Is a company that copies and sells certified hospital medical records selling taxable tangible personal property or an exempt service?

Plain-English summary

A company contracted with hospitals to produce certified copies of medical records and sell them to attorneys, insurance companies, peer-review organizations, government agencies, and individuals. Making a copy involved many steps — processing the request, locating and retrieving records, disassembling and reassembling files, copying, certifying, mailing, and billing. The company asked whether it was selling tangible personal property (taxable) or a service (potentially exempt).

DRS applied the "true object" test. Conn. Gen. Stat. § 12-412(11) exempts professional, insurance, or personal service transactions that involve sales of tangible personal property only as "inconsequential elements for which no separate charges are made." Whether that exemption applies turns on the real object the buyer seeks: an act done personally as an economic service (intellectual or manual effort), or the saleable end product of someone's skill (Columbia Pictures; American Totalisator). DRS looks at the character of the agreement, not its wording.

The true object here is the copies. DRS found that the customers' object is to obtain the certified medical-record copies — the end product — not to acquire the services involved in making them. So the sale is a taxable sale of tangible personal property, and the § 12-412(11) service exemption does not apply.

The whole charge is taxable. The sales tax is measured by the retailer's gross receipts (§ 12-408(1)), and "sales price" (§ 12-407(8)) expressly includes the cost of materials and the labor or service cost and any other expenses. So the entire amount the company charges — retrieval, copying, certifying, and all — is the taxable sales price.

Some buyers are exempt — with the right certificate. Sales to certain government agencies and non-profit/charitable organizations are exempt under § 12-412(1), (5), and (8), and the company should collect the appropriate exemption certificate at the time of sale. Sales to a peer-review organization are taxable unless the PRO issues a valid charitable/religious exemption certificate bearing its permit number (Conn. Agencies Regs. § 12-426-15).

What this means for you

If the customer wants the end product, it's a taxable sale — even with lots of labor

Connecticut's professional/personal-service exemption doesn't apply just because producing an item takes skill and many steps. Under the true-object test, if the buyer's real goal is the finished tangible item (here, the certified copies), the transaction is a taxable sale of tangible personal property.

Labor and service costs are baked into the taxable price

Because "sales price" includes the labor and service cost of producing the item, you can't carve out the copying/retrieval/certification labor from tax. The full charge for the copies is taxable.

Exempt buyers still need to hand you a certificate

Sales to exempt governments, charities, and non-profits are exempt only if you collect the correct exemption certificate at the time of sale. Don't assume a buyer (like a peer-review organization) is exempt without a valid certificate — otherwise the sale is taxable.

Common questions

Q: Is selling copies of medical records taxable in Connecticut?
A: Yes. DRS ruled it is a taxable sale of tangible personal property, because the customer's true object is the certified copies, not the service of making them.

Q: Doesn't the professional/personal-service exemption apply?
A: No. Under Conn. Gen. Stat. § 12-412(11), that exemption is for services where any tangible property is an inconsequential element. Here the copies are the object of the sale, so it doesn't apply.

Q: Can the copying and retrieval labor be excluded from tax?
A: No. "Sales price" includes materials, labor, and service costs, so the entire charge for the copies is taxable.

Q: Are any sales exempt?
A: Yes — sales to certain government agencies and non-profit/charitable organizations, if you obtain the proper exemption certificate. Sales to a peer-review organization are taxable unless it gives you a valid charitable-organization exemption certificate.

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-412(11) (professional/insurance/personal service exemption for inconsequential tangible property)
• Conn. Gen. Stat. § 12-408(1) (measure of tax); § 12-407(8) (sales price includes labor/service cost), (9) (gross receipts), (12) (retailer)
• Conn. Gen. Stat. § 12-412(1), (5), (8) (state, federal, and charitable/religious exemptions); Conn. Agencies Regs. § 12-426-15 (charitable/religious exemption certificate)

Case law (as cited by the ruling):

• Columbia Pictures Industries, Inc. v. Tax Commissioner, 176 Conn. 604, 410 A.2d 457 (1979); American Totalisator Co. v. Dubno, 210 Conn. 401, 555 A.2d 414 (1989)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 91-22

Original ruling text

Ruling 91-22, Sales and Use Taxes / Sale of Tangible Personal Property

Ruling 91-22

Sales and Use Taxes

Sale of Tangible Personal Property

FACTS:

Hospitals contract with Company to have Company provide certified medical record copies to attorneys, insurance companies, peer review organizations, governmental agencies and individuals. Company obtains records from a hospital's files, copies such records, and returns such records to the hospital's files. Company then invoices and receives payment from the requesting parties.

The process of satisfying a request for medical record copies involves several steps, including processing requests, locating and retrieving records, disassembling and reassembling hospital files, copying the records, certifying the records, mailing the copies to customers, and billing and invoicing the customer.

ISSUE:

Whether Company's sale of medical record copies is, for purposes of the Sales and Use Taxes Act, a sale of tangible personal property or a sale of services.

RULING:

Conn. Gen. Stat. §12-412(11) exempts from sales and use taxes the rendering of "[professional, insurance or personal service transactions ... which involve sales [of tangible personal property] as inconsequential elements for which no separate charges are made ...." The test for determining whether inconsequential sales of tangible personal property are being made is "to examine the real object sought by the buyer, i.e., the service per se or the property produced by the service, and to determine if it was the buyer's object to obtain an act done personally by the individual as an economic service involving either the intellectual or manual effort of the individual, or if it was the buyer's object to obtain only the saleable end product of some individual's skill." Columbia Pictures Industries, Inc. v. Tax Commissioner , 176 Conn. 604, 611, 410 A.2d 457 (1979). It is proper to examine "the character of the agreement rather than the phrasing of the contract involved ..."; id. at 607; in order to determine "the true object of the contracts between the parties"; American Totalisator Co. v. Dubno , 210 Conn. 401, 406, 555 A.2d 414 (1989). It is apparent that the true object of Company's customers is to obtain the certified medical record copies, and not to acquire the services involved in making those copies.

The sales tax is measured by the gross receipts of a retailer from the retail sale of tangible personal property. Conn. Gen. Stat. §12-408(1). A "retailer" includes every person engaged in the business of making sales at retail. Conn. Gen. Stat. §12-407(12). Gross receipts means the total amount of the sales price. Conn. Gen. Stat. §12-407(9). Sales price means the total amount for which tangible personal property is sold, and includes the cost of materials used, the labor or service cost, or any other expenses. Conn. Gen. Stat. §12-407(8). The total amount charged by Company for the property transferred constitutes the sales price on which the sales tax is imposed.

Company's sale of medical record copies to certain governmental agencies and to certain non-profit organizations are exempt from sales and use taxes under Conn. Gen. Stat. §12-412(1), (5) and (8). Company should acquire the appropriate exemption certificate from any exempt entity at the time of sale. Company's sales to a peer review organization are not exempt from sales and use taxes unless the PRO issues a valid charitable and religious organizations exemption certificate bearing the number of its exemption permit. Conn. Agencies Reg. §12-426-15.

LEGAL DIVISION

August 2, 1991