Are a medical cost-containment company's case management, utilization review, bill audit, and other services subject to New York sales tax?

Plain-English summary

An accountant petitioned on behalf of a company that insurance companies and third-party plan administrators hire to help contain medical costs for injured or ill employees. The company offers a wide menu of services: field and telephonic case management (nurses working directly with injured employees, doctors, and employers to speed a safe return to work), filing the first report of a medical problem to a state agency, "utilization management" services (precertifying that medical procedures are necessary, and retrospective review of medical bills using leased computer software to compare charges against fee schedules), independent medical exams by contracted physicians, and other services like peer review of medical files, hospital bill audits, and representing employees before the Social Security Administration. The accountant asked whether sales tax applies to any of this.

New York's sales tax only reaches services the statute specifically lists -- and none of these medical cost-containment services made that list. Field and telephonic case management, filing the first report of a medical problem, precertification and concurrent utilization review, the analytical and reporting work behind retrospective bill review, independent medical exams, peer reviews, hospital bill audits, and Social Security advocacy are all outside the scope of the enumerated-services tax, so none of those charges are subject to sales or use tax. The one exception is the sophisticated "canned" (prewritten) computer software the company leases to run its bill-comparison database for retrospective review -- because leasing prewritten software is itself a taxable transaction (leasing counts as a "sale" of tangible personal property under New York's software rules), that lease is subject to tax based on what the company itself pays for the software, and it doesn't qualify for the resale exclusion just because the company uses it to help produce its (nontaxable) bill-review reports for clients.

What this means for you

Medical cost-containment companies, case managers, and utilization review firms

Nearly all of your core service offerings -- case management, utilization review, bill audits, medical exams, and similar analytical/consulting services -- fall outside New York's enumerated services tax, but don't assume that protection extends to software you lease to help produce those services.

Companies leasing "canned" software to power an otherwise nontaxable service

The software lease itself can be taxable even when the reports or analysis it helps generate for your clients aren't -- the nontaxable treatment of your client-facing service doesn't pull your own software lease costs out of the tax base.

Accountants and tax professionals

This ruling is a useful multi-service walkthrough confirming that a bundle of individually nontaxable consulting/analytical services stays nontaxable even when delivered together as one integrated cost-containment program -- but it's also a reminder to separately analyze any prewritten software a client leases as part of running that program.

Common questions

Q: Is case management for workers' compensation or disability claims taxable in New York?
A: No -- field and telephonic case management services aren't specifically enumerated taxable services under New York's sales tax law.

Q: Does a company's lease of computer software used to produce a nontaxable service become nontaxable too?
A: No -- a lease of prewritten ("canned") computer software is its own taxable transaction, separate from whether the service or report the software helps produce is itself taxable.

Q: Are independent medical exams or peer reviews taxed as a "medical service"?
A: No -- charges for independent medical exams, peer reviews, hospital bill audits, and similar consulting/analytical services aren't specifically enumerated taxable services.

Q: Does this ruling apply to my medical cost-containment or utilization review business?
A: Not automatically. An Advisory Opinion binds the Department only for the taxpayer and facts it was issued to, and it can't be relied on by anyone else. Your own services and any software you lease would need their own analysis.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a97_53s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(53)S
Sales Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S960919A

On September 19, 1996 a Petition for Advisory Opinion was received from
Elaine K. Hoiska, CPA, State and Local Tax Institute, Box 922, Boston, MA 02103.
Petitioner, Elaine K. Hoiska, CPA, raises the following issue:
Whether New York State and local sales and use taxes apply to the following
services provided by her client to companies to contain medical costs.
(1)

Field and telephonic case management.

(2)

First report of medical problem.

(3)

Utilization management:

Precertification and concurrent review.

(4) Utilization management: Retrospective bill review and lease of canned
software.
(5)

Independent medical exams.

(6)
Other services:
Security advocacy.

Peer reviews, hospital bill audits and Social

Petitioner presents the following facts.
Petitioner's client is employed by insurance companies and third party
administrators of self-insured plans to contain medical costs. The services
provided are described as follows.
(1) Field and Telephonic Case Management. Petitioner's client provides
both field and telephonic case management services. The field service involves
a case worker (Registered Nurse) working directly with an employee and the health
care providers, adjusters and employer to expedite the return of the employee to
work. The service includes meeting with the employee, health care providers
and/or employer. The billing is based on professional consulting hours on the
telephone, meetings, labor market assessment, preparing a worker profile report
(respecting that employee's ability to work) and other coordination services with
reimbursement for travel and wait time, mileage and a processing fee (minimal
processing fee of less than $50).
The telephonic management service includes acceptance of the first reports
of the medical problem, and the services of a professional providing early
intervention in the case. The professional may negotiate discounts with medical
providers, identifies alternative care and works with employees. The billing is
on an hourly basis.

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(2) First Report of Medical Problem. Petitioner's client electronically
transfers (faxes) or mails the first report of details of the medical problem to
a state agency, employer and insurer after receiving the information from the
worker or adjuster and inputting it into a form. The charge is a flat fee of
about $15.
(3) Utilization Management: Precertification and Concurrent Review. This
review involves certifying orally or in writing that certain medical procedures
appear medically necessary and appropriate before commencing and following up
these procedures. The billing is a flat fee for each occurrence.
(4)
Utilization Management: Retrospective Bill Review.
Petitioner's
client's employees key in the medical bills submitted by the insurer or
third-party administrator of a self-insured plan.
Through the use of
sophisticated leased canned software, the actual charges are compared with
information in a database on fee schedules mandated by states, UCR rates for all
types of regions or other contractually set rates of various paid provider
networks (PPO's). The charges are reduced to allowable amounts as appropriate
and a disallowed amount, if any, is shown in the report to the client for each
patient/worker.
Petitioner's client's customers receive a confidential unique printout in
the following format: name of the patient/worker, case number, charges submitted
by each medical provider, the dates and descriptions of the services, the amount
allowed for each billing from these providers and amount recommended as not
allowed for each bill, the charge for processing each line of the billings and
the savings percentage agreed to as a fee. There may be hundreds of names of
patient/workers and one to three billings for medical services provided in the
“report" which serves also as an invoice for Petitioner's client.
The report/invoice shows the fees earned by Petitioner's client. The fees
for this service are a nominal amount per line of processing, a percentage of the
savings based on the recommended disallowed amount or generally both.
This information cannot be shared with anyone except the customer and is
specifically based on the billings the insurer or third-party administrator
submits for analysis and comparative review. The information is not likely to
be incorporated into a report furnished to another client.
The database used in preparing this report is not owned by Petitioner's
client.
(5)
Independent Medical Exams.
This service represents the use of
physicians contracted by Petitioner's client to perform independent medical exams
with an accompanying report for the specific patient/worker. The billing is a
flat fee.
(6) Other Services. Other services provided by Petitioner's client are:
peer reviews, hospital bill audits and Social Security advocacy. The peer review
service is billed on a flat fee basis and involves review of a medical file to
ascertain that the care was appropriate for the employee.

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The hospital bill audit represents the personal services of a nurse to
review hospital bills in order to eliminate errors or charges in excess of
customary amounts, earn discounts for prompt payment or negotiate fees. This is
billed on a per line, percentage of savings or both.
The advocacy service involves representing an employee before the Social
Security Administration to qualify him or her for benefits. The service is
billed based on time.
Applicable Law and Regulations
Section 1101(b) of the Tax Law provides in part:
When used in this article for the purposes of the taxes
imposed by subdivisions (a), (b), (c) and (d) of section eleven
hundred five and by section eleven hundred ten, the following terms
shall mean:
*

*

*

(4) Retail sale. (i) A sale of tangible personal property to
any person for any purpose, other than (A) for resale as such or as
a physical component part of tangible personal property, or (B) for
use by that person in performing the services subject to tax under
paragraphs (1), (2), (3), (5), (7) and (8) of subdivision (c) of
section eleven hundred five where the property so sold becomes a
physical component part of the property upon which the services are
performed or ....
(5) Sale, selling or purchase. Any transfer of title or
possession or both, exchange or barter, rental, lease or license to
use or consume (including, with respect to computer software, merely
the right to reproduce), conditional or otherwise, in any manner or
by any means whatsoever for a consideration, or any agreement
therefor, including the rendering of any service, taxable under this
article, for a consideration or any agreement therefor.
(6) Tangible personal property. Corporeal personal property
of any nature ....
Such term shall also include pre-written
computer software, whether sold as part of a package, as a separate
component, or otherwise, and regardless of the medium by means of
which such software is conveyed to a purchaser ....
*

*

*

(8) Vendor. (i) The term "vendor" includes:
(A) A person making sales of tangible personal property or
services, the receipts from which are taxed by this article;

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(B) A person maintaining a place of business in the state and
making sales, whether at such place of business or elsewhere, to
persons within the state of tangible personal property or services,
the use of which is taxed by this article;
*

*

*

(14)
Pre-written computer software.
Computer software
(including prewritten upgrades thereof) which is not software
designed and developed by the author or other creator to the
specifications of a specific purchaser. The combining of two or
more pre-written computer software programs or pre-written portions
thereof does not cause the combination to be other than pre-written
computer software.
Pre-written software also includes software
designed and developed by the author or other creator to the
specifications of a specific purchaser when it is sold to a person
other than such purchaser.
Where a person modifies or enhances
computer software of which such person is not the author or creator,
such person shall be deemed to be the author or creator only of such
person's modifications or enhancements. Pre-written software or a
prewritten portion thereof that is modified or enhanced to any
degree, where such modification or enhancement is designed and
developed to the specifications of a specific purchaser, remains
pre-written software; provided, however, that where there is a
reasonable, separately stated charge or an invoice or other
statement of the price given to the purchaser for such modification
or enhancement, such modification or enhancement shall not
constitute pre-written computer software.
Section 1105(a) of the Tax Law imposes sales tax on, "[t]he receipts from
every retail sale of tangible personal property, except as otherwise provided in
this article."
Section 1105(c) of the Tax Law imposes tax on the receipts from every sale,
except for resale, of certain enumerated services.
Services which are not
specifically described in the statute are not subject to sales tax.
Section 1105(c)(1) of the Tax Law imposes a sales tax on the receipts from
every sale, except for resale, of the service of "[t]he furnishing of information
by printed, mimeographed or multigraphed matter or by duplicating written or
printed matter in any other manner, including the services of collecting,
compiling or analyzing information of any kind or nature and furnishing reports
thereof to other persons, but excluding the furnishing of information which is
personal or individual in nature and which is not or may not be substantially
incorporated in reports furnished to other persons..."
Opinion
(1)
Petitioner's client's charges to its customers for field and
telephonic case management services do not fall within the specified services
subject to tax under section 1105(c) of the Tax Law and are outside the scope of
the tax and thus are not subject to sales or use tax.

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(2)
Petitioner's client's flat fee charge for each occurrence to its
customers for inputting details of a medical problem into a form and (a)
electronically transferring or (b) mailing, the first report of a medical problem
to a state agency, employer and insurer represent charges for services that do
not fall within the specified services subject to tax under section 1105(c) of
the Tax Law.
Nor does such charge represent the sale of tangible personal
property under the Tax Law. This charge is therefore not subject to sales or use
tax.
(3) Utilization management: Petitioner's client's precertification and
concurrent review which certify either orally or in writing certain medical
procedures as necessary are not considered to be services subject to tax under
section 1105(c) of the Tax Law and thus are not subject to sales or use tax.
(4) Utilization management: Petitioner's client's retrospective bill
review charges for input, analysis and comparative review of medical bills and
the issuance of confidential reports, which also serve as a statement of charges
to its customers, are not considered to be services subject to tax under section
1105(c) of the Tax Law.
Petitioner's client's lease of canned computer software for use in New York
State would be subject to tax based upon Petitioner's client's cost of the
software where such software is pre-written computer software. Such lease of the
software does not qualify for the resale exclusion under section 1105 of the Tax
Law.
(5)
Charges for independent medical exams and reports for specific
patients/workers which are contracted to physicians by Petitioner's client are
charges for services which do not fall within the specified services subject to
tax under section 1105(c) of the Tax Law and are outside the scope of the tax and
thus are not subject to sales or use tax.
(6)
Petitioner's client's charges for the services of peer reviews,
hospital bill audits and Social Security advocacy are also charges for services
that do not fall within the specified services subject to tax under section
1105(c) of the Tax Law and are outside the scope of the tax and thus are not
subject to sales or use tax.

DATED: August 25, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.