Is a hospital vendor-credentialing service -- compiling vendor documents and issuing access badges -- a taxable 'data processing service' in Texas, and can the credentialing company buy the access badges tax-free?

Plain-English summary

A company "credentials" vendors and contractors — like pharmaceutical/medical-device reps and service contractors — so they can access secure areas of subscribing hospitals and healthcare facilities. Vendors pay the company a fee; the hospitals themselves pay nothing. Vendors submit personal information and accreditations electronically (or on paper, which the company scans for an extra fee), and the company compiles this into a database, checks government watch lists (felons, registered sex offenders) by name and driver's license, and issues an access badge good at any subscribing hospital using the same database. The company doesn't verify whether the submitted documents themselves are genuine.

The Comptroller ruled this is a taxable data processing service, not a nontaxable security service. Data processing under § 151.0035 and Rule 3.330 covers "data entry, data retrieval, data search, information compilation" — and it doesn't matter whether the person paying (here, the vendor) is the same as the "beneficiary" of the processed data (here, the subscribing hospitals that get access to the compiled records). The company argued a prior STAR letter (200212661L) treated "credentialing services" as nontaxable, but the Comptroller distinguished it: that earlier case involved cataloging managed-care contracts, completing applications, negotiating, and ongoing market analysis — a different bundle of services that just happened to share the word "credentialing."

Two follow-on questions got answered too:

• Document-scanning fees (converting paper submissions to electronic form) are separately taxable data processing.
• The access badges are treated differently depending on which one: the initial badge, bundled into the credentialing fee, is an "integral part of the taxable service" transferred to the vendor — so the company can buy those badges tax-free from its supplier using a resale certificate. Replacement badges, sold separately to vendors who lose theirs, are simply resold tangible personal property — also purchasable tax-free by resale certificate, just under the ordinary resale-certificate rule rather than the integral-part-of-a-service rule.

What this means for you

Credentialing, background-check, and access-control companies

Calling your service "credentialing" or "security" doesn't exempt it from tax if what you're actually doing is compiling, storing, and providing access to information — the Comptroller looks at the substance of the service (data compilation) over the label. Compare your actual activities carefully against a prior favorable ruling before assuming it covers you; small factual differences (like ongoing contract negotiation/management vs. straight data compilation) can flip the result.

Businesses issuing access badges, ID cards, or similar credentials as part of a taxable service

An initial badge bundled into your service fee and handed over as part of that service can qualify for tax-free purchase via resale certificate as an "integral part" of the taxable service — but track this separately from stand-alone replacement-badge sales, which fall under a different (though similarly tax-free-for-you) resale rule.

Accountants and tax professionals

The key holding to flag for clients: it's the beneficiary of the compiled data (the subscribing hospitals here) that matters for the data-processing taxability analysis, not who's actually paying the invoice (the vendors here).

Common questions

Q: Does labeling a service as "credentialing" or "security" instead of "data processing" avoid Texas sales tax?
A: No, per this ruling — the Comptroller looks at what the service actually does (compiling, maintaining, and providing access to information), not the label used to describe it.

Q: Does it matter that the vendors pay the fee but the hospitals benefit from the credentialing data?
A: No, per this ruling — data processing services are taxable regardless of whether the payer and the beneficiary of the compiled data are the same party.

Q: Can a company buy access badges tax-free if they're part of a taxable service?
A: Yes, per this ruling — an initial badge that's an integral part of a taxable service and transferred to the customer can be purchased tax-free via resale certificate; replacement badges sold separately can also be purchased tax-free via resale certificate, under the ordinary resale-of-goods rule.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0101(a)(12) (data processing as a taxable service)
• Tex. Tax Code § 151.0035 (definition of data processing service, including "or other beneficiary of the service")
• Tex. Tax Code § 151.009; § 151.010 (tangible personal property / sale definitions)
• 34 Tex. Admin. Code Rule 3.330(a)(1) (Data Processing Services)
• 34 Tex. Admin. Code Rule 3.285(a)(2)(A) (resale of tangible personal property in the same form)
• 34 Tex. Admin. Code Rule 3.285(a)(2)(C) (resale where property is transferred as an integral part of a taxable service)

Distinguished prior guidance:

• STAR Document 200212661L — a different "credentialing" service bundling managed-care contract management, application completion, and negotiation, held nontaxable on different facts (limited analytical value per this ruling, since no reasoning was given there)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201501008L

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017.

January 6, 2015

Re: Private Letter Ruling #13276853

Dear ****:

We issue this private letter ruling in accordance with Rule 3.1 in response to
your request dated June 5, 2014. Detrimental reliance is provided in
accordance with Rule 3.10, the Taxpayer Bill of Rights.

You requested guidance on the comptroller’s interpretation of taxable services
as it relates to the services provided by COMPANY A. We issue this private
letter ruling because the statutes, rules, and other applicable authorities
regarding taxable services are not sufficiently clear to provide guidance as to
whether COMPANY A is providing taxable data processing services under Tax Code
Ann. Section 151.0101 [ENDNOTE 1] and 151.0035 and Rule 3.330, Data Processing
Services.

RELEVANT FACTS

COMPANY A is engaged in the business of “credentialing” individuals and
businesses, such as pharmaceutical/medical device representatives and service
contractors (“Vendors”), to provide controlled access to secured areas of
hospitals or healthcare institutions (“the Subscribing Facilities”), which
subscribe to COMPANY A’s services.

COMPANY A charges the Vendors seeking credentialing a fee. Subscribing
Facilities do not pay a fee for any of the services provided by COMPANY A.

Vendors submit certain personal information and accreditations (either for the
individual or the relevant employees in the case of a business), based on
Subscribing Facilities’ requirements, to COMPANY A electronically. If the
Vendors are unable to submit the documents electronically, hard copies are sent
to COMPANY A to scan the documentation into its system. An additional fee is
charged by COMPANY A to the Vendors for the scanning service.

COMPANY A compiles the information required by Subscribing Facilities and
ensures that all required documents are received and signatures are affixed to
the document, if applicable, and stores the information on its servers in
Texas. COMPANY A searches government watch lists for felons and registered sex
offenders utilizing the person’s name and driver’s license. COMPANY A does not
otherwise verify that any documents submitted and received from Vendors are
genuine or valid.

Once COMPANY A has the information required by the Subscribing Facilities,
COMPANY A issues a badge to the Vendors to enter the secured area.
Alternatively, a kiosk is available at Subscribing Facilities where Vendors
enter certain information provided by COMPANY A for access.

COMPANY A points out that once Vendors are “registered with COMPANY A their
badge is valid at any hospital that uses COMPANY A’s database.” Thus, the
Vendors do not need to resubmit information already retained by COMPANY A if
they need to enter multiple Subscribing Facilities. In addition, the
Subscribing Facilities may contractually require that the data used by COMPANY
A to certify Vendors be stored and made available for retrieval by the
Subscribing Facilities.

We understand that the cost of the badge issued by COMPANY A is
“inconsequential” compared to the cost of the services provided. The cost of
the initial badge provided by COMPANY A is part of the credentialing fee and is
not separately invoiced. The information compiled and maintained by COMPANY A,
and upon which access to the Subscribing Facilities is granted, is accessible
only to the Vendors submitting the information and the Subscribing Facilities.

RULING AND ANALYSIS

The main service for which COMPANY A seeks guidance is the taxability of its
“credentialing service.”

Data processing services are taxable services under Section 151.0101(a)(12).
Data Processing services include “data entry, data retrieval, data search,
[and] information compilation. . .” Section 151.0035. Section 151.0035
further provides that a data processing service means “the use of a computer or
computer time for data processing whether the processing is performed by the
provider of the computer or computer time or by the purchaser OR OTHER
BENEFICIARY OF THE SERVICE.” (Emphasis Added.) Data processing services also
include “the processing of information for the purpose of compiling and
producing records of transactions, maintaining information, and entering and
retrieving information.” Rule 3.330(a)(1).

COMPANY A’s credentialing service is a taxable data processing service because
COMPANY A is being paid by the Vendors to use a computer to compile and
maintain information specified by the Subscribing Facilities, and made
available to the Vendors and Subscribing Facilities, in order for the Vendors
to access the Subscribing Facilities. COMPANY A compiles and maintains
documents required for admission to Subscribing Facilities, issues the
appropriate badge or access, and provides the Subscribing Facilities access to
the information. COMPANY A does not verify the documents received are genuine
or valid or otherwise certify the qualifications of the Vendors.

The service of compiling and maintaining the information is a taxable data
processing service. The fact that the data being processed is required by
Subscribing Facilities, but paid for by the Vendors, does not change the
taxability determination since the Subscribing Facilities are the beneficiaries
of the data processing services.

COMPANY A relies, in part, on STAR Document 200212661L, which it contends
provides general guidance that “credentialing services” are non-taxable.
However, the facts presented in STAR Document 200212661L indicate the service
provider is engaged in services that are different from those provided by
COMPANY A.

One of the services includes cataloging and maintaining information on
designated managed care contracts. The provider also completes applications,
engages in negotiations, performs analytical services, and generally keeps the
customer abreast of changes and developments related to the managed care
marketplace (i.e., preferred provider, network affiliation, and similar
associations related to healthcare organizations and medical group practices).
The services, identified collectively [ENDNOTE 2] as (a) managing contracts and
(b) providing credentialing services, were held to be nontaxable when billed
lump-sum. In addition, no analysis of the facts is presented, which makes the
letter of limited value since it is not clear why that taxability determination
was made.

Overall, COMPANY A and the taxpayer in STAR Document 200212661L both identify
their services as “credentialing” services; however, the underlying facts
demonstrate this categorization is the only similarity in the actual services
provided.

You also asked whether additional fees charged by COMPANY A to Vendors to
upload documents required for credentialing are taxable. Although this is not
an issue of first impression, we respond to explain the taxability of charges
relating to COMPANY A’ services which are not included in the lump-sum charge
for credentialing.

Data processing services mean “data entry…” and “processing of information for
the purpose of compiling and producing records of transactions, maintaining
information, and entering and retrieving information.” Section 151.0035 and
Rule 3.330(a)(1). The additional fees charged by COMPANY A to process the
documentation from paper to electronic form are taxable data processing
services based on the plain language of the statute and rule.

Lastly you ask about the taxability of the initial badge provided as part of
the credentialing fee and fees to replace lost badges and whether the purchase
of the badges is taxable. Although these are not issues of first impression,
we respond to explain the taxability of charges relating to the badge included
with the initial charge for credentialing services as well as charges for
replacement badges.

The initial badge is an integral part of the taxable service as it allows the
Vendors access to the Subscribing Facilities. A sale for resale includes a
sale of “tangible personal property to a purchaser who acquires the property
for the purpose of transferring care, custody, and control of the property to a
customer … as an integral part of a taxable service.” Rule 3.285(a)(2)(C).
Since the badge is an integral part of the taxable data processing service and
the care, custody, and control is transferred to the Vendors, COMPANY A may
purchase the badges tax-free by issuing a valid, properly completed resale
certificate to its supplier at the time of purchase.

Charges to Vendors for replacement badges are subject to Texas sales and use
tax as the sale of tangible personal property. See Section 151.009, 151.010.
A sale for resale includes a sale of “tangible personal property to a purchaser
who acquires the property for the purpose of reselling it … in the form or
condition in which it is purchased…” Rule 3.285(a)(2)(A). Therefore,
replacement badges may also be purchased tax-free by COMPANY A by issuing a
valid, properly completed resale certificate to its supplier at the time of
purchase.

If you have questions about this private letter ruling, please email us at
https://www.window.state.tx.us/taxhelp/ and reference Private Letter Ruling

13276853.

Regards,

Tax Policy Division

ENDNOTES:

1. References to Section are to Texas Tax Code Annotated (Vernon 1992).
   References to Rule are to sections of Title 34, Texas Administrative Code.

2. The contracts further identify a multitude of services to be provided in
   connection with managing the contracts and providing credentialing services.