Does a company that processes Medicare claims under a federal government contract owe sales tax on the claim forms, checks, and supplies it uses to do that work?

Subject

Medicare Claims Processor's Forms, Checks, and Supplies Are Taxable Even Under a Federal Contract

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1271E06

Plain-English Summary

A company under contract with the federal government to process and pay Medicare Part A and B claims for members in Texas asked the Comptroller whether it could get an exemption from state sales tax. The letter notes that the company is not considered an exempt organization under Rule 3.322 - Exempt Organizations, and that its Medicare-processing operations are kept separate from its other business.

The company's contract stated that purchases it made (other than furniture or depreciable items) to perform its duties under the federal contract were exempt from state sales tax. The Comptroller assumed the items at issue were primarily supplies — such as claim forms and checks — used to process Medicare claims.

The Comptroller explained the general rule: companies providing services to the federal government are consumers of, and owe tax on, taxable items they buy for their own use. Taxable items sold to the federal government are exempt only where title or possession passes to the federal government before the business uses the items — that is, true sales to the government (or purchases for resale to the government) are exempt.

Applying that rule here, the letter concludes that the claim forms, checks, and other supplies the company uses to process Medicare claims for patients are not sold or transferred to the federal government, and are therefore taxable to the company. The contract language exempting certain purchases did not change this outcome for these consumable processing supplies, because they never pass to the government — they are simply used up by the company in performing its own contractual obligations.

What This Means For You

Being a federal contractor doesn't automatically exempt your purchases. Even where a federal contract states that certain purchases are exempt from state sales tax, the Comptroller looks at whether title or possession of the specific item actually passes to the federal government before your business uses it. If it doesn't, your purchase is taxable, regardless of contract language.

Consumable items used to perform a service contract are generally taxable to the service provider. Claim forms, checks, and similar supplies used up internally while performing services (like processing Medicare claims) are treated as items purchased for the company's own use — not as items sold or resold to the government — so sales/use tax applies.

The resale/government-sale exemption is narrow. It applies only when the taxable item itself is sold to, or its title/possession passes to, the federal government before the business's own use. Simply being reimbursed under a government contract, or having contract language calling purchases "exempt," does not by itself satisfy that test according to this letter.

Not being an "exempt organization" matters. The letter notes the company here did not qualify as an exempt organization under Rule 3.322, which reinforces why its purchases were analyzed under the ordinary consumer/resale framework rather than any organizational exemption.

Q&A

Q: Is a company processing Medicare claims under a federal contract automatically exempt from Texas sales tax on its supplies?
A: No. The letter states the company is not considered an exempt organization under Rule 3.322 - Exempt Organizations, and its claim forms, checks, and other supplies used to process claims are taxable to the company.

Q: What supplies did the Comptroller analyze in this letter?
A: The Comptroller assumed the purchases at issue "would primarily be supplies, such as claim forms and checks, used by [the company] in processing claims for Medicare patients."

Q: When are purchases by a federal government contractor exempt from Texas sales tax?
A: Per the letter, taxable items sold to the federal government are exempt "where title or possession is passed to the federal government before any use by the business," and are defined as sales to the federal government. The purchase of taxable items by the business for resale to the federal government is also exempt.

Q: Why weren't the claim forms and checks exempt here, even though the federal contract said certain purchases were exempt?
A: Because, per the letter, "the claim forms, checks and other supplies used by [the company] to process ... claims for patients are not considered sold or transferred to the federal government and are taxable to [the company]."

Q: How does the Comptroller generally treat companies that provide services to the federal government?
A: The letter states that companies providing services to the federal government "are considered consumers of (and owe tax on) taxable items that they buy for their own use."

Original ruling text

October 21, 1993

Dear *:

Thank you for your letter requesting an opinion on a possible exemption
on state sales tax for your company.

FACTS: **, is not considered an exempt organization under Rule
3.322 - Exempt Organizations. However, ** is under contract with
the Federal Government to process and pay Medicare Part A and B claims for
members in the state of Texas and these operations are kept separate from
other business.

According to the * contract, purchases made by ** (other
than furniture or depreciable items) to perform these duties under the
contract are exempt from state sales tax.

RESPONSE: I assume that the purchases that you are seeking tax relief
on would primarily be supplies, such as claim forms and checks, used by
** in processing claims for Medicare patients.

Companies providing services to the federal government are considered
consumersof (and owe tax on) taxable items that they buy for their
own use. Taxable items sold to the federal government, where title or
possession is passed to the federal government before any use by the
business, are defined as sales to the federal government and
those sales are exempt. Similarly, the purchase of taxable items by
the business for resale to the federal government would also be exempt.

The claim forms, checks and other supplies used by * to process
* claims for patients are not considered sold or transferred to the
federal government and are taxable to **.

This opinion is based on the facts presented. Other facts though similar
mayprovide a different result. If you have other questions or need
more information, you may call me at 1-800-531-5441, extension 3-4502.
The regular number is 512/463-4502. You may also write to Tax
Administration Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division

NOTE: Previous Accession Number 9311086L.3 and/or 9311086L