Did Virginia sales tax apply to a provider's charges for furnishing medical records in print, by fax, or electronically along with coding and related services?

Subject

The true object of the transactions is the provision of nontaxable services. Medical records.

Plain-English summary

A company collected and furnished medical records for physicians, hospitals, and other healthcare facilities. It delivered records as printed copies, by fax, or electronically as PDFs and also charged for coding, training, education, abstraction, conversion, storage, and online database access.

Virginia applied the true-object test. When the customer's object is a service and transferred tangible property is not critical, the transaction may be exempt; when the object is the property produced, the full charge is taxable.

The substantial information and processing services made the medical-record transactions nontaxable services. Virginia therefore ruled that sales tax did not apply to the provider's charges to healthcare providers or other requesting parties, including when records were delivered in tangible form.

The provider was still the user and consumer of tangible property it bought to perform the service. It had to pay sales tax to suppliers or self-report use tax on Form ST-7 when a supplier did not collect Virginia tax.

Common questions

Did printed medical records make the whole charge taxable? No. On these facts, the printout was incidental to the broader medical-record service.

Did the same result cover electronic PDFs and database access? Yes. The ruling considered tangible and intangible delivery together with the associated coding, training, conversion, storage, and access services.

Was the service provider exempt on its own purchases? No. It owed sales or use tax on tangible property consumed in providing the services.

Citations and references

• Va. Code § 58.1-609.5(1).
• 23 VAC 10-210-4040 D.
• P.D. 95-136, P.D. 95-265, and P.D. 04-193.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-16

Original ruling text

March 8, 2016

Re: Request for Ruling: Retail Sales and Use Tax

Dear *:

This will reply to your letter submitted on behalf of your client (the "Taxpayer") in which you request a ruling regarding the proper application of the Virginia retail sales and use tax to charges for copies of medical records and related services. I apologize for the delay in responding to your request.

FACTS

The Taxpayer is in the business of collecting and furnishing health care information and medical records upon request. The Taxpayer has physical operations at various healthcare facilities in Virginia and is registered and collecting Virginia sales tax on its charges for medical records. The Taxpayer enters into agreements with physicians, hospitals, and other healthcare facilities (the "Healthcare Providers") that require the Taxpayer to provide all medical records as may be requested by patients, insurance companies, healthcare providers, employers, government agencies, and others (the "Requesting Parties"). The medical records at issue are transferred to the Requesting Parties in printed form, by facsimile, or electronically in a PDF format.

In order to fully comply with the Virginia tax laws, the Taxpayer requests a ruling on the services provided in furnishing healthcare information and medical records to the Requesting Parties. The services include, but are not limited to:

Charges for services and medical records that are delivered by, printed copies, facsimile, and electronically in PDF documents.

Charges for coding services.

Charges for training and education services.

Charges for abstraction services.

Charges for access to an on-line database of medical records for customers.

RULING

Virginia Code § 58.1-609.5(1) provides an exemption from the retail sales and use tax for "professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made ...."

Title 23 of the Virginia Administrative Code 10-210-4040(D) sets forth the "true object" test to determine whether a particular transaction involves the taxable sale of tangible personal property or the provision of an exempt service. This regulation states:

If the object of the transaction is to secure a service and the tangible personal property which is transferred to the customer is not critical to the transaction, then the transaction may constitute an exempt service. However, if the object of the transaction is to secure the property which it produces, then the entire charge, including the charge for any services provided, is taxable.

The Department has previously applied the true object test to services similar to those described in your letter and ruled that the provision of medical records in which a substantial service element is involved constitutes the provision of a nontaxable service. See Public Documents 95-136 (5/26/95), 95-265 (10/17/95), and 04-193 (10/29/04).

Based on the information furnished in your letter and the descriptions of the services furnished by the Taxpayer in providing both tangible and intangible medical records, i.e. , coding, training, education, converting, and storage services, I find that the true object of the transactions is the provision of nontaxable services. Therefore, the sales tax would not be applicable to transactions between the Taxpayer and the Healthcare Providers or Requesting Parties.

As a service provider, the Taxpayer is the user and consumer of all tangible personal property used in Virginia for providing its services. Accordingly, the Taxpayer is required to pay the tax to its suppliers at the time of purchase. If the supplier is not registered to collect the Virginia sales tax, the Taxpayer must remit the use tax directly to the Department on a Consumers Use Tax Return, Form ST-7. The use tax is based on the cost price of the tangible personal property purchased.

This ruling is based on the facts provided in your letter. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia section, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you should have any questions concerning this ruling, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5908266725.Q