Claiming Section 199? It’s Possible for Pharmacies Packaging Multi-Dose Prescriptions with Automation
Case law: it’s on your side.
You may have an opportunity to claim Section 199’s tax break, enacted for businesses who perform domestic manufacturing and other, certain production activities.
Let’s tell you the about story of Precision Dose, Inc., who claimed a Section 199 tax deduction and won its case.
Who is Precision Dose, Inc.?
Precision Dose, Inc. creates and sells unit dose delivery systems to medical facilities. They purchase drugs in bulk orders, seal them into non-reusable single-dose containers and sell them to various medical facilities.
Sound familiar? This should, especially if your multi-dose business performs the same act of repackaging drugs using automation machines. You purchase drugs in bulk from wholesalers, package them into distinct materials and sell them as a new, final product.
Keep on reading!
Precision Dose filed a refund for 2007 and 2008 federal income taxes stemming from Section 199 deductions. Initially, the IRS denied this filing, stating that Precision Dose only engaged in repackaging and no other manufacturing, producing, growing or extracting (MPGE) activities. Precision Dose did not agree with the IRS and claimed they engaged in other production activities.
United States v. Dean
Case law saved the day—and permitted Precision Dose to claim a tax refund. The District Court for the Northern District of Illinois ruled that the unit doses produced by Precision Drug were possible due to their process, even though the company did not create the containers and drugs. As outlined by John McKinley, CPA, JD and Eric Zilber in “New Product or Different Presentation?” from the Journal of Accountancy, the District Court for Illinois stated:
“The court stated these facts were analogous to those in Dean in that the taxpayer [Precision Drug] engaged in repackaging, but that other production activities involved, including market research, mixing studies, design, and testing, constituted a ‘complex production process that results in a distinct final product’ (Precision Dose, Inc., slip op. at 4, quoting Dean, 945 F. Supp. 2d at 1118 n. 10).”
Given the precedence set by United States v. Dean, the court ruled in favor of Precision Dose. In other words, Precision Dose was engaged in other, complex production activities as determined by a previous case ruling, Dean. That’s the power of case law!
What Made this Ruling Possible?
Precision Dose’s court ruling was possible because Dean’s ruling was determined on a broader definition of what constitutes MPGE activities under Regs. Sec. 1.199-3(e).
In simpler terms, when the courts were deciding on a ruling for Dean, they made their decision based on the broad definition of Sec. 1.199-3(e). The District Court for the Northern District of Illinois interpreted Precision Dose’s case based on the previous, successful ruling of Dean. This is the basic nature of case law. Case law is the body of prior judicial decisions that guide judges on deciding issues before them, such as what decision they should make on Precision Dose’s case.
What this Means for Your Business
How can you determine if you’re eligible for a Section 199 refund?
As outlined by McKinley and Zilber, taxpayers need to persuasively claim that a unique product was created, and the packaging, repackaging, labeling or minor assembly was not the only activity involved in production. The courts found the following key aspects of the production process persuasive for taxpayers claiming Section 199:
- The processes relied upon assembly line workers and machines (ex. using machines to automate the multi-dose packaging process)
- The form, purpose and resulting demand of the final products were distinct from items before the process began
- Subassembly of the items into the final form did not constitute most of the process resulting in the final product
Use these points as a guide to measure if your activities qualify as MPGE. Contact your certified public accountant today to see if your business qualifies for a Section 199 refund.
We, Medicine-On-Time, are not CPAs or lawyers. Please consult your CPA for more information about Section 199 and if you qualify for this federal tax refund.
This material has been prepared for general informational purposes only and is not intended to be relied upon as formal legal or other professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Medicine-On-Time does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.