CORRECTION: Change in California Tax Law May Raise Price of Botox Treatments

By Andrew McIntosh, The Sacramento Bee, Calif.

Nov. 9–The story slugged SA-BOTOX-PRICES, filed by Knight Ridder/Tribune Business News for Nov. 9, incorrectly stated in paragraph 20 that Allergan is based in Riverside. It is based in Irvine.

Please delete the previous version of the story and use the following corrected one.

Change in California tax law may raise price of Botox treatments

By Andrew McIntosh

The Sacramento Bee, Calif.

Nov. 9–When state auditors began asking California dermatologists why they hadn’t charged sales tax on cosmetic Botox treatments since 2002, it was enough to furrow their brows.

Rather than seek cosmetic relief, the doctors turned to their longtime Sacramento lobbyist, John R. Valencia.

He quickly persuaded the state’s Board of Equalization to temporarily put the audits on hold. Better yet for his clients, the lobbyist and attorney had state tax officials acknowledging that their rules might need a little nip and tuck to clarify the matter for good.

The BOE expects to decide in January whether a change in tax law is necessary — a decision that will affect millions of dollars in potential revenue for doctors and the state and determine whether Botox consumers will see a price increase.

Sales of Botox may be close to $1 billion this year and are forecast to surge by 13.9 percent a year through 2010.

The figures explain why auditors had vigorously pursued the sales tax revenue and why members of the California Society of Dermatologists and Dermatologic Surgery put Valencia on the case this spring after some members were told they would have to pay back taxes.

“They are plain folk who thought that prescription medicines are exempt from sales and use taxes,” Valencia said.

The BOE tax regulations state that prescription medicines are exempt from sales tax. However, medicines are defined as “any substance or preparation intended for use by external or internal application to the human body in the diagnosis, cure, mitigation, treatment or prevention of disease and which is commonly recognized as a substance or preparation intended for that use.”

The problem, contends Valencia, is that the regulations do not define what is meant by disease, leaving it open to tax auditors to apply their “completely unscientific” and “ad hoc” views regarding disease.

Such treatments were meant to be tax-exempt because federal Food and Drug Administration officials approved cosmetic Botox as a treatment for medical conditions in 2002, Valencia added.

“I would never argue that they are serious medical conditions, but they are conditions,” he said.

That view is so widespread, Valencia said, he shouldn’t have to waste his clients’ time or money.

“It’s a shame they had to undergo audits and hire a certified professional accountant or enrolled agents to help them,” he added.

Valencia has proposed changing the BOE regulation by defining medicines to include any product approved by the FDA to “diagnose, cure, mitigate, treat or prevent any disease, illness or medical condition.”

The Botox tax issue is surfacing now because audits are done on a three-year cycle, and Botox was not approved for cosmetic uses until 2002.

The Board of Equalization plans a public hearing on the issue on Nov. 30 at BOE headquarters, 450 N St., Sacramento. A discussion paper will be available at www.boe.ca.gov a week before the hearing.

As California considers the issue, other states have taken a different route.

Last year, the New Jersey Legislature passed a bill slapping a 6 percent tax on the gross receipts of physicians performing cosmetic procedures — defined as “anything that did not prevent or treat illness or that didn’t meaningfully promote functioning of the body.”

New Jersey estimated the tax would generate $26 million in 2005, but it raised only $6 million or $7 million, said Robb Bohannon, state government affairs manager at the American Academy of Dermatology in Washington.

Both dermatologists and Botox maker Allergan Inc. of Irvine are closely watching the outcome.

Seeking to keep youthful looks, hundreds of thousands of Americans have sought Botox injections as a less invasive alternative to plastic surgery.

Golden State residents are among the biggest consumers of Botox, which costs $200-$250 a shot, and California has 16 percent of the nation’s working dermatologists.

Allergan’s Botox sales have exploded since the U.S. Food and Drug Administration approved its use for cosmetic purposes in 2002. The company reported $439.7 million in Botox sales in 2002. By 2004, sales hit $705.1 million.

As word of the tax audits spread, fearful dermatologists called the BOE. They were told cosmetic Botox treatments were taxable and advised to consider a tax amnesty application to avoid penalties.

Alarm spread quickly throughout the profession. Dr. Emil Tanghetti, a Sacramento dermatologist, learned of the controversy from peers.

“The audits were absolutely ridiculous,” he said. “These treatments were given for years without sales taxes being charged, and it seems unfair to go back now and decide you’re going to charge it and assess doctors,” he said.

“What’s next, face-lifts? Liposuction? It’s a thorny issue,” Tanghetti said.

That’s why the doctors called Valencia, who moved quickly to defend his physician clients.

“Suspending the audits was the right thing to do until the policy-makers try and resolve it,” Valencia said.

He has been the Sacramento lobbyist for the California Society of Dermatology and Dermatologic Surgery for 15 years.

The society paid him and his firm $50,272 for lobbying between Jan. 1 and Sept. 30 of this year, state filings show. In early 2005, Allergan Inc. also paid Valencia’s firm $20,594 for lobbying work in late 2004.

Valencia began his Botox tax tussle in September by filing a formal petition.

Complaining that “numerous California physicians” were being audited amid “erroneous claims” by BOE field auditors, he urged BOE board members to reverse the audits and clarify the rules.

Valencia, who was also representing the California Society of Plastic Surgery, the California Society of Ophthalmology and the California Medical Association, said that auditors were specifically singling out Botox treatments for skin wrinkles.

Valencia accused BOE auditors of adopting “an unstudied and layperson’s view of how Botox treatments are used.”

An Allergan spokeswoman said the firm supports the medical groups’ BOE petition but declined further comment.

Filings with the secretary of state show Allergan has boosted its lobbying activities and donations as legislators prepare for a 2006 election. The company has paid Ackler & Associates more than $64,000 for lobbying services so far this year.

Allergan is also a major political donor, contributing more than $200,000 in 2004-2005, including $125,000 to the California Republican Party, $30,000 to the Republican Party of Orange County and $15,000 to Gov. Arnold Schwarzenegger’s Citizens to Save California and California Recovery Team.

Karmi Ferguson, executive director of the California dermatologists group, said if the state does impose a sales tax, the costs will be passed to consumers. Still, she does not expect business to drop among the image-conscious.

Dr. Tanghetti welcomed the BOE’s public hearing.

“Having a tax auditor decide this issue is unfair. We need a consensus as a society,” he said.

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