Is a fee for gathering medical records from doctors and hospitals on behalf of an insurance company's underwriting department subject to Texas sales tax?

Subject

Medical Information — Gathered And Obtained From Medical Service Providers For Insurance Companies For A Fee

Plain-English summary

A firm asked the Comptroller whether it owes sales tax on fees it charges insurance companies' underwriting departments for gathering medical information. The firm's role was narrow: it received requests from insurance companies, contacted doctors, hospitals, and other medical service providers to obtain the requested medical information, and passed that information along for a fee. The firm did not keep or reuse the information for any other purpose, could not sell it, and made no determinations about an applicant's eligibility for insurance or benefits.

The taxpayer had already discussed the issue informally with the Comptroller's Waco office, which suggested the service might not be taxable under Rule 3.342(d)(1), and recommended getting confirmation from Austin.

The Comptroller's answer: taxable. The service and fee for obtaining medical information from doctors, hospitals, and other medical service providers for insurance companies is taxable — specifically, as an "insurance inspection" (insurance investigation) service. Rule 3.355(a)(3) defines an "insurance investigation" as any activity performed to evaluate an individual's eligibility or qualifications for insurance coverage or for the payment of benefits, or any other similar activity — and gives as an example the assembly or evaluation of information to determine whether to issue a life insurance policy. The Comptroller found the firm's information-gathering activity fell within that definition, even though the firm itself made no eligibility determinations and didn't retain or resell the information.

What this means for you

Firms that gather medical records or other information for insurance underwriters

If you're paid a fee to contact medical providers (or other third parties) and collect information used by an insurer to evaluate coverage or benefit eligibility, that service is taxable as an insurance investigation under Rule 3.355(a)(3) — regardless of whether you personally make the eligibility decision, and regardless of whether you retain, use, or resell the information afterward.

Insurance companies purchasing these services

Expect sales tax to apply to fees paid to third-party firms for assembling or evaluating applicant information (such as medical records) in connection with underwriting or benefits decisions.

Businesses that got informal guidance from a local Comptroller field office

This letter is a reminder that informal comments from a local field office (here, Waco) are not authoritative — the taxpayer had to seek written confirmation from the Tax Policy Division in Austin, which reached a different conclusion (taxable) than what the field office had suggested.

Common questions

Q: Is a fee for collecting medical information from doctors/hospitals for an insurance company taxable in Texas?
A: Yes. The Comptroller ruled this is taxable as an insurance investigation service under Rule 3.355(a)(3).

Q: Does it matter that the firm doesn't decide whether the applicant qualifies for insurance or benefits?
A: No — the ruling still found the service taxable even though the firm made no eligibility or benefits determinations itself.

Q: Does it matter that the firm can't keep, use, or resell the medical information it gathers?
A: No — those facts were part of the taxpayer's description of its service, but the Comptroller still classified the fee as taxable.

Q: The firm was told by a local Comptroller office that this might not be taxable under Rule 3.342(d)(1) — does that control?
A: No. The Waco office's informal view was not the final answer; the Tax Policy Division in Austin determined the service is taxable under Rule 3.355(a)(3) instead.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.355(a)(3) (defines "insurance investigation"; basis for finding the service taxable)
• 34 Tex. Admin. Code Rule 3.342(d)(1) (raised by the taxpayer as a possible non-taxable-services provision, but not the rule the Comptroller relied on)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9611829L

Original ruling text

November 14, 1996

Dear ***:

Thank you for your recent letter concerning the taxation of the services
your firm provides to insurance companies' underwriting departments.

The firm receives requests for medical requests from
insurance companies. Your firm is paid a fee for obtaining this information
for the insurance company. Your firm contacts doctors, hospitals, and/or other
medical service providers requesting the information. The information is not
maintained by your firm and cannot be utilized or sold in any other way. In
addition, your firm does not make any determinations regarding the eligibility
for insurance or for payments of benefits.

You discussed the above scenario with individuals in
the Waco office of the Comptroller's Office who believed that this fell under
Section 3.342(d)(1) as services that were not subject to tax. The Waco office
suggested you get confirmation from Austin.

Response: The service and fee received for getting
information from doctors, hospitals and other medical service providers for
insurance companies are taxable. The service is taxable as an insurance
inspection. Section 3.355(a)(3) defines an "insurance investigation" as "any
activity performed to evaluate an individual's eligibility or qualifications
for insurance coverage, or for the payment of benefits, or any other similar
activity. For example, the assembly or evaluation of information for the
purpose of determining whether to issue a life insurance policy to a specific
individual would be considered an insurance investigation."

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 3-4683. The direct line is
512/463-4683. You may also write to Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division