Was an interactive telephone disease-management program taxable as communications or exempt as data processing in South Carolina?

Plain-English summary

The South Carolina Department of Revenue ruled that a company's interactive telephone disease-management program was nontaxable data processing on the specific facts presented.

Healthcare providers enrolled patients through a customer-specific web portal. The program called patients with health messages and questions, patients entered responses through their telephone keypads, and the company stored, manipulated, sorted, and combined the responses. Healthcare professionals then used the portal to review patient data, disease-group reports, and alerts for readings outside defined parameters.

Although the service used telephone communications, the Department concluded that the healthcare provider's true object was the processing of patient-supplied information and electronic access to the results. Section 12-36-910(C) excluded those data-processing charges from sales and use tax.

Why the service qualified

The ruling emphasized four connected facts:

• patients furnished the underlying information through interactive responses;
• the company manipulated that information using procedures, personnel, and computers;
• the system sorted and combined data by patient, disease type, alert thresholds, and other provider needs; and
• the web portal electronically delivered access to the processed information.

Those functions matched the ruling's statutory definition of data processing, which included manipulating, summarizing, computing, extracting, storing, retrieving, sorting, sequencing, and electronically transferring or providing access to customer information.

Communications versus data processing

South Carolina taxes charges for the ways or means of transmitting voice or messages. The ruling noted that taxable communications can include telephone, paging, cable and satellite programming, fax, email, online information services, and website access.

But the Department applied the true-object test to the entire disease-management transaction. The telephone was the means by which patients supplied information and received messages; the central purchased result was the organized patient data and alerts made available to the healthcare provider.

The conclusion was expressly limited to transactions involving interactive patient responses. The ruling did not decide the treatment of a materially different service that only sends one-way messages without collecting and processing patient information.

What this means for similar businesses

Healthcare technology providers

Document what customer or patient information the service receives, how it manipulates that information, what reports or alerts it produces, and how customers access the processed results. Merely using a telephone or web portal does not by itself determine the tax treatment.

Healthcare organizations

The ruling focused on the substance of the purchased service. A contract centered on processed patient data may be analyzed differently from one centered on telephone access, messaging capacity, or other communications.

Common questions

Q: Did telephone delivery automatically make the service taxable communications?

A: No. The Department treated the telephone and portal as parts of a broader data-processing service on these facts.

Q: What patient information did the program process?

A: Patients entered information such as weight and symptoms, which the system stored, sorted, combined, and tested against alert parameters.

Q: Would a one-way reminder service receive the same result?

A: The ruling did not answer that question. Its conclusion was limited to transactions involving interactive patient responses and processing of that information.

Q: Can another company rely on this PLR?

A: No. The ruling binds agency personnel only for the requesting taxpayer and the accurate facts presented.

Citations and references

• S.C. Code Ann. § 12-36-910(C) — data-processing exclusion and definition
• S.C. Code Ann. §§ 12-36-910(B)(3) and 12-36-1310(B)(3) — taxable communications charges
• S.C. Code Ann. § 12-36-60 — tangible personal property and taxable services
• S.C. Code Ann. § 12-36-100 — sale and purchase definitions
• S.C. Code Ann. § 12-36-110 — retail-sale definition
• S.C. Regulations 117-308.3 and 117-308.8 — medical-provider property rules cited in the ruling
• SC Revenue Rulings #89-14, #04-15, and #06-8 — communications guidance cited by the ruling

Subject

Disease Management Program – Communications or Data Processing

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR13-1.pdf

Original ruling text

State of South Carolina

Department of Revenue
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P. O. Box 12265, Columbia, South Carolina 29211
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #13-1

SUBJECT:

Disease Management Program – Communications or Data Processing
(Sales and Use Tax)

REFERENCES:

S.C. Code Ann. Section 12-36-910 (2000; Supp. 2011)
S.C. Code Section 12-36-1310 (2000; Supp. 2011)
S.C. Code Section 12-36-1110(A) (Supp. 2011)
S.C. Code Section 12-36-60 (2000)
S.C. Code Section 12-36-100 (2000)
S.C. Code Section 12-36-110 (2000)
27 S.C. Code Regs. 117-308.3 (Supp. 2011)
27 S.C. Code Regs. 117-308.8 (Supp. 2011)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (2011)
SC Revenue Procedure #09-3

SCOPE:

A Private Letter Ruling is an advisory opinion issued to a specific
taxpayer by the Department to apply principles of law to a specific set of
facts or a particular tax situation. It is the Department’s opinion limited to
the specific facts set forth, and is binding on agency personnel only with
respect to the person to whom it was issued and only until superseded or
modified by a change in statute, regulation, court decision, or another
Departmental advisory opinion, providing the representations made in the
request reflect an accurate statement of the material facts and the
transaction was carried out as proposed.

Question:
Are charges by ABC to healthcare providers for their 123! for health disease management
program provided through the telephone, as described in the facts, subject to the sales and use
tax?

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Conclusion:
The charges by ABC to healthcare providers for their 123! for health disease management
program, as described in the facts, are sales of a nontaxable data processing service as defined in
Code Section 12-36-910(C) when the program involves interactive responses by the patients of
the healthcare provider, since (1) 123! for health is a service where information furnished by
patients of the healthcare provider is manipulated by ABC through all or part of a series of
operations involving an interaction of procedures, processes, methods, personnel, and computers;
(2) the data is sorted and combined by patient disease type, alerts for responses falling outside of
determined parameters, and other categories as needed by the specific healthcare provider; (3)
“data processing” includes “the electronic transfer of or access to that information;” and (4) the
web portal used by the healthcare provider is the means through which the healthcare provider
has access to the “data processing” performed by ABC.
Facts:
ABC, LLC was founded by health communication specialists from clinical and academic health
centers. Its mission is to provide quality content and technology systems to optimize the medical
care of patients with serious illnesses. This is accomplished using state of the art communication
empowered by audio and interactive technology.
ABC provides voiced and text messages using a variety of technologies. One of the services
ABC provides is a disease management program known as 123! for health. It is a voice
messaging disease management program sold to healthcare professionals and institutions. This
program seeks to educate, engage, and empower patients about their disease while collecting and
monitoring daily clinical information. The platform can be customized to allow interactive
delivery communication for a wide variety of health and medical needs.
To implement the program, the healthcare professional or institution receives consent from the
patient, subsequently enrolling the patient into the program through a customer specific webbased portal. Messages are, in most cases, sent by telephone to the patient at a specific time of
day. The patient listens to the message and responds using their telephone keypad – typically
answering questions related to the patient’s weight and symptoms using their telephone keypad.
The patient’s responses are recorded in a database accessible by an authorized healthcare
professional via a web-based portal. The data is stored by patient and displayed in standard
reporting formats. Examples of standard reporting formats are:
Views by Program, such as only diabetes patients or only surgical patients;
Alerts for responses falling outside determined parameters, for example, weight changes
calculated by the system of greater than 2 pounds for congestive heart failure patients;
Views of all patients’ responses; and
Views of all patient responses for specific date.
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The data is stored on a per patient basis for each healthcare provider; however, it does, based on
user reports, combine data from multiple patients and sorts this data for the healthcare provider
to manage their patient load.
Discussion:
Code Section 12-36-910(A) states:
A sales tax, equal to [six] 1 percent of the gross proceeds of sales, is imposed upon
every person engaged or continuing within this State in the business of selling
tangible personal property at retail. (Emphasis added.)
Code Section 12-36-1310(A) states:
A use tax is imposed on the storage, use, or other consumption in this State of
tangible personal property purchased at retail for storage, use, or other
consumption in this State, at the rate of [six] 2 percent of the sales price of the
property, regardless of whether the retailer is or is not engaged in business in this
State. (Emphasis added.)
Based on the above, for the sales tax or use tax to apply there must be a retail sale of tangible
personal property.
Code Section 12-36-100 defines the terms “sale” and “purchase” to mean:
any transfer, exchange, or barter, conditional or otherwise, of tangible personal
property for a consideration including:
(1) a transaction in which possession of tangible personal property is transferred
but the seller retains title as security for payment, including installment and credit
sales;
(2) a rental, lease, or other form of agreement;
(3) a license to use or consume; and
(4) a transfer of title or possession, or both.
Code Section 12-36-110 defines the terms “retail sale” and “sale at retail” in part as:
Sale at retail and retail sale mean all sales of tangible personal property except
those defined as wholesale sales. The quantity or sales price of goods sold is
immaterial in determining if a sale is at retail.
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2

Code Section 12-36-1110 increased the sales and use tax rate by 1% beginning June 1, 2007.
See footnote #1.

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(1) The terms include:

(i) sales of drugs, prosthetic devices, and other supplies to hospitals, infirmaries,
sanitariums, nursing homes, and similar institutions, medical doctors, dentists,
optometrists, and veterinarians, if furnished to their patients as a part of the
service rendered. These institutions, companies, and professionals are deemed to
be the users or consumers of the property;
As such, the sale of tangible personal property to hospitals and doctors are retail sales when such
property is furnished to their patients as a part of the service rendered. In addition, hospitals and
doctors are deemed to be the users or consumers of such tangible personal property. See also SC
Regulations 117-308.3 and 117-308.8.
Code Section 12-36-60 defines the term "tangible personal property" to mean:
...personal property which may be seen, weighed, measured, felt, touched, or
which is in any other manner perceptible to the senses. It also includes services
and intangibles, including communications, laundry and related services,
furnishing of accommodations and sales of electricity, the sale or use of which is
subject to tax under this chapter and does not include stocks, notes, bonds,
mortgages, or other evidences of debt. … (Emphasis added).
Consequently, the term tangible personal property includes the sale or use of services and
intangibles, including communications, that are subject to South Carolina sales or use taxes
under Chapter 36 of Title 12.
Communications are subject to sales and use taxes under Chapter 36 of Title 12 pursuant to Code
Sections 12-36-910(B)(3) and 12-36-1310(B)(3) 3, which impose the tax on the:
gross proceeds accruing or proceeding from the charges for the ways or means for
the transmission of the voice or messages, including the charges for use of
equipment furnished by the seller or supplier of the ways or means for the
transmission of the voice or messages …. (Emphasis added.)
The Department has long held that Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3)
impose the sales and use tax on the total amount of money derived, exclusive of deductions, from
a commercial venture and accruing or proceeding from charges for the manner, method or
instruments for sending a signal of the voice or of messages. See SC Revenue Ruling #89-14, SC
Revenue Ruling #04-15 and SC Revenue Ruling #06-8.

3

See SC Revenue Ruling #06-8 for other statutes concerning communications subject to the sales and use tax. These
other communications statutes are not relevant to this discussion.

4

Furthermore, the definition of tangible personal property, as defined in Code Section 12-36-60,
includes services and intangibles "the sale or use of which is subject to tax under [Chapter 36],”
such as "communications." The Second College Edition of the American Heritage Dictionary
defines "communication,” in part, as "[t]he exchange of thoughts, messages or information, as by
speech, signals or writing." "Communications" is defined, in part, as, "a means of
communicating esp.: a system of sending and receiving messages, such as mail, telephone and
television." The Department has long used the definition found in the Second College Edition of
the American Heritage Dictionary for the term “communications.”
Based on the above discussion, it is the Department’s position that charges for the ways or means
of communication include charges for access to, or use of, a communication system (the manner,
method or instruments for sending or receiving a signal of the voice or of messages), whether
this charge is based on a fee per a specific time period or per transmission. This is further
supported by the definition of the terms "sale" and "purchase," which are defined in Code
Section 12-36-100 to include "a license to use or consume." See SC Revenue Ruling #89-14, SC
Revenue Ruling #04-15 and SC Revenue Ruling #06-8.
The Department of Revenue has taxed communication services such as telephone services,
paging services, cable television services, satellite programming services (includes, but is not
limited to, emergency communication services and television, radio, music or other
programming services), fax transmission services, e-mail services, and database access
transmission services (on-line information services), such as legal research services, credit
reporting/research services, and charges to access an individual website.
Finally, Code Section 12-36-910(C) states:
Notwithstanding other provisions in this article or Article 13, Chapter 36, of this
title, the sales or use tax imposed by those articles does not apply to the gross
proceeds accruing or proceeding from charges for or use of data processing. As
used in this subsection, "data processing" means the manipulation of information
furnished by a customer through all or part of a series of operations involving an
interaction of procedures, processes, methods, personnel, and computers. It also
means the electronic transfer of or access to that information. Examples of the
processing include, without limitation, summarizing, computing, extracting,
storing, retrieving, sorting, sequencing, and the use of computers.
From time to time it is necessary to determine if the transaction is a sale or rental of tangible
personal property or the furnishing of a service. The so-called "true object" test is generally used
to delineate sales of services from sales of tangible personal property. In this case, the “true
object” test can assist in determining the “true object” of the transaction between ABC and the
healthcare providers using their 123! for health disease management program provided through
the telephone.

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The "true object" test is best described in 9 Vanderbilt Law Review 231 (1956), wherein it is
stated:
The true test then is one of basic purpose of the buyer. When the product of the
service is not of value to anyone other than the purchaser, either because of the
confidential character of the product, or because it is prepared to fit the
purchaser's special need - a contract or will prepared by a lawyer, or the accident
investigation report prepared for an insurance company - this fact is evidence
tending to show that the service is the real purpose of the contract. When the
purpose of a contract is to produce an article which is the true object of the
agreement, the final transfer of the product should be a sale, regardless of the fact
that special skills and knowledge go into its production. Under this analysis,
printing work, done on special order, and of significant value only to the
particular customer, is still a sale. The purchaser is interested in the product of
the services of the printer, not in the services per se. Similarly, it would seem that
contracts for custom-produced articles, be they intrinsically valuable or not,
should be classified as sales when the product of the contract is transferred.
The Vanderbilt Law Review article, in quoting Snite v Department of Revenue, 398 Ill. 41, 74
N.E.2d. 877 (1947), also establishes the following general rule:
If the article sold has no value to the purchaser except as a result of services
rendered by the vendor, and the transfer of the article to the purchaser is an actual
and necessary part of the services rendered, then the vendor is engaged in the
business of rendering service, and not in the business of selling at retail. If the
article sold is the substance of the transaction and the service rendered is merely
incidental to and an inseparable part of the transfer to the purchaser of the article
sold, then the vendor is engaged in the business of selling at retail, and the tax
which he pays ... [is measured by the total cost of article and services]. If the
service rendered in connection with an article does not enhance its value and there
is a fixed or ascertainable relation between the value of the article and the value of
the service rendered in connection therewith, then the vendor is engaged in the
business of selling at retail, and also engaged in the business of furnishing service,
and is subject to tax as to the one business and tax exempt as to the other.
While the above quotes do not establish rigid rules, they do provide general guidance in
determining the purpose of a transaction, and are particularly helpful in addressing the issues at
hand.
Based on the above, the transaction between ABC and healthcare providers, as described in
the facts, is the sale of a nontaxable data processing as defined in Code Section 12-36-910(C)
when such transaction involve interactive responses by the patients of the healthcare
provider, since (1) 123! for health is a service where information furnished by patients of the
healthcare provider is manipulated by ABC through all or part of a series of operations
involving an interaction of procedures, processes, methods, personnel, and computers; (2) the
data is sorted and combined by patient disease type, alerts for responses falling outside of
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determined parameters , and other categories as needed by the specific healthcare provider;
(3) “data processing” includes “the electronic transfer of or access to that information;” and
(4) the web portal used by the healthcare provider is the means through which the healthcare
provider has access to the “data processing” performed by ABC.
Therefore, the charge by ABC to healthcare providers, as described in the facts, is for “data
processing” - the manipulation of the customer’s information and “the electronic … access to
that information” - and is not subject to the tax based on the facts presented when such
transactions involve interactive responses by the patients of the healthcare provider.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/William M. Blume, Jr.
William M. Blume, Jr.
February 6
, 2013
Columbia, South Carolina

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