I run a lockbox/remittance service that automates payment posting for doctors' offices -- is that a taxable data processing service in Texas?

Subject

Fastreceipt Service — Automated Accounts Receivable Payment Posting Provided To Doctors

Plain-English summary

A company asked the Comptroller whether its "ABC charges" -- fees for a service that automates payment posting for doctors' offices -- are taxable. Under the service, a patient's payment and invoice go to a lock box in Ohio, where a bank opens and processes them. The remittance information is then electronically scanned and transmitted through the company's network in Texas to an electronic mailbox at the doctor's office. The doctor's office can print the payment file, and the next business day the processing bank electronically transfers the payments to the doctor's bank account, along with reports confirming that the deposits match the amounts posted to patient accounts.

The answer: taxable. The Comptroller held that these charges fall within the definition of a taxable data processing service under Comptroller Rule 3.330 and Secs. 151.0101 and 151.0035, Tex. Tax Code. Rule 3.330 defines data processing services as "the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information." The Comptroller also cited its own January 1996 pamphlet on data processing services, which states that data processing is "a service performed using the customer's data," and that "entering, storing, manipulating, or retrieving a customer's data is taxable."

The Comptroller noted the ruling is based on the specific facts submitted, and that different facts, even if similar, could produce a different result.

What this means for you

Payment-processing and lockbox service providers

If your service takes a customer's transaction data (here, patient payments and invoices), scans or enters it, transmits it electronically, and makes it available for the customer to retrieve or store, that combination of activities is a taxable data processing service in Texas -- even though the underlying work (posting payments to accounts) looks like routine back-office bookkeeping rather than "computing."

Doctors' offices and other businesses buying these services

Expect the vendor to charge Texas sales tax on these payment-posting/data-processing fees, since the Comptroller treats the charge for automating receipt posting as taxable, not as an exempt banking or professional service.

Businesses offering similar automated back-office services

Because this ruling turns on its specific facts (a lock box, electronic scanning, transmission over a network, and electronic retrieval by the customer), don't assume every fact pattern lands the same way -- the Comptroller expressly said different facts may yield a different answer. If your service doesn't involve entering, storing, or retrieving the customer's data, it may not fit this precedent.

Common questions

Q: Is a service that automates posting of patient payments to a doctor's accounts receivable taxable in Texas?
A: Yes. The Comptroller ruled that this type of "ABC charge" is a taxable data processing service under Rule 3.330 and Secs. 151.0101 and 151.0035, Tex. Tax Code.

Q: Why does this count as "data processing" rather than just payment handling?
A: Because the service enters, transmits, and makes retrievable the doctor's transaction data (patient payment and invoice information) -- activities the Comptroller's rule and pamphlet describe as data processing: compiling and producing records of transactions, and entering, storing, manipulating, or retrieving a customer's data.

Q: Does it matter that a bank in Ohio physically opens and processes the lock box payments?
A: The ruling doesn't carve out an exception for that step -- the Comptroller looked at the overall service (lock box receipt, scanning, electronic transmission to the doctor's office, and reporting) and found the whole "ABC charge" taxable as data processing.

Q: Can I rely on this ruling if my service works a little differently?
A: Not automatically. The Comptroller stated the opinion is based on the facts presented, and that different facts, though similar, may result in different answers.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.330 (defines data processing services)
• Tex. Tax Code Sec. 151.0101 (lists data processing services as taxable)
• Tex. Tax Code Sec. 151.0035 (defines data processing service)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9701260L

Original ruling text

January 16, 1997

Dear **:

Thank you for your letter dated December 30, 1996, concerning the taxability of
ABC charges by your company.

Facts: ABC charges refers to the service provided to doctors to automate their
receipt posting. The patient sends his payment and invoice to a lock box
located in **, Ohio where it is opened and processed by the bank.
Via electronic scanning, the remittance information is transmitted through your
DEF network based in CITY X, Texas to an electronic mail box at the doctor's
office. When the doctor's practice accesses the electronic mail, they have the
option of printing out a copy of the patient payment file. The next business
day, payments are transferred electronically to their bank account by the
processing bank. They then receive all the necessary reports to ensure that
the automatic deposits equal the funds posted to patient accounts.

Response: The ABC charges described above, fall within the definition of data
processing services. See Comptroller Rule 3.330 and Secs. 151.0101 and
151.0035, Tex. Tax Code.

Rule 3.330, provides in relevant part that "data processing services means the
processing of information for the purpose of compiling and producing records of
transactions, maintaining information, and entering and retrieving
information." A pamphlet published January 1996 by the Comptroller, entitled
Data Processing Services: states that, "Data processing is a service performed
using the customer's data." The pamphlet further states that, "Entering,
storing, manipulating, or retrieving a customer's data is taxable."

This opinion is based on the facts presented in your letter. Different facts
though similar, may result in different answers.

If you have any questions or need more information, 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 Policy Division, Comptroller of Public Accounts.

Sincerely,
Bettie Peterson
Tax Policy Division