We run an electronic clearinghouse that scans, converts, and transmits medical insurance claims between healthcare providers and payors -- which of our fees (claims conversion, transaction, clearinghouse, archival) owe Texas sales tax, and do we owe use tax on the software and equipment we give customers?

Subject

Electronic Insurance Claims Clearinghouse/Processing/Distribution System

Plain-English summary

This file actually bundles two separate Comptroller letters to the same or a similar taxpayer ("Company A"), an earlier one dated January 29, 1996 and a follow-up dated May 10, 1996, both about a business that electronically moves medical insurance claims between healthcare providers and the insurance companies (payors) that pay them.

The business model: Company A gives customers (hospitals, clinics, insurance providers) software and sometimes scanners to convert paper claim forms into electronic data, reformats that data, and transmits it electronically to whoever is paying the claim. The May 1996 letter walks through three variations: (1) claims scanned at a customer's out-of-state headquarters and then sent to Company A's Texas computer for processing; (2) claims sent directly from customer branch locations to Company A's Dallas, Texas office; and (3) claims received electronically from existing claims networks (like NEIC, Envoy, BCBS) rather than being scanned at all.

The holdings on fees:

• Claims conversion fee (scanning a paper claim into an electronic image): taxable as a data processing service. It's exempt only to the extent the service is used outside Texas (Tex. Tax Code § 151.330(e)-(f)) -- relevant because customers in cases 1 and 2 may have locations in multiple states.
• One-way transaction fee (transmitting a claim from Company A to the payor, in case 3): taxable as part of the sales price of the taxable service (§ 151.007(a)(2)); related incidental charges can't be carved out of the tax base (34 Tex. Admin. Code §§ 3.330(d)(3), 3.355(i)(3)).
• Clearinghouse fee (receiving, repricing, and forwarding a claim, in case 3): taxed the same way as the one-way transaction fee.
• Archival fee (converting the electronic claim image to a CD for the customer): taxable data processing service in all three cases.

The earlier (January 1996) letter addressed a simpler, similar arrangement and held that the per-claim charge was a taxable insurance service under Tex. Tax Code § 151.0039 (which covers claims-processing services) and § 151.0101 (defining taxable services), not merely a data-transmission charge. That letter also warned that if Company A tried to restructure the contract to call the charge an "electronic transmission of data" fee instead, it would still be taxable -- either as the same insurance service, or, if the service really were pure data transmission, as a taxable telecommunications service under § 151.0103 and Rule 3.344, potentially subject to the Telecommunications Infrastructure Fund (TIF) assessment created by H.B. 2128 (1995).

Sourcing rule for the insurance/data-processing charges: tax is based on the location of the customer (the healthcare provider), not the payor. If the provider is entirely outside Texas, no Texas tax is due; if the provider has multiple locations including some in Texas, tax applies to the Texas-location share, and a multi-state provider with a Texas sales tax permit can issue an exemption certificate and self-accrue use tax on its Texas-attributable claims.

Software and equipment:

• Company A owes use tax on the tangible personal property (computer hardware, scanners) used to provide the software interface, because the agreement described doesn't require Company A to actually transfer/license the software to customers -- both Company A and the customer merely use the same interface.
• Company A likewise owes use tax on rented equipment (computers/scanners) supplied to customers unless it truly transfers custody and control of that equipment to the customer -- meaning actual possession and operational control, not just access.
• Company A can buy computers/scanners tax-free (via resale certificate, § 151.302(b)) only for equipment where custody and control genuinely passes to the customer; otherwise no exemption applies and Company A is the taxable consumer.

What this means for you

Claims clearinghouses, medical billing services, and similar data-processing/insurance-service providers

If you scan, convert, reformat, or transmit insurance claims (or similar data) for a fee, expect the Comptroller to treat these as taxable data processing or insurance services, not exempt data transmission. Rebranding a service as "electronic transmission" instead of "claims processing" does not avoid tax -- the Comptroller looks at the substance of what's being done, not the label on the invoice.

Businesses with multi-state customers

Track where each customer actually uses the service. Under § 151.330(e)-(f), data processing charges are exempt to the extent the customer's use is outside Texas, so a customer with both Texas and out-of-state locations should be apportioned, and a permitted Texas customer can issue an exemption certificate and self-accrue use tax on its own Texas usage.

Businesses that furnish software or equipment to customers as part of a service

Whether you owe use tax on that software/equipment turns on custody and control. If your customer only gets "access" while you retain possession and operational control, you (the service provider) owe use tax on it. If you genuinely transfer possession and operational control to the customer, you may be able to purchase that equipment tax-free with a resale certificate instead.

Accountants and tax professionals

Note the two-letter structure here: the January 1996 letter frames the core service as a taxable "insurance service" under § 151.0039, while the May 1996 follow-up analyzes the same type of arrangement primarily as "data processing services." Both routes lead to taxability; which characterization applies may matter for sourcing, rate, or exemption-certificate purposes in your specific fact pattern.

Common questions

Q: Is the fee for scanning a paper insurance claim into an electronic image taxable in Texas?
A: Yes -- per this letter, that's a data processing service, and the conversion fee is taxable, subject to the multi-state usage exemption in Tex. Tax Code § 151.330(e)-(f).

Q: Does it matter where the insurance payor (versus the healthcare provider) is located?
A: No. Per the January 1996 letter in this file, the transaction is between the clearinghouse and the medical services provider (its customer); the payor is neither buyer nor seller of the service, so the payor's location doesn't affect taxability.

Q: Can a clearinghouse avoid tax by calling its charge a "data transmission" fee instead of a "claims processing" fee?
A: No. The letter states that changing the contract's wording wouldn't change the substance of the transaction, and even a genuine pure data-transmission service would likely be taxed as a telecommunications service instead.

Q: Does the clearinghouse owe use tax on computers and scanners it gives to customers?
A: It depends on custody and control. If the clearinghouse keeps operational control of the equipment (customer just has access), the clearinghouse owes use tax on it. If actual possession and operational control transfer to the customer, the clearinghouse can buy that equipment tax-free with a resale certificate instead.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.330(e) -- data processing service exemption when not used in Texas
• Tex. Tax Code § 151.330(f) -- proportional exemption when data processing service is used both in and outside Texas
• Tex. Tax Code § 151.007(a)(2) -- sales price includes charges directly related to a taxable service
• 34 Tex. Admin. Code § 3.330(d)(3) -- data processing rule on inseparability of related charges
• 34 Tex. Admin. Code § 3.355(i)(3) -- insurance services rule on inseparability of related charges
• Tex. Tax Code § 151.0039 -- definition of taxable insurance services (includes claims processing)
• Tex. Tax Code § 151.0101 -- definition of taxable services
• Tex. Tax Code § 151.0103 -- definition of taxable telecommunications services
• 34 Tex. Admin. Code § 3.344 -- telecommunications services rule
• H.B. 2128, 74th Legislature (1995) -- created the Telecommunications Infrastructure Fund assessment
• Tex. Tax Code § 151.302(b) -- resale exemption

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9605L1424A07

Original ruling text

May 10, 1996

Dear **:

Thank you for your recent letter seeking additional clarification about the
taxation of processing medical claim forms.

FACTS

Company A, which is qualified to do business in Texas, is primarily engaged "in
the electronic receipt and transmittal of claims" on behalf of Company A's
customers. Company A moves claims electronically between providers of health
care (Self-Insured/Self Administered business entities, Preferred Provider
Organizations (PPOs), and Third Party Administrators (TPAs))and payors of the
claims. We have described three potential cases below that illustrate the
paperless claim flow.

1. Company A will supply a computer software interface program to be installed
   at the customer' s corporate headquarters. For example, the corporate
   headquarters would be located in Arkansas. However, the customer's branches and
   retail stores are located in various states. All of the insurance claim forms
   are sent to the Arkansas location for processing.

Along with this program, Company A may provide a scanner to be utilized in
scanning the claim form into a personal computer at the provider's (customer's)
Arkansas location. The data is edited at the provider's location and then
transmitted electronically to Company's A computer located in Texas. A would
change the file format but would not make any decisions regarding the
information contained on the claim. The data would be processed, and
transmitted electronically to the payor of the claim. The payor of the
insurance claim may be located anywhere in the United States. In this example,
the customer (insurance provider) was located in Arkansas, however, the
customer may by located anywhere in the United States.

2. This case is similar to number 1 except that the customer's branches and
   retail locations send the insurance claim forms directly to Company A's
   location in Dallas, Texas for further processing. The claims are not handled by
   the customer's corporate location in Arkansas.

After receipt of the claim by Company A, the claim is processed in the same
manner as case number 1.

3. This case differs from the other cases, in that the claims are not scanned
   into the computer at the corporate headquarters. The claims are filed
   electronically by the insurance provider (Company A's customer) using a local
   clearinghouse. The claims are sent electronically from the existing electronic
   claim networks (i.e., NEIC, Envoy, BCBS and others) to Company A. Company A
   processes the claim and transmits the claim electronically to the payor.

REQUEST FOR A LETTER RULING

Based on the facts contained herein, we request your opinion regarding the
sales/use tax status of the following items as it relates to cases 1, 2, and 3
as described above:

ITEMS BILLED (INVOICED) TO CUSTOMERS BY COMPANY A: Please address the
taxability of the following items, along with authoritative support for your
conclusion:

A. Claims conversion fee

This is a fee for scanning the healthcare claim form and creating an electronic
image which is stored on the customer's computer. The image is then transmitted
to Company A and finally to the payor of the claim. Company A would invoice
their customer for this service on a per claim basis. This fee includes data
analysis and reporting.

This would apply to cases 1 and 2 above. Please address each of these cases in
your response.

Response: Scanning the healthcare claim form to create an electronic image
that is stored on the customer's computer is a data processing service. The
conversion fee is taxable.

In Case 1, the customer's headquarters are located in Arkansas, but the
customer has branches and retail stores located in various states. The
conversion fee is not taxable if the data processing service is not used in
Texas [Texas Tax Code 151.330(e)]. In Cases 1 and 2, if the data processing
service will be used both within and outside Texas, the conversion fee is
exempt to extent the data processing service is used outside Texas [Texas Tax
Code 151.330(f)].

B. One-Way transaction fee

This is a fee for transmitting the claim from Company A to the payor.

This revenue item would apply only to case 3. Please address this case in your
response.

Response: The one-way transaction fee for transmitting the claims
electronically in Case 3 is taxable as part of the sales price of the taxable
service [Texas Tax Code 151.007(a)(2)]. Rules 3.330(d)(3) concerning data
processing and 3.355(i)(3) concerning insurance services state: "Charges for
services or expenses directly related to and incurred while providing the
taxable service are taxable and may not be separated for the purpose of
excluding these charges from the tax base."

C. Clearinghouse fee

This is a fee for transmitting claims from the customer to Company A, repricing
the claim and transmitting the claim to the payor. This fee includes data
analysis and reporting.

This revenue item would apply only to case 3. Please address this case in your
response.

Response: Same as the response to B.

D. Archival fee

This is a fee for converting the claim from an electronic image to a CD. The CD
is sent to the customer.

This revenue item is applicable to cases 1, 2, and 3 above. Please address each
of these cases in your response.

Response: The conversion of the claim from an electronic image to a CD is a
data processing service. The archival fee is taxable when charged in Cases 1,
2 and 3. Also, see the response to B.

ITEMS NOT BILLED (INVOICED) TO CUSTOMERS BY COMPANY A:

I. License of Computer Software

Company A will install and furnish computer software to their customers but
will not charge a license fee or maintenance fee. The charges are included in
the fees listed above. The software and source code will be owned by Company A.
Depending upon your response to items A-C above, will any use tax be applicable
for the computer software?

Response: The agreement does not have a provision requiring Company A to
provide software. The agreement states that Company A "will develop a software
interface between Company A and ___ to send and receive claims ekectronically
and to link medical providers...who elect to use Company A's system to submit
claims..." It appears that both Company A and its customers use the interface.
If this is the case, Company A, as the consumer, owes tax on the tangible
personal property used in providing the software interface.

II. Rental:

Although Company A may furnish computer hardware and scanners to their
customers, the sales invoice will not list a charge for rental of this
equipment. The charges are included in the fees listed above. Depending upon
your response to items A-C above, will any use tax be applicable to the rental
fees charged to Company A by the owner of the equipment?

Response: Company A will incur a use tax on the rental fees charged by the
lessor of the equipment unless Company A transfers custody and control of the
equipment to its customers. Custody and control is determined by the
equipment's use. The rental agreement between Company A and the lessor may
prohibit Company A from subletting the equipment. The service agreement does
not require Company A to furnish computer hardware or scanners to its
customers.

PURCHASE OF COMPUTER EQUIPMENT

Can Company A purchase the computers and scanners transferred to the customers
exempt from Texas sales tax?

Response: The service agreement does not require Company A to transfer any
equipment to its customers. However Company A may buy computers and scanners
tax free if the custody and control of the computers are transferred to the
customer. Transfer of the computer means transfer of possession and
operational control and not mere access to the computer.

The apparent difference in the facts presented in your letter and the terms of
the agreement concerns me. The responses are based on based on the facts
presented, not on the terms of the agreement. An auditor will likely assume
that what is done under an agreement is what the agreement stipulates.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free 1-800-531-5441, extension 3-4987. The direct line is
512/463-4987. You may also write to Tax Policy Division, Comptroller of Public
Accounts,, P.O. Box 13528, Austin, Texas 78711.

Sincerely,

Karey W. Barton
Manager, Tax Policy Division

January 29, 1996

Dear **:

Thank you for your letter of January 3, 1996. You asked that we address the
taxability of the following situation.

FACTS

Company A, which is qualified to do business in Texas, is primarily engaged "in
the electronic receipt and transmittal of claims" on behalf of Company A's
customers. Company A moves claims electronically between providers of health
care and payors of the claims. Company A would supply the customer with a
computer software interface program that would be installed at the customer's
location. Along with the program, Company A may provide a scanner that would
be utilized in scanning the claim form into a personal computer at the medical
provider's (customer's) location. The data is edited at the provider's
location and then transmitted electronically to Company A's computer located in
Texas. Company A would change the file format but would not make any decisions
regarding the information contained on the claim. The data would be processed,
and through the "electronic switching system" be transmitted electronically to
the payor of the claim. The provider and payor may be located anywhere in the
United States. Company A would charge their customer, who is the provider of
the health care service, a per claim charge. The per claim charge would be
invoiced to the customer on a monthly basis by Company A.

Question: Is the per claim charge invoiced by Company A to their customers
located in Texas subject to Texas sales tax as a taxable service? If the charge
is subject to tax, please provide authoritative support for your conclusion.

Response: Company A is providing a taxable insurance service. Company A
should collect and remit tax on the per claim charge billed to the medical
services provider.

Section 151.0039 of the Texas Tax Code defines an insurance service. This
definition includes services to process insurance claims. Section 151.0101
defines taxable services and includes insurance services.

Question: It appears that the payor is the beneficiary of this service because
the data is transmitted directly to the payor's computer. Will the location of
the payor of the insurance claim have any impact on the taxability of the
transaction?

Response: No, the claims processing transaction is between Company A and the
medical services provider. Even though the payor of the claim may receive some
benefit from Company A formatting the claim for the medical services provider,
the payor of the claim is neither a buyer nor seller of the claims processing
service.

The location of the medical services provider will impact the taxability of the
transaction. For example, if Company A processes claims for a medical services
provider located outside of Texas, no Texas tax is due. If a medical services
provider has locations in several states, including Texas, Texas tax is due on
the charges for claims processed for the Texas service locations. A medical
services provider with multi-state locations that has obtained a Texas sales
and use tax permit may issue an exemption certificate to Company A and accrue
and remit use tax on the claims processed for its Texas locations.

Question: If a ruling is issued that subjects the per claim charge to Texas
sales tax, can Company A modify the contract in such a manner that the "form"
of the contract would be a nontaxable service? In this case, the sales invoice
would be modified to reflect that charges are for electronic transmission of
data.

Response: Such a change to the contract would not change the essence of this
transaction. Company A would still be providing taxable insurance services.
However, if the actual service being provided was solely transmitting data
electronically, tax would still be due on this service as a taxable
telecommunications service. Please refer to 151.0103 of the Texas Tax Code and
Rule 3.344 regarding telecommunication services. The Texas Legislature in 1995
enacted legislation (H.B. 2128) requiring the Comptroller's office to collect
an annual Telecommunications Infrastructure Fund (TIF) assessment of $75
million from telecommunication utilities and $75 million from commercial mobile
service providers. Telecommunication utilites are defined to include telephone
companies, long distance carriers and other sellers of telecommunication
services. This would include companies that electronically transmit data for a
charge. The TIF assessment is on the service providers and is calculated as a
percentage of telecommunication service receipts subject to sales tax times a
rate of .01362. We can provide you with copies of the rules on the TIF
assessment if you need them.

Question: Can Company A purchase their computers and supplies exempt from
Texas sales tax if you determine that Company A is providing a taxable service?

Response: There is no exemption for the computer equipment or supplies used by
Company A to provide their services. The scanners and software Company A
transfers to the medical service may be purchased tax free by issuing a resale
certificate to the vendors of these products. See 151.302(b).

This opinion is based on the facts presented. If there are any additional or
different facts, the opinion may change.

I hope this answers your questions. If you have additional questions, please
contact Lindey Osborne in my Sales Tax Policy section toll free at
1-800-531-5441, ext. 5-0037. The direct line is 512/475-0037. You also may
write to Sales Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Karey W. Barton
Manager, Tax Policy Division