiry necessarily is confined to the question whether the classification is arbitrary, capricious or [without] reasonable or rational basis. [Citations.] (Wallace Berrie & Co. v. State Bd. of Equalization (1985) 40 Cal.3d 60, 65 (Wallace Berrie).)

We review de novo the trial courts decision to grant summary judgment. (Shamsian v. Atlantic Richfield Co. (2003) 107 Cal.App.4th 967, 975.)

B. Section 6369 and Regulation 1591.1

The statute at issue in this case is section 6369, a portion of Californias sales and use tax law. Subdivision (a) provides in part: There are exempted from the taxes imposed by this part the gross receipts from the sale in this state of, and the storage, use, or other consumption in this state of, medicines: [] (1) Prescribed for the treatment of a human being by a person authorized to prescribe the medicines, and dispensed on prescription filled by a registered pharmacist in accordance with law. [] (2) Furnished by a licensed physician and surgeon, dentist, or podiatrist to his or her own patient for treatment of the patient. [] (3) Furnished by a health facility for treatment of any person pursuant to the order of a licensed physician and surgeon, dentist, or podiatrist. [] (4) Sold to a licensed physician and surgeon, podiatrist, dentist, or health facility for the treatment of a human being. Subdivision (b) excludes certain products from the definition of medicine, and subdivision (c) provides that certain products, such as sutures, bone screws, pacemakers, certain orthotic devices, and prosthetic devices, are medicines for purposes of section 6369. The diabetic supplies at issue here are not mentioned in subdivision (b) or (c). Subdivision (e) provides: Insulin and insulin syringes furnished by a registered pharmacist to a person for treatment of diabetes as directed by a physician shall be deemed to be dispensed on prescription within the meaning of this section.

The Board has adopted regulation 1591.1, which provides in part: (b)(5) Insulin and Insulin Syringes. Insulin and insulin syringes furnished by a pharmacist to a person for treatment of diabetes as directed by a physician shall be deemed to be dispensed on prescription within the meaning of Revenue and Taxation Code section 6369(e). As such, the sale or use of insulin and insulin syringes furnished by a pharmacist to a person for treatment of diabetes, as directed by a physician, is exempt from tax. [] Glucose test strips and skin puncture lancets furnished by a registered pharmacist that are used by a diabetic patient to determine his or her own blood sugar level and the necessity for and amount of insulin and/or other diabetic control medication needed to treat the disease in accordance with a physicians instructions are an integral and necessary active part of the use of insulin and insulin syringes or other anti-diabetic medications and, accordingly, are not subject to sale or use tax pursuant to subsection (e) of the Revenue and Taxation Code section 6369. These medical supplies are not medicines and their sale or use does not qualify for tax exemption under subsections (a) or (b) of Revenue and Taxation Code section 6369.

C. Insulin Syringes

The question before us is whether the diabetic supplies at issueinsulin syringes, glucose test strips, and skin puncture lancetsare exempt from sales and use taxes when sold to hospitals. We first consider insulin syringes, because they are specifically mentioned in section 6369, subdivision (e).

The Board contends that the language of subdivision (e) indicates a legislative intent to exempt from sales and use taxes only sales of syringes to individual diabetic patients. The Board argues: By its terms, section 6369(e) does not create a separate tax exemption at all. Rather it clarifies what will be deemed to be dispensed on prescription within the meaning of section 6369, subd. (a)(1), the tax exemption for sales of prescription medicines to individuals. Because section 6369(e) pertains to sales to individuals and no sales to individuals are at issue in this case, Cardinals attempt to rely upon this statute as a tax exemption for its sales to hospitals must fail.

We agree with the Board that section 6369, subdivision (e) does not establish an independent exemption from taxation. The exemptions are provided by subdivision (a), which exempts medicines dispensed, sold, or furnished under certain circumstances. However, unless subdivision (e) is read to express an intent to treat syringes as medicine for purposes of section 6369, there would be no purpose to defining the circumstances under which they are deemed to be dispensed on prescription, because they would not fall within the terms of section 6369, subdivision (a)(1). Under the plain language of the statute, there is simply no way to deem sales of syringes exempt from taxes under section 6369, subdivisions (e) and (a)(1) unless syringes are deemed to be medicines, because section 6369, subdivision (a)(1) exempts only medicines dispensed on prescription. And if the Legislature had intended to have insulin syringes treated as medicines only for the limited purpose of the exemption provided by subdivision (a)(1), and not for purposes of any other exemption in subdivision (a), it could easily have so provided.

Assuming that insulin syringes are treated as medicines under section 6369, there is no serious dispute as to whether the sales in question are exempt from sales and use taxes. Whether or not the Board is correct that section 6369, subdivision (a)(1)s exemption of medicines dispensed on prescription is limited to sales to individuals, the sales of insulin syringes to the hospitals clearly fall within the terms of subdivision (a)(4), which exempts the sale of medicines sold to a health facility for the treatment of a human being.

The statutory language is clear, and there is no need for us to resort to other indicia of legislative intent, such as legislative history. (Leroy T., supra, 12 Cal.3d at p. 438.) In any case, a review of the legislative history would not lead to any other conclusion. Section 6369 was first enacted in 1961, and contained only the following language: There are exempted from the taxes imposed by this part the gross receipts from the sale, and the storage, use, or other consumption, in this State of medicines prescribed for the treatment of a human being by a person authorized to prescribe the medicines, and dispensed on prescription filled by a registered pharmacist in accordance with law. Medicines includes any drug defined pursuant to Section 4031 of the Business and Professions Code. Medicines do not include (a) any auditory, prosthetic, ophthalmic or ocular device or appliance nor (b) any alcoholic beverage the manufacture, sale, purchase, possession or transportation of which is licensed and regulated by the Alcoholic Beverage Control Act . . . . (Stats. 1961, ch. 866, 1, p. 2273.)

Section 6369 was amended in 1962 to add exemptions for the receipts from the sale, storage, use, or consumption of medicines supplied to his own patients by a physician and surgeon or podiatrist . . . and also including furnishing of medicines to patients in a county or other licensed hospital if the medicines are prescribed for such patients and dispensed by a registered pharmacist or are administered under the direction of a physician . . . . (Stats. 1962, ch. 7, 1, p. 12.) The amendment was declared to be merely a clarification of the original intention of the Legislature. (Id., 2, p. 13.) It appears from the legislative history that the purpose of this provision was to allow hospitals to purchase, tax-free, medicines they intended to furnish to their patients, even if they did not make a separate charge for the medicines, thus treating such transactions in the same way as sales of medicines by pharmacists.[3]

Section 6369 was again amended in 1963. In pertinent part, the amendment revised the statute to read: (a) There are exempted from the taxes imposed by this part the gross receipts from the sale, and the storage, use, or other consumption in this State of medicines: [] (1) Prescribed for the treatment of a human being by a person authorized to prescribe the medicines, and dispensed on prescription filled by a registered pharmacist in accordance with law, or [] . . . [] (3) Furnished by a hospital for treatment of any person pursuant to the order of a licensed physician and surgeon or podiatrist, or [] (4) Sold to a licensed physician and surgeon, podiatrist or hospital for the treatment of a human being. (Stats. 1963, ch. 716, 1, p. 1723.) Subdivision (d) was added: Insulin furnished by a registered pharmacist to a person for treatment of diabetes as directed by a physician shall be deemed to be dispensed on prescription within the meaning of this section. (Id., p. 1724.)

The insulin provision, by then designated as subdivision (e), was amended in 1982 to include both insulin and insulin syringes. (Stats. 1982, ch. 1530, 1. p. 5955.) As first introduced on February 26, 1981, the legislation would have added a new section to the Revenue and Taxation Code, section 6369.5, exempting from sales and use taxes the gross receipts from the sale, and the storage, use, or other consumption of syringes to be used by a diabetic. (Assem. Bill No. 681 (1981-1982 Reg. Sess.).) The Legislative Counsels Digest indicated that the bill would exempt from state and local sales and use taxes syringes for diabetics. A March 20, 1981, legislative bill analysis prepared by the Board raised the objection that as worded, the bill would exempt all syringes used by diabetics, whether or not designed to administer insulin, and suggested the bill be amended to exempt  insulin syringes. The analysis also pointed out that the bill did not require syringes used by diabetics to be sold pursuant to a physicians directive. The Board recommended that the bill be revised in three ways: to strike the proposed new section; to amend section 6369, subdivision (b) to define needles and syringes used for insulin as medicines; and to amend subdivision (e) to provide that needles and syringes used for insulin be deemed to have been dispensed on a prescription when furnished by a registered pharmacist to a person for treatment of diabetes as directed by a physician.

The bill was amended to delete the proposed new section and to add the words and insulin syringes to section 6369, subdivision (e). The Legislature did not adopt the Boards suggestion that insulin syringes and needles be defined as medicines. The Legislative Counsels Digest indicated that the bill would exempt from sale and use taxes insulin syringes used in the treatment of diabetes. (Legis. Counsels Dig., Assem. Bill No. 681 (1981-1982 Reg. Sess.).) In a letter to then-Governor Brown, the Boards Executive Secretary, Douglas D. Bell, noted that the bill would exempt from the sales and use tax insulin syringes used in the treatment of diabetes. This portion of the bill expands the present exemption for insulin to the syringes used to administer the insulin.

The Board argues that by failing to act on its suggestion that insulin syringes be defined as medicines for purposes of section 6369, the Legislature evinced an intent to limit the scope of the exemption allowed to syringes to the furnishing of insulin syringes by a registered pharmacist to a diabetic person for his or her own use. The Board also argues that the calculations of the anticipated fiscal impact of the 1982 legislation was based on the number of syringes used by individual diabetic people in each year, not on the number used in hospitals. The Boards arguments are cogent, but nothing in the legislative history with which we have been provided explains why the Legislature adopted the Boards suggestion that it revise subdivision (e) to include syringes as well as insulin, but did not act on the suggestion that it define syringes as medicine under subdivision (b). It appears to us, however, that in amending subdivision (e) to include insulin syringes as well as insulin, the Legislature intended to have insulin and insulin syringes treated in the same way for tax purposes. If the Legislature had intended to have insulin syringes treated as medicines only for purposes of section 6369, subdivision (a)(1), and not for any other portion of subdivision (a), it could have provided, in subdivision (e), that insulin syringes should be deemed medicines only for purposes of subdivision (a)(1).

The Board argues, however, that it has long construed section 6369 to exclude sales of insulin syringes to hospitals, and that we should defer to its long-standing and consistent interpretation of the statute it is charged with administering. As our Supreme Court has noted, evidence that the agency has consistently maintained the interpretation in question, especially if [it] is long-standing  is a factor suggesting an agencys interpretation of a statute is likely to be correct. However,  [a] vacillating position . . . is entitled to no deference.  (Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 12-13 (Yamaha).)

The Board draws our attention to its Sales and Use Tax Annotation[4] No. 425.0462, dated March 31, 1992, which states: Insulin Syringes. Sales of insulin syringes to a patient by a pharmacy qualify for the prescription medicine exemption. However, sales of insulin syringes to medical facilities for their own consumption are subject to tax. It is not clear, however, that the Boards interpretation of section 6369 has been consistent. In an earlier annotation, No. 425.0125, the Board stated: Blood Monitoring Equipment, Glucose Test Strips and Related Supplies. Blood monitoring equipment, glucose test strips and related supplies, other than insulin and insulin syringes, used by diabetic patients to determine his/her blood sugar level do not qualify as medicines under Section 6369(e), nor under any provision of Section 6369. The sale of such items are subject to sales tax although they may be prescribed by the patients physician. (Italics added.) The clear implication of this annotation is that insulin syringes are medicines under section 6369, subdivision (e). A similar implication is at least arguably present in regulation 1591.1, subdivision (b)(5), which indicates that glucose test strips and skin puncture lancets furnished by a pharmacist to be used by a diabetic are an integral and necessary active part of the use of insulin and insulin syringes or other anti-diabetic medications . . . . (Italics added.)

Whether or not the Boards interpretation of section 6369s provision regarding insulin syringes is long-standing and consistent, the plain language of section 6369 compels us to reject the Boards interpretation. The trial court correctly ruled that Cardinals sales of insulin syringes to hospitals and health facilities were exempt from sales and use taxes.

D. Glucose Test Strips and Skin Puncture Lancets

The Boards contention that the trial court erred in concluding that sales of glucose test strips and skin puncture lancets are exempt from sales and use taxes has more merit. As we have noted, regulation 1591.1, subdivision (b)(5) provides that glucose test strips and skin puncture lancets furnished by a pharmacist and used by a diabetic patient in accordance with a physicians instructions are an integral and necessary active part of the use of insulin and insulin syringes or other anti-diabetic medications and, accordingly, are not subject to sale or use tax pursuant to subsection (e) of the Revenue and Taxation Code section 6369. These medical supplies are not medicines and their sale or use does not qualify for tax exemption under subsections (a) or (b) of Revenue and Taxation Code section 6369.

The trial court ruled in its order granting summary judgment: Regulation 5191.1(b)(5) provides in pertinent part that glucose test strips and skin puncture lancets are an integral and necessary active part of the use of insulin and insulin syringes and are not subject to sales and use tax pursuant to subsection (e) of Revenue and Taxation Code section 6369. The language preceding the latter provision concerning such items being furnished by a registered pharmacist for use by a diabetic patient to determine his or her own blood sugar level does not foreclose hospital personnels administration of such items from satisfying the exemption provided by subdivision (e). To the extent such language is interpreted to the contrary it is void and severable from the regulatory provisions.

As the Board points out, by its terms, regulation 1591.1, subdivision (b)(5) exempts only glucose test strips and skin puncture lancets that are furnished to a diabetic patient by a registered pharmacist. Furthermore, just as the Board has never treated the sale of insulin syringes to hospitals as tax exempt, it has never treated the sales of the test strips and lancets as exempt. The question, then, is whether, having concluded that section 6369 treats insulin syringes as medicines and exempts their sale to hospitals from the sales and use taxes, we must also conclude that regulation 1591.1, subdivision (b)(5), by extension, also exempts from taxation the sales to hospitals of glucose test strips and skin puncture lancets. We answer that question in the negative. The Legislature has not extended the tax exemption for insulin and insulin syringes to other products such as the test strips and lancets, and regulation 1591.1, subdivision (b)(5) is unambiguous in stating that these supplies are not medicines.

Cardinal argues that the Board has determined the test strips and lancets are an integral and necessary part of the use of insulin and insulin syringes, and that therefore regulation 1591.1, subdivision (b)(5) should not limit the exemption for sales of insulin and syringes by refusing to apply it to sales of lancets and test strips to hospitals. In light of our earlier conclusion, it may appear anomalous that regulation 1591.1, subdivision (b)(5) exempts sales of the test strips and lancets when a pharmacist furnishes them to a diabetic patient and not when they are sold to a hospital to be supplied to its patients by its personnel. However, section 6369 nowhere mentions glucose test strips and skin puncture lancets, and we cannot conclude it was arbitrary or capricious of the Board to disallow an exemption for their sale to hospitals. (See Wallace Berrie, supra, 40 Cal.3d at p. 65.)

E. Attorney Fees

The Board contends the trial court abused its discretion in awarding Cardinal its attorney fees. Section 7156 allows the prevailing party in a civil action for a refund of sales and use taxes to recover its litigation costs, including attorney fees, under certain circumstances. ( 7156, subds. (a), (b) & (c)(1)(B)(iii).) The prevailing party is the party who (i) Establishes that the position of the State of California in the civil proceeding was not substantially justified, and [] (ii)(I) Has substantially prevailed with respect to the amount in controversy, or [] (II) Has substantially prevailed with respect to the most significant issue or set of issues presented. (Id., subd. (c)(2)(A).)

  California cases have defined a substantially justified position to mean one which is justified to a degree that would satisfy a reasonable person or  has a  reasonable basis both in law and fact.    . . .  [Citations.] . . . [T]he [taxing agencys] position need not be the one accepted by the trier of fact. So long as the position is one that a reasonable person could think is correct, it may be substantially justified even in the face of conflicting evidence.  (Agnew v. State Bd. of Equalization (2005) 134 Cal.App.4th 899, 909.) We review the trial courts determination of whether the Boards litigation position is substantially justified for abuse of discretion. (Ibid.; see also Tetra Pak, Inc. v. State Bd. of Equalization (1991) 234 Cal.App.3d 1751, 1755.)

The parties disagree about whether the position the Board has taken was substantially justified. Here, of course, we have agreed with the Board and reversed the judgment of the trial court as to two of the three types of products at issue in this litigation. Moreover, although we have ultimately agreed with Cardinals position that sales of insulin syringes to health care facilities are exempt from sales and use taxes, we cannot agree that a reasonable person could not have thought the Boards position correct. In the circumstances, we must reverse the trial courts determination that the Boards position was not substantially justified.

III. DISPOSITION

The judgment is affirmed to the extent it allows Cardinal a refund of sales and use taxes paid on insulin syringes. In all other respects, the judgment is reversed. The matter is remanded for further proceedings consistent with this opinion. The parties shall bear their own costs on appeal.

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RIVERA, J.

We concur:

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REARDON, Acting P. J.

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SEPULVEDA, J.

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[1] All undesignated statutory references are to the Revenue and Taxation Code.

[2] The proceedings at the administrative level are not relevant to the issues on appeal, and we will not recite them here.

[3] For instance, a report on the bill to then-Governor Edmund Brown from his Legislative Secretary, Paul D. Ward, stated, In view of the general exemption accorded to sales of prescriptive medicines under the 1961 legislation, it appears illogical to continue taxation of transactions involving the furnishing of such medicines by physicians and hospitals. An earlier letter to Ward from Acting Secretary R.G. Hamlin stated: Since the [original] exemption is limited to sales of medicines dispensed by registered pharmacists pursuant to prescriptions, it did not include situations in which a physician furnished medicines directly to his patients, nor to the furnishing of medicines by hospitals without making a separate charge therefor. In the latter situation, under long-standing interpretations of the Sales and Use Tax Law, the hospital is regarded as the consumer of the medicines and other tangible personal property furnished to the patients. Thus, the sale of the medicines to the hospital is subject to tax. Senate Bill No. 7 would correct these situations by exempting the sale of medicines by a physician to his own patients and by providing that the furnishing of medicines by a hospital constitutes a sale, whether or not a charge is made, thus enabling the hospital to purchase the medicines ex-tax for resale.

[4] As our Supreme Court explained in Yamaha, supra, 19 Cal.4th at pages 4-5, For more than 40 years, the [Board] has made available for publication as the Business Taxes Law Guide summaries of opinions by its attorneys of the business tax effects of a wide range of transactions. Known as annotations, the summaries are prompted by actual requests for legal opinions by the Board, its field auditors, and businesses subject to statutes within its jurisdiction. The annotations are brief statementsoften only a sentence or twopurporting to state definitively the tax consequences of specific hypothetical business transactions. [Fn. omitted.] More extensive analyses, called back-ups, are available to those who request them.