13 November 2002 GST/HST Interpretation 38064 - Tax Status of In Vitro Diagnostic Reagents Under the Excise Tax Act

Dear Sir:

This is in reply to your letter of XXXXX, with attachments, and your electronic mail message of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a category of products known as "reagents" for in vitro (in a test-tube or other laboratory environment) diagnostic use by clinical laboratories.

Our delay in responding to your query was due to the fact that we undertook an extensive review of the application of the GST/HST to in vitro diagnostic products that considered the legislative and policy issues related to these products.

Interpretation Requested

You are requesting our comments on the tax status of reagent products manufactured by XXXXX, specifically whether these products qualify as a "zero-rated" supply of a drug under the Excise Tax Act (the "ETA").

We understand that XXXXX manufactures and sells over XXXXX reagent products for use XXXXX[.] You suggested that based on the treatment of these products under the Medical Devices Regulations to the Food and Drugs Act (the "FDA"), they cannot be drugs under the FDA, specifically drugs included in Schedule D.

For our consideration, you provided us with product descriptions of XXXXX reagents. These reagents are representative of the type of products under discussion, and our response therefore focuses on these types of products. We understand that the reagents are packaged in vials.

XXXXX

Interpretation Given

We understand that reagents are formulations or mixtures of various substances used in vitro to cause reactions or detect other substances in bodily specimens, and that there are thousands of different formulations or mixtures. In our research we found that reagents are manufactured in a wide variety of ways, and that they range from basic substances to highly processed and complex products. We also found that an ingredient or the "source material" of a reagent may be derived from a substance listed on Schedule C or D to the FDA. The source material may be processed, fused or blended with other substances, and as a result of this processing it is transformed into a new product.

Paragraph 2(a) of Part I of Schedule VI to the ETA zero-rates the supply of a drug included in Schedule C or D to the FDA. The issue for ETA purposes is whether the product in question is included in Schedule C or D to the FDA, and not whether an ingredient or component of the product is included in Schedule C or D to the FDA. When considering the application of the ETA to the supply, it is the new product that is evaluated. The first step is to identify the product that is being supplied. For example, is the supply a new manufactured product that is the result of a combination of ingredients? The next step is to determine whether that new product is a drug that is included in one of the schedules to the FDA noted in the ETA.

We understand that the regulatory scheme of the FDA classifies and regulates products based on their main ingredients, components or intended use. However, the status of a product for taxing purposes is determined on the basis of what is being supplied rather than on the product's ingredients or components. Thus, in order for a product to be zero-rated under paragraph 2(a) of Part I of Schedule VI to the ETA, the product must be a drug included among the items listed, by name or description, in Schedule C or D to the FDA. This approach is based on the wording of the ETA that requires the product itself be "a drug included" in one of the noted FDA schedules.

We have previously issued letters communicating our position that generally, supplies of products known as reagents and test kits for in vitro diagnostic use are subject to the GST/HST at the rate of 7% or 15%. (The exception are those testing strips, reagents, and tablets described in section 29 of Part II of Schedule VI to the ETA, i.e., blood-sugar testing strips, blood-ketone testing strips, urinary-sugar testing strips, reagents or tablets, or urinary-ketone testing strips, reagents or tablets, which are identified as zero-rated supplies.) The basis for this position is that these products are not themselves included in Schedule C or D to the FDA and therefore they do not fall within the scope of paragraph 2(a) of Part I of Schedule VI to the ETA.

After a further review of these products our position remains that in order for a product to be zero-rated under the ETA as a drug included in Schedule C or D to the FDA, the product in question must be a drug included among the items listed, by name or description, in Schedule C or D.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-6761.

Yours truly,

Susan Eastman
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division