Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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425.0000 PRESCRIPTION MEDICINES—Regulation 1591

Annotation 425.0028


425.0028 Drugs and Placebos Used in Clinical Trial. A drug company purchases "raw materials" to specifically develop a new drug. The "raw materials" are drugs each of which could be purchased as a prescription drug in its own right. The "raw materials" are purchased in bulk quantities and shipped to an independent laboratory located out of state. Syringes are purchased from another firm and also sent to the lab. The lab combines two of the "raw materials" in one syringe and a third "raw material" is placed in a separate syringe. The lab then returns the drugs and syringes to the drug company in California. The company then packages the drugs and syringes into clinical trial kits and distributes the kits at no charge to various clinical sites. The final product is to be administered to the patient by a doctor who is running a clinical trial. The company pays the doctors to participate in this human clinical trial stage of the FDA's drug approval process.

As part of the clinical trial phase, the company uses placebo injections which contain the same ingredients as the other injections except one of the three ingredients is inactive. These clinical trials are double-blind.

First, the drug company's purchases of the "raw materials" and the placebos are subject to sales or use tax. A placebo is an inactive substance which is not sold or used for treatment of the patient but rather to test effectiveness of another drug in treating a human being. These placebos, therefore, do not qualify as "medicines" under Regulation 1591(b)(1). The "raw materials" themselves are also not purchased for the treatment of a human being, but for incorporation into another product, and it is that product which is used to treat human beings. The raw materials cannot be purchased for resale at this time since they are not being resold but rather are being consumed by the company through the agency of the physician.

Second, under these facts, the combination of drugs are not "medicines" under Regulation 1591(b)(1). They are still being developed and tested for effectiveness as part of the FDA approval process. Thus, they cannot be said at the stage to be "commonly recognized as [substances or preparations] intended for the [diagnosis, treatment, etc., of disease]."

Third, the lab's "services" are part of the manufacturing process of materials furnished by the consumer (the company) and subject to sales or use tax. (Regulation 1526(a).) Since the lab operates out of state, the drug company is subject to use tax on the charges made by the lab for the lab services for those drugs consumed in California.

This conclusion is distinguishable from Annotation 425.0050. In Annotation 425.0050, the drugs at issue were "medicines" at the time of purchase by the drug company and withdrawn from an ex-tax resale inventory. Here, the raw materials are being purchased specifically to develop a new drug. 6/13/94. (Am. 2003–2).

(Note: Statutory change effective 1/1/95 which added paragraph (a)(6) to section 6369 is not reflected in this opinion.)