Are medical-record copying, storage, digital database, and file-management services subject to Kansas sales tax?

Plain-English summary

A company that manages hospital patient charts asked the Department whether four of its product lines are subject to Kansas sales tax: (1) copying medical records for requesting parties (with charges for copying, handling, and shipping), (2) monthly storage of records in off-site space, (3) a virtual file room that digitally captures charts into a database for a monthly fee, and (4) file-management staffing billed at an hourly rate. The Department's answer is that none of these services is taxable.

How Kansas decides. The Department applied its standard two-step analysis: first ask whether the sales tax act imposes tax on this type of transaction, then ask whether an exemption applies. The key rule for services: while tax is imposed on all transfers of tangible personal property, "with services... tax is imposed only on those transactions that are specifically enumerated in the sales tax act."

The holding. Running the described services through that test, the Department concluded: "It is the opinion of the Department that no imposition exists in the law to impose Kansas sales tax on the services as described in this letter." Because copying, storage, database hosting, and records-management staffing are not among the enumerated taxable services, they fall outside the tax.

But the provider still pays tax on its own inputs. The Department was clear that the company "is required to pay Kansas sales and compensating taxes on all purchases of tangible personal property and taxable services used or consumed by their business." Asked specifically about the paper used to generate revenue, the Department said yes — the company owes sales or compensating (use) tax on all tangible personal property purchased in state or delivered into Kansas from out of state. In tax terms, the company is the final consumer of the paper and supplies it uses, so it pays tax on those purchases even though it does not charge tax on its services.

Questions that dropped out. Because the services are not taxable, the company's follow-up questions — whether the postage or handling were taxable, and whether an out-of-state requesting party changed the result — were answered "Not applicable." The Department also noted it was unaware of any rules or regulations specifically governing the taxation of photocopying medical records.

Bottom line: these records services are non-taxable enumerated-service gaps, so the company does not collect tax from its hospital customers — but it does pay sales or use tax on the paper, equipment, and supplies it consumes to deliver them.

What this means for you

Service businesses in Kansas

Kansas taxes services only when the statute names them. If your service is not on the enumerated list, you generally do not charge sales tax on it — but confirm the specific service, because the enumerated list is the whole ballgame. Copying, off-site storage, database/records hosting, and staffing were all outside it here.

You are the consumer of your own supplies

A non-taxable service does not make your inputs tax-free. The Department required this company to pay sales or use tax on the paper and other tangible personal property it buys to do the work. Budget for tax on supplies, equipment, and materials you consume, including anything shipped in from out of state (that is where compensating use tax applies).

Bundled handling and shipping follow the service

Because the underlying service was not taxable, the separately listed handling and postage were "not applicable" — there was no taxable sale for them to attach to. When the service itself is non-taxable, related charges generally are not taxed either; the analysis flips if the service is enumerated.

Common questions

Q: Are medical-record copying, storage, and database services taxable in Kansas?
A: No. The Department found no imposition in Kansas law to tax these services, because Kansas taxes services only when they are specifically enumerated and these are not.

Q: If the service is not taxed, why does the company owe any tax?
A: Because it is the final consumer of the paper and supplies it uses. The Department required it to pay Kansas sales or compensating (use) tax on all tangible personal property it purchases in state or has delivered into Kansas.

Q: Is the postage or handling taxable?
A: The Department answered "not applicable" — since the underlying service is not taxable, there is no taxable sale for postage or handling to be part of.

Q: Does it matter if the requesting party is out of state?
A: No. The Department answered that question "not applicable" as well, because the services are not taxable in the first place.

Citations and references

• The enumerated-service rule — the Department's stated test: Kansas imposes sales tax on all transfers of tangible personal property, but on services "only... those transactions that are specifically enumerated in the sales tax act." The ruling identifies no enumerated service that reaches these records-management activities, so it found "no imposition exists in the law" to tax them. (The ruling states this rule in general terms and cites no specific statute section.)

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-122

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 26, 2001

XXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX

Dear XXXXXXXXXX:

The purpose of this letter is to respond to your letter dated September 28, 2001.

In your letter you stated:

XXXXXXXXXX, an industry leader in the administration of patient charts, provides traditional and virtual file room solutions. We are in the process of compiling information regarding the taxability of our sales for the following product lines.

Product #1: Release of Information:

We contract directly with hospitals to perform the copying of medical records for all requesting parties, which may include other hospitals, doctors, insurance companies, attorneys, governmental agencies as well as individuals. Our company places a copy machine at each hospital for our use. On predetermined days, company personnel report to the hospital to copy the charts and to invoice and mail the documents to the requesting party. Included on the invoices are the charges for the copying services, handling, and shipping (paid to a common carrier or the US post office).

Product #2: Storage

XXXXXXX rents a storage space outside of hospitals & clinics to store all medical records and we charge our customers a monthly storage fee based on size and volume of their records.

Product #3: XXXXXXXXXXX Virtual File Room

Where we digitally capture all patient charts into the XXXXXXXXX, which are stored in a database and charge our customers a monthly fee based on size, volume, and number of users.

Product #4: File Management Services

XXXXXXXXXXXX also provide staffing to support hospitals and clinics with their medical records management. In return, we charge our customers an hourly rate for the work performed.

In deciding whether a particular transaction is subject to sales tax, a two step analysis is generally necessary. The first step is to determine whether the sales tax act generally imposes tax on the type of transaction in question. The second step is to determine whether the act provides an exemption for the particular type of transaction.

As a rule, sales tax is imposed on all transactions involving the transfer of tangible personal property. With services, however, tax is imposed only on those transactions that are specifically enumerated in the sales tax act. Exemptions for transactions involving either tangible personal property or services are allowed as specifically enumerated.

Your letter continues with a series of questions:

1. Are the service transactions described above taxable?

Answer: It is the opinion of the Department that no imposition exists in the law to impose Kansas sales tax on the services as described in this letter.

Your Company is required to pay Kansas sales and compensating taxes on all purchases of tangible personal property and taxable services used or consumed by their business.

2. If the service transaction is taxable,

Is the actual postage taxable?

Answer: Not applicable.

Is the handling taxable?

Answer: Not applicable.

3. If the service transaction is not taxable, are the paper costs to generate revenue taxable?

Answer: Yes, your company is responsible to pay sales or compensating (use) taxes on all tangible personal property purchased in state or delivered into Kansas from out of state.

4. 4. If the requesting party is located outside your state, is the transaction taxable?

Answer: Not applicable.

Please provide a letter and a copy of the rules and regulations as they relate to the photocopying of medical records and our other lines of product.

Answer: I am unaware of any rules or regulations regarding the taxation of photocopying of medical records.

This private letter ruling is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 10/30/2001 Date Modified: 10/30/2001

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