Ruling 2012-2, Sales and Use Taxes, Medical Records, Tangible Personal Property, Computer and Data Processing Services

FACTS:

A business (“Taxpayer”) has entered agreements with healthcare providers such as doctors and hospitals (“Healthcare Providers”) that require Taxpayer to respond on behalf of the Healthcare Providers to all requests for medical records, data and information about particular patients (“Medical Records”) that are made by or for patients, insurance companies, other healthcare providers, attorneys, federal or state agencies, etc. (“Requesting Party”).  There is no contract between Taxpayer and the Requesting Parties.

Under the agreement with a Healthcare Provider --

• Taxpayer employees review incoming requests for Medical Records and validate authorizations for their release in compliance with HIPAA and state law.

• Taxpayer employees obtain the Medical Records, which may be in hard copy, electronic format or microfilm, and either make paper copies or scan and upload them to equipment at Taxpayer’s headquarters, where the records are either printed as hard copy or made available through Taxpayer’s online system for the Requesting Parties to download using a password.

• Taxpayer mails, faxes, or e-mails Medical Records, and/or makes them available to Requesting Parties through Taxpayer’s e-delivery system.

• Taxpayer invoices the Requesting Party for copies, in accordance with state and federal regulations which may limit the amount to be charged to certain Requesting Parties.  The fees are retained by Taxpayer as its primary compensation for performing the services for the Healthcare Provider, although there are instances where the Healthcare Provider may also pay compensation to Taxpayer. Taxpayer provides a detailed invoice to Requesting Parties explaining that payment is to be made to Taxpayer, not the Healthcare Provider. 

ISSUES:

Are Medical Records furnished to Requestors in hard copy subject to sales and use taxes?

Are Medical Records furnished to Requestors by allowing access to an online data base subject to sales and use taxes?

Are Medical Records furnished to Requestors by fax subject to sales and use taxes?

Are Medical Records furnished to Requestors by e-mailed copy subject to sales and use taxes?

RULINGS:

Medical Records furnished to Requestors in hard copy are taxable sales of tangible personal property.

Medical Records furnished to Requestors by allowing access to an online data base are subject to sales and use taxes at 1% as computer and data processing services.

Medical Records furnished to Requestors by fax subject are not subject to sales and use taxes.

Medical Records furnished to Requestors by e-mailed copy are not subject to sales and use taxes.

DISCUSSION:

Sales of photocopies by professional service providers, such as law firms, medical offices, laboratories and other medical facilities, accounting firms, banks and insurance companies are not subject to sales and use taxes. This is so because in most cases, sales of photocopies by professional service providers are merely incidental to the primary services provided by such entities.  In contrast, sales of photocopies by retailers that are in the business of selling photocopies, or by persons that make coin-operated photocopying machines available to the public, are subject to sales and use taxes.  Thus, the furnishing of records by a vendor in the business of selling hard copies of medical records obtained from medical offices has been held to be taxable as the sale of tangible personal property in Ruling No. 91-22.  The fact that Taxpayer must spend professional time to filter patient information that cannot be provided under HIPAA does not convert the transaction from the sale of tangible personal property to a nontaxable service.  Therefore, the sale of hard copies of Medical Records by Taxpayer is taxable as the sale of tangible personal property (except when the transaction is eligible for an exemption under Conn. Gen. Stat. § 12-412).

Computer and data processing services, as defined in Conn. Agencies Regs. §12-426-27(b)(1), include, among others, storing and filing information, and retrieving or providing access to information. See Policy Statement 2006(8), Sales and Use Taxes on Computer-Related Services and Sales of Tangible Personal Property. When the Medical Records are made available via Taxpayer’s online system for the Requesting Party to download, the transaction is taxable at 1% as a computer service because it constitutes providing access to the Taxpayer’s database (except when the transaction is eligible for an exemption under Conn. Gen. Stat. § 12-412).

Connecticut sales and use taxes are imposed on sales of tangible personal property and certain services enumerated in Conn. Gen. Stat. § 12-407.  When Medical Records are furnished to a Requesting Party by fax or by email, the true object is the furnishing of the Medical Records.  “In determining whether the ‘true object’ standard has been met with respect to computer services, it is not enough that computer equipment is employed by the Company in transmitting and receiving data. The use of computers to transmit data must be found to be an essential aspect of the service, without which the service would not exist, or the service recipient would not have contracted with the Company.”  Ruling No. 96-1. Thus, when documents are provided by faxing them or by e-mailing them, neither tangible personal property nor any of the enumerated taxable services are being sold, and so such sales are not taxable.

LEGAL DIVISION

February 17, 2012