Ruling 93-6, Sales and Use Taxes / Computer and Data Processing Services / Business Management Services

This Ruling is cited in Rulings 93-11, 94-2, 95-1, 95-2, 97-1, 98-2

FACTS:

The Company provides a claims processing, management and collection service that expedites and maximizes payment of claims from insurance carriers or governmental payors (such as Medicare and Medicaid) to health care providers, such as doctors or hospitals (hereinafter referred to as "customers"). The Company provides and installs computer hardware and software to its customers free of charge. Claims information is entered by the Company's customers on their computers which electronically transmit the claims to the Company, and the Company in turn transmits the information to the appropriate insurance carrier or governmental payor. If the insurance carrier or governmental payor cannot receive or efficiently handle the Company's electronically transmitted claims, the Company produces the claim on a standard industry form and mails it to the insurance carrier or governmental payor. After the claims are processed, the Company's claims operations personnel use computer-assisted follow-up methods to ensure timely collection. The Company retains a percentage of the actual claim payment amounts collected as its fee. No fee is payable by the customer unless the claim is collected.

ISSUES:

Whether the Company's claims processing, management and collection services are computer and data processing services subject to tax under Conn. Gen. Stat. § 12-407(2)(i)(A).

Whether the Company's claims processing, management and collection services are business management services subject to tax under Conn. Gen. Stat. § 12-407(2)(i)(J).

DISCUSSION: 

Conn. Gen. Stat. § 12-407(2)(A) defines "sale" and "selling" as including computer and data processing services. Conn. Agencies Regs. § 12-426-27(b) defines such services as including, among others, "providing computer time, storing and filing information, and retrieving or providing access to information." The Connecticut Supreme Court has stated that "legislative ratification of a ...regulation supports the position that the regulation is consistent with the general statutory scheme that the regulation was designed to implement." Texaco Refining & Marketing Co. v. Commissioner of Revenue Services, 202 Conn. 583, 600, 522 A.2d 771 (1987).

In analyzing whether the Company's claims processing, management and collection services are taxable computer and/or data processing services, a determination must be made as to whether the true object of the contract is a computer and data processing service. Hartford Parkview Associates Limited Partnership v. Groppo, 211 Conn. 246, 558 A.2d 993 (1989); see also Ruling No. 91-11. In determining whether the "true object" standard articulated in Hartford Parkview has been met with respect to a computer service, it is not enough that computer equipment is employed by the Company in transmitting, and by the subscribers in receiving, the information. Id. at 250. Instead, the use of the computer must be found to be essential to the provision of the service, and not "merely incidental" to it. Id. at 253. 

The Company provides its customers with a service that permits them to use their personnel and resources more efficiently in providing health care than would be possible without the claims processing and advance funding services. By availing themselves of the Company's services, its customers can avoid the time and expense involved in dedicating at least a portion of each day or week to processing and monitoring claims made to insurance carriers or governmental agencies. In Ruling No. 91-11, the service provider requested driving records from the Department of Motor Vehicles ("DMV") on behalf of the service provider's customers. The requests were transmitted to the DMV on magnetic tape on a daily basis, and the responses were received by the service provider on magnetic tape on the next day. The service provider would then either electronically transmit the records to its customers' computers or mail the records in hard copy to its customers. The Department's conclusion in Ruling No. 91-11 was that the use of a computer by the service provider, while helpful, was not essential to the provision of the service of providing driving records to its customers.

As in the facts of Ruling No. 91-11, even though the customers seeking the Company's services are aware that computer technology is used to assist the Company in rendering its services, their fundamental purpose in purchasing the Company's services is to have their insurance claims processed, filed and paid expeditiously without the need to devote their own personnel and resources to such process. While computers make the Company's services easier to provide, the same basic activities involved in claims processing, management and collection could still take place almost as efficiently using other means than computer technology. Therefore, the true object of the contract between the Company and its customers is not a computer and data processing service.

Conn. Gen. Stat. § 12-407(2)(i)(J) includes in the definition of "sale" and "selling" business analysis, management, management consulting and public relations services. Conn. Agencies Regs. § 12-407(2)(i)(J)-1 provides in pertinent part that the term "business management services" means "the controlling or directing of ... all or a portion of the core business activities ... of a service recipient." The term "core business activities" is defined in subsection (h) of the regulation as "activities directly related to a service recipient's lines of business involving sales of products, property, goods or services to others, its capital structure, its budgeting and its short-range, long-range or strategic planning." The core business of the Company's customers, doctors and hospitals, is to provide health care. The collection of unpaid insurance claims falls outside the core business of providing health care.

RULING:

The Company's claims processing, management and collection services are not taxable as either computer and data processing services or business management services.

LEGAL DIVISION

May 17, 1993