Were charges for collecting, electronically transmitting, and reconciling patient payments taxable when the processor also supplied periodic reports?

Plain-English summary

A company automated patient-payment posting for doctors. Patients mailed payments and invoices to a bank lockbox. The bank processed them, remittance information moved electronically to the doctor's office, funds were transferred to the doctor's bank account, and the practice received reports reconciling deposits to patient accounts.

The Board's tax counsel treated the true object of the agreement as account-collection and reconciliation services. Because the periodic reports were incidental to that service rather than the object of a tangible-property sale, tax did not apply to the company's customer charges.

The company was still the consumer of the materials used to prepare its periodic reports. Tax applied to the purchase price when the company bought or consumed those materials in California.

What this means for you

Payment processors

An electronically operated collection and reconciliation workflow was treated as a service even though customers received periodic reports.

Medical practices

The customer charge was not taxable on the described facts because the practice sought payment processing and account reconciliation, not physical reports.

Accountants and tax professionals

Separate the tax treatment of the service charge from the provider's purchases. A nontaxable service provider can still owe tax as the consumer of paper or other incidental materials.

Common questions

Q: Were the processor's customer charges taxable?

A: No. The true object was account collection and reconciliation.

Q: Did the periodic reports make the transaction taxable?

A: No. The reports were incidental to the service on the stated facts.

Q: Who owed tax on materials used for the reports?

A: The processor, as consumer, owed tax on the purchase price when it bought or used those materials in California.

Q: Did the opinion distinguish sales tax from use tax?

A: Yes. It summarized both taxes, but the decisive point was that the customer paid for a service rather than tangible personal property.

Citations and references

• California Revenue and Taxation Code §§ 6011, 6012, 6051, 6201–6203, and 6401
• California Civil Code § 1656.1
• California Sales and Use Tax Regulations 1501 and 1700

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0001.900
• Original supporting opinion: 515.0001.900 PDF

Original ruling text

515.0001.900

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHN KLEHS
First District, Hayward

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
TELEPHONE: (916) 324-2637
FAX: (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
KATHLEEN CONNEL
Controller, Sacramento
________

February 26, 1997
RE: Account No. REDACTED TEXT

JOHN CHIANG
Acting Member
Fourth District, Los Angeles
_______
E.L. SORENSON, JR
Executive Director

Dear REDACTED TEXT,
This is in response to your letter dated December 30, 1996 asking how tax applies on your company's charges for its operations entitled "REDACTED TEXT." You state: '''REDACTED TEXT charges' refer to the service provided to doctors to automate their receipt posting. The patient sends his payment and invoice to a lock box located in REDACTED TEXT, Ohio where it is opened and processed by the bank. Via electronic scanning, the remittance information is transmitted through our EDI network based in REDACTED TEXT, TX 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." Discussion California imposes a sales tax on a retailer's gross receipts from the retail sale of tangible personal property in this state unless the sale is specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.)1 Where sales tax does not apply, use tax is imposed on the sales price of property purchased from a retailer for the storage, use, or other consumption of property inside this state. (Rev.
& Tax. Code §§ 6201, 6401.)2 Taxable gross receipts or sales price include all amounts received with respect to the sale, with no deduction for the cost of materials, service, or expense of the retailer passed on to the purchaser, unless there is a specific statutory exclusion. (Rev. & Tax. Code §§ 6011, 6012.) Taxable gross receipts or sales price do not include amounts received from the sale of a service provided the service is not part of the sale of tangible personal property. (See Reg. 1501.) A person engaged in the business of rendering a service is the consumer of property it transfers incidentally to its customer in the performance of that service and owes tax or tax reimbursement on that property. (Id.)

1 This tax is imposed on the retailer who may collect reimbursement from the customer if the contract of sale so provides. (Civ. Code § 1656.1; Reg. 1700.) 2 This tax is imposed on the person actually storing, using, or otherwise consuming the property. (Rev. & Tax. Code § 6202.) A retailer engaged in business inside this state is required to collect this tax from its customers and remit it to this Board. (Rev. & Tax. Code § 6202, 6203.)

515.0001.900
We understand from your letter that REDACTED TEXT provides automated payment processing to its customers. That is, REDACTED TEXT collects payments on behalf of its customers for bank processing, transmits the amounts collected to the customer through electronic or telephonic transmission, and provides its customers with a periodic report reconciling the total deposits with amounts credited to specific patient accounts. Under these facts, we regard the true object of REDACTED TEXT’s agreement with its customers to be one for the providing of account collection and reconciliation services. This means that tax does not apply to REDACTED TEXT "REDACTED TEXT" charges to its customers. REDACTED TEXT is, however, the consumer of the materials it uses in preparing its periodic reports and tax applies to the purchase price of these materials where REDACTED TEXT purchases or consumes these materials inside this state. We hope this answers your questions. If you have any further questions, please write again. Sincerely,

Warren L. Astleford
Tax Counsel
WLA:rz
cc: REDACTED TEXT District Administrator REDACTED TEXT