Are the custodian, authorization, and copy fees a medical-records retrieval company charges attorneys and insurers for litigation-related records subject to Texas sales tax?

Plain-English summary

The Texas Comptroller split a litigation-support medical-records retrieval company's fees into taxable and nontaxable categories, based on what each fee actually pays for.

The taxpayer retrieves patients' medical records for attorneys and insurance companies handling lawsuits, always under a patient's written consent, a subpoena, or a court order. Its invoices break into three fee types:

Custodian fees — not taxable. This just reimburses the taxpayer for what the medical provider itself charged to produce the records. Since a medical provider's own charge for copying/producing records under a proper legal request is part of its nontaxable professional medical service, passing that cost through doesn't make it taxable either.

Authorization fees — not taxable. This is the taxpayer's own charge for preparing record requests, reviewing records for accuracy/completeness, and transferring them to the customer. None of these activities fall within Texas's specific list of taxable services, so this fee is untaxed.

Copy fees — split, depending on the task. Fees for OCR (optical character recognition), electronic Bates labeling, and bookmarking are taxable data processing services (only 80% of the charge is taxable, since Texas exempts 20% of data processing charges) — the Comptroller has treated OCR and Bates labeling as data processing in prior guidance going back to 1994. But fees for producing extra physical copies, CDs/DVDs, or copies of x-rays and medical imaging are taxed differently — as ordinary sales of tangible personal property, on the full charge, regardless of format.

Notably, this ruling itself replaces an earlier version the Comptroller had issued in January 2022 on the same request, after additional information and an in-person meeting.

What this means for you

Medical-records retrieval and litigation-support companies

Structure your invoices to separately itemize custodian reimbursement, your authorization/review service fee, and any copy-processing tasks — the first two categories are untaxed, but data-processing-style copy tasks (OCR, Bates labeling, bookmarking) and any extra physical/digital copies are taxable, on different percentages of the charge.

Law firms and insurance companies purchasing records retrieval services

Expect sales tax on the OCR/labeling/bookmarking portion of your invoice (at 80% of that charge) and on any extra copies, imaging, or media provided — but not on the core custodian and authorization fees.

Accountants and tax professionals

This ruling extends the well-established rule that a medical provider's own records-production charge is a nontaxable part of its medical service (STAR 9605L1409B13) to a third-party retrieval intermediary passing that cost through as a "custodian fee." It also reaffirms that OCR and Bates labeling are settled taxable data processing activities dating back to 1994 guidance and a 2010 Comptroller decision.

Common questions

Q: Is a fee that just reimburses what a doctor's office charged for records taxable?
A: No, when it's a pass-through of a medical provider's own nontaxable records-production charge under a proper legal request (consent, subpoena, or court order).

Q: Is OCR (scanning documents into searchable text) a taxable service in Texas?
A: Yes. The Comptroller has consistently treated OCR as taxable data processing since at least 1994, and only 20% of the charge is exempt under § 151.351.

Q: Are extra copies of medical records, x-rays, or imaging taxed the same way as OCR/labeling?
A: No. Extra physical or digital copies (paper, CDs, DVDs, imaging copies) are taxed as sales of tangible personal property on the full charge, not as data processing at the 80% rate.

Q: Can I rely on this ruling for my own records-retrieval business?
A: Only if you're the taxpayer it was issued to. It binds the Comptroller solely as to that taxpayer's specific fee structure and facts and can't be relied on by others.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (Sales Tax Imposed)
• Tex. Tax Code § 151.009 (Tangible Personal Property)
• Tex. Tax Code § 151.010 (Taxable Item — electronic form doesn't change tax status)
• Tex. Tax Code § 151.0101(a)(12) (Taxable Services — data processing)
• Tex. Tax Code § 151.351 (Information Services and Data Processing Services — 20% exemption)
• 34 Tex. Admin. Code § 3.330(a)(1) (Data Processing Services)
• STAR Accession No. 9605L1409B13 (May 13, 1996) (medical provider's records charge is part of nontaxable medical service)
• STAR Accession No. 9401L1282B08 (Jan. 10, 1994) (OCR is taxable data processing)
• Comptroller's Decision No. 103,099 (2010) (Bates labeling and document indexing are data processing)
• 42 U.S.C. § 1320d (HIPAA — records confidentiality background)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202212003L

Original ruling text

December 2, 2022

RE: Private Letter Ruling No. 20200901083412

Dear**,

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated Aug. 24, 2020, and supplemental submissions dated Oct. 12, Oct. 19, Nov. 23, Dec. 11, 2020, and April 8, 2021. Additional information was also provided at an in-person meeting held on Oct. 10, 2022.

This letter supersedes the original private letter ruling issued on Jan. 7, 2022. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of charges for services related to the retrieval of medical records pursuant to a lawsuit.

Facts Presented

**, (Taxpayer) is a Texas based medical records retrieval company. Taxpayer’s customers are licensed attorneys and to a lesser degree, insurance companies. All records retrieved by Taxpayer are obtained pursuant to a lawsuit and require either the patient’s written consent, subpoena, or a court order.

The records obtained by Taxpayer may relate to multiple visits by a patient to multiple doctors and healthcare facilities. Customers contract with Taxpayer to retrieve a patient’s records from the appropriate medical service providers. These providers generally charge Taxpayer for retrieving those records.

Medical records are not available to the public and are protected by multiple federal and state laws, including but not limited to the Health Insurance Portability and Accountability Act, 42, U.S.C. §1320d.

Taxpayer’s customers contact its analysts to place orders. Taxpayer’s customers must provide patient information and a power of attorney or court order before Taxpayer can fulfill an order.

The retrieval process of medical records is not automated and requires analysts to review and confirm the record content is complete, accurate, and applicable to the relevant patient. Analysts undergo legal evidentiary standards and Health Insurance Portability and Accountability Act (HIPAA) compliance training. In addition, analysts are trained on the procedural laws of varying states to ensure medical records contain the necessary disclosures and follow the appropriate chain of custody standards.

Once Taxpayer fulfills and reviews orders, medical records are transferred to customers either electronically or via hard copy, based on customer preference.

Taxpayer invoices to customers may include three types of charges:

custodian,

authorization, and

copy fees

When Taxpayer obtains medical records for customers, Taxpayer charges a custodian fee and an authorization fee. The custodian fee is to reimburse Taxpayer for the amount charged by medical service providers for the medical records. The authorization fee is Taxpayer’s service charge to prepare requests for records from medical service providers, review records for accuracy and completeness, and transfer records to customers.

Taxpayer’s copy fees relate to additional tasks performed once the medical records have been retrieved. These tasks may be requested to comply with court procedures. Invoiced charges to customers may include charges for optical character recognition (OCR), electronic Bates labeling, bookmarking of records, providing additional copies of records in either hard copy form or on CDs or DVDs, and making copies of x-rays and other medical imaging.

Question, Ruling, and Analysis

A restatement of your question is shown below, followed by our response and analysis.

Question: Are Taxpayer’s custodian, authorization, and copy fees charged to customers for the retrieval of medical records pursuant to pending litigation subject to sales tax?

Ruling: Taxpayer’s custodian and authorization fees are not taxable. Taxpayer’s copy fees charged for tasks such as OCR, electronic Bates labeling, and the electronic bookmarking of records are taxable data processing services. Taxpayer’s copy fees for additional copies of records in hard copy form and CDs and DVDs, and for copying x-rays and other medical imaging are taxable sales of tangible personal property.

Analysis: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (“Sales Tax Imposed”). The term taxable item includes tangible personal property and taxable services. Section 151.010 (“Taxable Item”). Section 151.010 also states the sale or use of a taxable item in electronic form instead of on physical media does not alter the item's tax status. Tangible personal property is personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner. Section 151.009 (“Tangible Personal Property”). Section 151.0101 (“Taxable Services”) lists services that are taxable in Texas and includes data processing services. Section 151.0101(a)(12).

Data processing is the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information. It specifically includes word processing, payroll and business accounting, and computerized data and information storage or manipulation. Rule 3.330(a)(1) (Data Processing Services).

Custodian Fee

The custodian fee is a charge to reimburse Taxpayer for the amount medical service providers charge Taxpayer to provide medical records. Charges by a medical service provider to copy medical records for a patient, a patient’s authorized representative, or to provide records under subpoena are not taxable. They are part of a medical service provider’s nontaxable professional service. See STAR Accession No. 9605L1409B13 (May 13, 1996).

All records provided by Taxpayer to its customers are pursuant to a pending lawsuit and require a patient’s written consent or are provided under a subpoena or other court order. As described by STAR Accession No. 9605L1409B13, medical records obtained by Taxpayer and provided to the patient or the patient’s representative are part of a medical service provider’s nontaxable medical service. Taxpayer’s custodian fee for the reimbursement costs of the medical records is therefore not taxable.

Authorization Fee

The authorization fee is Taxpayer’s service charge for preparing requests for medical records from medical service providers, for reviewing the records produced to ensure compliance with the requests and regulations, and for transferring records to customers. These activities do not fall under the list of taxable services provided by Section 151.0101. Therefore, Taxpayer’s authorization fee is not subject to sales and use tax.

Copy Fee

Copy fees are charged for additional tasks including OCR, electronic Bates labeling, bookmarking records, and additional copies of records.

The activities performed to provide OCR, electronic Bates labeling, and bookmarking of records involve data entry, compilation, and manipulation and are taxable as data processing. See, for example, STAR Accession No. 9401L1282B08 (Jan. 10, 1994), where the Comptroller stated that OCR is taxable data processing. Similarly, Comptroller’s Decision No. 103,099 (2010) found activities including Bates labeling and document indexing to be data processing.

Section 151.351 (Information Services and Data Processing Services) exempts 20 percent of the charge for data processing services. Taxpayer is responsible for collecting and remitting Texas sales and use tax on 80 percent of its charges for these services.

The sale of additional copies of medical records regardless of format (i.e., physical, or electronic), copies of x-rays and other medical imaging, and copies of CDs and DVDs are taxable sales of tangible personal property. Sections 151.009, .010, and .051. Taxpayer is responsible for collecting sales and use tax on the full amount of invoiced charges for these tasks.

Comptroller’s Decisions and STAR documents can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20200901083412.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.