Is sales tax due on charges by a medical transcriptionist for transcribing medical dictation, and does the state pay interest on refunds of tax collected on that service?

Plain-English summary

This letter responds to a taxpayer's e-mail about sales tax collected on medical transcription services. The Comptroller's office explains that a district court had recently ruled that a medical transcriptionist's transcription of medical dictation is not a data processing service. As a result, sales tax is not due on charges by a medical transcriptionist to transcribe medical dictation.

The letter also explains why the office took a while to act on the ruling: it needed to review the court's finding of fact and the written order before deciding not to appeal, and that material took several weeks to become available. Once the decision not to appeal was made, the Comptroller's office began amending its rule on data processing services to specify that a medical transcriptionist's use of a computer to transcribe medical dictation is not a data processing service. It also describes its outreach efforts — an information packet on the refund process, coordination with trade associations representing medical transcriptionists, coverage in the Comptroller's Tax Policy News newsletter and its website, and a planned follow-up in the Sales Tax Update quarterly newsletter sent to all sales tax permit holders.

Separately, the letter answers a second question from the taxpayer about whether the state pays interest on tax overpayments, referencing Rule 3.325. The Comptroller explains that the Texas Legislature authorized interest on refunds of tax erroneously paid only for reporting periods between January 1, 1982 and December 1, 1986. Subsection (c)(2) of Rule 3.325 confirms that overpayments and credits on transactions occurring after December 4, 1986 do not draw interest, because the Legislature repealed the interest-payment provision effective that date — a legislative decision, not a Comptroller policy choice.

What this means for you

Medical transcriptionists and businesses that use them

If you provide or pay for medical transcription services — transcribing oral or taped dictation into patients' records and letters — sales tax should not be charged on those charges, because the service is not treated as taxable data processing. Businesses that previously paid sales tax on these charges may want to look into the refund process the Comptroller's office describes setting up.

Accountants and tax professionals

This letter documents the Comptroller's response to a district court decision reclassifying medical transcription outside the data processing services tax base, plus the timeline for the related rule amendment and taxpayer outreach (Tax Policy News, Sales Tax Update, trade association coordination). It's useful for understanding both the substantive holding and the administrative process the agency followed when a court ruling changed established tax treatment.

Taxpayers seeking refunds or interest on overpayments

Interest on refunds of erroneously paid tax was only authorized by the Legislature for reporting periods between January 1, 1982 and December 1, 1986. If your overpayment or credit relates to a transaction after December 4, 1986, no interest is paid, per Rule 3.325(c)(2) — this is a statutory limit set by the Legislature, not something the Comptroller's legal department can override.

Common questions

Q: Is sales tax due on charges for transcribing medical dictation?
A: No. A district court ruled that this service is not a data processing service, and the Comptroller decided not to appeal that decision, so sales tax is not due on charges by a medical transcriptionist to transcribe medical dictation.

Q: Why did it take the Comptroller's office a while to act after the court's decision?
A: The office needed to review the court's finding of fact and the actual written order before deciding whether to appeal, and that material took several weeks to become available.

Q: Is the Comptroller changing its rules because of this court decision?
A: Yes. The letter states the office was, at the time, amending its rule on data processing services to specify that a medical transcriptionist's use of a computer to transcribe medical dictation is not a data processing service.

Q: How is the Comptroller's office publicizing this change to taxpayers?
A: Through a special information packet on the refund process, coordination with trade associations representing medical transcriptionists, coverage in the June issue of Tax Policy News, availability on its website, and a planned discussion in the September issue of Sales Tax Update.

Q: Does the state pay interest on sales tax overpayments?
A: Only for reporting periods between January 1, 1982 and December 1, 1986, per statutory authorization. For transactions occurring after December 4, 1986, Rule 3.325(c)(2) states that overpayments and credits do not draw interest, because the Legislature repealed the interest provision effective that date.

Q: Can I rely on this letter for my own situation?
A: This is a letter addressed to a specific taxpayer about their own inquiry; STAR letters can generally be relied upon only by the taxpayer to whom they were issued, so you should confirm current guidance applies to your own facts.

Citations and references

• Rule 3.325 (referenced regarding refunds and interest on tax overpayments; specifically subsection (c)(2), addressing overpayments/credits on transactions after December 4, 1986)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9607L1418A03

Original ruling text

July 6, 1996

To: ***

Dear ***:

Mr. Sharp asked me to respond to your recent e-mail message
about sales tax collected on medical transcription services.

As you know, the district court recently ruled that the
service of transcribing medical dictation by a medical transcriptionist should
not be considered a data processing service. Therefore, sales tax is not due
on charges by a medical transcriptionist to transcribe medical dictation.

Only recently did we make the decision not to appeal the
district court decision. It is true that there was some lag time between the
date the judge announced his decision and the date we decided to forego appeal,
but we needed to review the court's finding of fact and the actual written
order before making our decision. It was several weeks before that material
was available to us.

This office has always made an effort to collect only taxes
legally due the state and to keep the taxpayers of Texas informed of any tax
law or policy changes. To that end, we are currently in the process of
amending our rule on data processing services to specify that the use of a
computer by a medical transcriptionist to transcribe medical dictation is not a
data processing service. We developed a special information packet with a
detailed explanation of the refund process and worked with trade associations
that represent medical transcriptionists to disseminate this information to
their members. The change was also explained in the June issue of our monthly
newsletter, Tax Policy News, which is mailed to tax practitioners, trade
associations and many businesses around the state. It is also available on our
Internet web page. We plan to discuss the change again in the September issue
of Sales Tax Update, a quarterly newsletter which we send to all sales tax
permit holders. If you have suggestions for other ways we can publicize the
court's ruling, please let me know.

You also asked why the state does not pay interest on
overpayments as you understood Rule 3.325 to indicate. I am sorry you found
the rule so confusing and that you received incorrect information when you
called to ask about it. The Texas Legislature authorized the state to pay
interest on refunds of tax erroneously paid to the Comptroller for reporting
periods between January 1, 1982 and December 1, 1986.

Subsection (c)(2) of Rule 3.325 explains that tax
overpayments and credits on transactions occurring after December 4, 1986 do
not draw interest. That is because the Texas Legislature repealed the
provision authorizing the state to pay interest on tax overpayments effective
December 4, 1986. This was not an election or determination by our legal
department; it was a decision of the Texas Legislature. We are bound to abide
by the Legislature's decisions.

I appreciate your bringing these concerns to our attention.
If you have other questions or need additional information, please contact
Kevin Koller of our Tax Policy Division toll free at 1-800-531-5441, extension
5-0613. His Internet address is [email protected].

Sincerely,

Glen Hunt
Director, Research & Policy Development

cc: Kevin Koller, Tax Policy Division
John Sharp, State Comptroller

NOTE: Previous Accession Number 9607351L