Is preparing and mailing patient billing statements for out-of-state doctors a taxable Texas data processing service?

Subject

Billing Services — Accounts Receivable Monthly Statements

Plain-English Summary

The Texas Comptroller ruled that a company's "fastbill" service — receiving doctors' billing information by electronic transmission and using it to prepare accounts-receivable statements that are mailed directly to the doctors' patients in Texas — is a taxable data processing service. Even though most of the charge to customers covered postage and forms, with only a small remainder covering the actual service and profit, the whole charge is subject to Texas sales and use tax because the billing preparation is "achieved through the use of a computer" under Tex. Tax Code §§ 151.0101(a)(12), 151.0035, and Rule 3.330(a).

The ruling also addresses the situation where the company performs this work from outside Texas. Even then, because the benefit of the service — patients in Texas receiving their bills — is derived in Texas, the transaction is subject to Texas use tax under § 151.011. If the company doesn't collect and remit the tax itself, its Texas customers (the doctors) are responsible for accruing and remitting use tax on the charges. And the company itself must hold a Texas sales and use tax permit and collect/remit tax if it has "representation in Texas" as defined in Rule 3.286(a)(1)(A)-(E) (for example, employees, agents, or other in-state presence).

What This Means For You

Billing and data-processing companies serving Texas clients: If your business takes client data (electronically transmitted or otherwise) and uses a computer to generate documents — bills, statements, reports — that are sent to recipients in Texas, that service is very likely taxable Texas data processing, regardless of where your company itself is physically located.

Out-of-state service providers: Performing the work entirely outside Texas does not avoid Texas tax. Because the benefit (the mailed statement reaching a Texas patient) is realized in Texas, Texas use tax applies. Whether you or your customer is responsible for collecting and remitting depends on whether your company has "representation in Texas" under Rule 3.286(a)(1) and whether you hold a Texas sales/use tax permit.

Doctors and other clients purchasing billing services: If your billing vendor does not collect Texas tax on its charges, you are responsible for accruing and remitting the corresponding use tax yourself.

Q&A

Q: Is preparing and mailing patient account statements from doctor-supplied billing data a taxable service in Texas?
A: Yes. Because the billing statements are prepared using a computer, the service qualifies as a taxable "data processing service" under Tex. Tax Code § 151.0101(a)(12) and Rule 3.330(a).

Q: Does it matter that most of the charge is for postage and forms rather than the service itself?
A: No. The ruling treats the full charge — the cost of postage/forms plus the service and profit component — as part of the taxable data processing charge.

Q: What if the company preparing the bills is located outside Texas?
A: It still owes Texas tax. Under § 151.011, when a service is performed outside Texas but the benefit is derived in Texas (i.e., a Texas patient receives the bill), the transaction is subject to Texas use tax.

Q: Who has to pay the tax if the billing company doesn't collect it?
A: The Texas customers (the doctors) are responsible for accruing and remitting use tax themselves on the charges. Separately, the billing company must hold a Texas sales and use tax permit and collect/remit tax if it has "representation in Texas" as defined in Rule 3.286(a)(1)(A)-(E).

Citations

• Tex. Tax Code § 151.0101(a)(12) (definition of taxable data processing services)
• Tex. Tax Code § 151.0035 (definition of data processing service)
• Tex. Tax Code § 151.011 (Texas use tax)
• 34 Tex. Admin. Code Rule 3.330(a) (data processing services)
• 34 Tex. Admin. Code Rule 3.286(a)(1) (seller's and purchaser's responsibilities; representation in Texas)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9407L1329G13

Original ruling text

July 6, 1994

Dear **:

Thank you for your letter dated June 28, 1994, regarding sales tax as it
applies to your fastbill charges to customers in Texas.

FACTS: ** receives by electronic transmission, billing
information from doctors in Texas. The information is used to prepare
accounts receivable billings that are then mailed directly to the
doctors' patients in Texas. The majority of the costs involved are for
postage and forms. The remaining amount covers the cost of service and a
profit.

RESPONSE: Preparing accounts payable is a data processing service that
is subject to Texas sales and use tax when the service is achieved
through the use of a computer. Texas Tax Code Secs. 151.0101 (a)(12),
151.0035, and Rule 3.330(a).

When the service is provided outside Texas but the benefit is derived in
Texas, the service is subject to the Texas Use Tax under Sec. 151.011.

Your Texas customers are responsible for accruing and remitting the use
tax on charges for your services if your company is not responsible for
collecting and remitting the tax.

** is required to hold a Texas sales and use tax permit,
collect and remit the Texas tax if the company has representation in
Texas as defined in the enclosed Rule 3.286(a)(1)(A) through (E).

This opinion is based on the facts you submitted. Other facts, though
similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 50330. The direct line
is 512/475-0330. You may also write to Tax Administration, Comptroller of
Public Accounts.

Sincerely,

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9407811L