Are the various per-record fees a medical-records company charges (copying, retrieval, certification, postage, etc.) subject to Colorado sales tax?

Plain-English summary

A company runs the "release of information" process for hospitals and health systems: it pulls a hospital's paper and electronic medical records, copies them, and delivers them to whoever requested them — usually patients, attorneys, insurance companies, or government entities — and bills the requester. It uses two delivery methods: Method One delivers paper copies by mail or courier; Method Two delivers digital copies through a web portal or by FTP file transfer. A typical invoice can carry a long list of separately stated fees — basic, retrieval, certification, deposition, affidavit, notary, handling, labor, photo, per-page, no-records-found, postage, shipping/handling, plus (for digital delivery) a Quickview web-portal fee and an electronic FTP fee.

The company asked which of those fees are subject to Colorado sales tax. The Department's answer: none of them, under either delivery method.

Why. Colorado taxes tangible personal property, not services (§§ 39-26-104(1)(a), 202). When a taxable good's price is a composite of materials plus the labor to bring it to market, that labor is included in the taxable price (§ 39-26-102(12)) — unless the service is "separable" from the sale of the goods (the classic example: a dress retailer who also does alterations can't tax the separable alteration service; A.D. Stores v. Department of Revenue, 19 P.3d 680 (Colo. 2001)). When a service is inseparable from the sale of goods, you ask whether the whole transaction is really a sale of goods or a sale of a service — the "true object" test.

The true-object test asks "what does the buyer want?", viewed from the buyer's perspective. Here, the requesting attorney or insurer could in theory retrieve the records themselves, but they pay the company to compile the information for them — so what they're really buying is the service of compiling and retrieving the medical information, not the paper. The Department pointed to City of Boulder v. Leanin' Tree, 72 P.3d 361 (Colo. 2003), and to Treece, Alley, Musat & Bosworth, P.C. v. Denver Dept. of Finance (Colo. Ct. App., No. 11CA0026, Nov. 23, 2011), which on substantially similar facts held the true object is a service: the dominant cost is labor, the paper's value is nominal, and the object is information (intangible) whose use is strictly controlled. The Department added that this is like a custom market survey made for one company's use, which it had previously treated as a service (GIL-07-27).

Conclusion: because the transaction is primarily the sale of a non-taxable service, all the Method One and Method Two fees are non-taxable — whether a given fee is inseparable from the service (and so part of the non-taxable service) or separable (and so not taxable in its own right).

What this means for you

Medical-records and release-of-information companies

If the true object of what your customers buy is the service of locating, compiling, and certifying records — not the paper copies — Colorado treats the whole engagement as a non-taxable service, and the itemized fees follow. The fact that you hand over paper (or even a markup-free postage line) doesn't convert it into a taxable sale of goods. (Remember this is a private ruling — see the reliance note below.)

Healthcare providers and service businesses

The decisive question is buyer's purpose: are customers paying for a thing or for your labor/expertise to produce information for them? Service-dominant, intangible-object, labor-is-the-real-cost transactions tend to be non-taxable services under Leanin' Tree / Treece — even when a tangible artifact (paper, a disc) is delivered.

Accountants and tax professionals

The analysis runs: labor in the price is taxable (§ 39-26-102(12)) unless separable (A.D. Stores) → if inseparable, apply the true-object test (Leanin' Tree; Treece, on point for medical records) → service-dominant, intangible object, nominal materials, controlled use ⇒ non-taxable service. Note the Department said it's not bound by and doesn't necessarily agree with the courts' reasoning but reached the same result. This PLR is the binding-on-one-taxpayer companion to the Department's later general guidance on the same subject. Watch the home-rule-city caveat below.

Common questions

Q: Are medical-records copying and retrieval fees taxable in Colorado?
A: In this ruling, no. The Department found the true object of the release-of-information transaction is a non-taxable service, so none of the enumerated fees — under either paper or digital delivery — were taxable.

Q: Doesn't handing over paper copies make it a taxable sale of goods?
A: No. The paper's value is nominal and the dominant cost is labor; the buyer wants the compiled information (a service/intangible), not the paper, so the whole transaction is a service.

Q: What's the difference between "separable" and "inseparable" fees here?
A: It didn't change the outcome. Inseparable fees are part of the non-taxable service; separable fees aren't taxable in their own right either. Both come out non-taxable.

Q: Can my medical-records business rely on this ruling?
A: No. A private letter ruling binds the Department only as to the taxpayer and facts it was issued to and cannot be relied upon by anyone else. It's also void if the taxpayer's representations were inaccurate. It shows the Department's reasoning, but your facts may differ.

Q: Does this cover city sales tax?
A: No. The Department administers state and state-collected local taxes only; self-collected home-rule cities set their own rules.

Citations and references

Statutes:
- §§ 39-26-104(1)(a), 202, C.R.S. (sales/use tax on tangible personal property, not services)
- § 39-26-102(12), C.R.S. (purchase price includes labor/service to bring a product to market)

Cases and Department guidance:
- A.D. Stores v. Department of Revenue, 19 P.3d 680 (Colo. 2001) (separable services not taxed)
- City of Boulder v. Leanin' Tree, 72 P.3d 361 (Colo. 2003) (true-object / sale-vs-service tests)
- Treece, Alley, Musat & Bosworth, P.C. v. Denver Dept. of Finance, No. 11CA0026 (Colo. App. Nov. 23, 2011) (medical-records release = service)
- Colorado GIL-07-27 (custom market survey treated as a service)

Related rulings: [[gil-15-009-services-in-connection-with-retrieving-and-copying-medical-records]] (same release-of-information subject), [[gil-14-001-promotional-videos]] (true-object test), [[gil-14-008-membership-fees]] (true object of a bundled transaction).

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-13-002.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

PLR-13-002

May15,2013

xxxxxxxxxxxxxxxxxxx
ATTN:XXXXXXXXXXXXXX
xxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxx
Re: Private Letter Ruling
Dear XXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXXX ("Company") a request for a
private letter ruling to the Colorado Department of Revenue ("Department") pursuant to
Regulation 24-35-103.5. This letter is the Department's private letter ruling.
Issues

1. Which of the enumerated invoice component fees that Company charges using
   Delivery Method One are subject to Colorado sales and use tax?

2. Which of the enumerated invoice component fees that Company charges using
   Delivery Method Two are subject to Colorado sales and use tax?
   Conclusion

3. None of the enumerated invoice component fees are subject to Colorado sales and
   use tax. Inseparable fees from the sale of a non-taxable service are not subject to
   sales and use tax. In addition, if fees are separable from the sale of a non-taxable
   service or taxable tangible personal property or services, they are also not subject
   to Colorado sales and use tax.

4. None of the enumerated invoice component fees are subject to Colorado sales and
   use tax. Inseparable fees from the sale of a non-taxable service are not subject to
   sales and use tax. In addition, if fees are separable from the sale of a non-taxable
   service or taxable tangible personal property or services, they are also not subject
   to Colorado sales and use tax.

Background
Company enters into agreements with hospitals, health systems, physician practices
and clinics (collectively referred to herein as ("Hospitals")) to process and fulfill medical
record requests (known in the industry as the release of information process).
Company makes photocopies of medical records, furnishes them directly to the
requesting party, and bills the requesting party for the copies. The requesting parties
typically are patients, attorneys, insurance companies, government entities, or
hospitals ("Customers").
A Company employee acquires Hospital's medical records through Company's
technology platform, which creates digital copies of Hospital's paper and electronic
records. The digital medical records are then electronically transmitted to Company's
release of information processing center, located outside of Colorado.
Company uses two different methods to deliver medical records to Customers. Delivery
Method One provides paper copies of the medical records, which are printed,
packaged, and delivered either by the United States Postal Service or a private
common carrier with whom Company contracts for delivery. Delivery Method Two
provides Customers access to digital copies of the medical records either through
Company's web portal or by electronic file transfer (File Transfer Protocol (FTP)) to
Customer's computer.
There are a variety of costs associated with the release of medical records because of
the strict procedural and highly regulated steps involved in the release of information
process. Fees for Company's services and/or products are normally based on rates
regulated by state statutes, rules, or policies. If there is no governing state authority,
Company sets a reasonable fee for its services and/or products in accordance with the
Health Insurance Portability and Accountability Act of 1996 (HIPAA) guidelines.
Below are the various possible fees that can make up a typical invoice and a short
explanation of each fee.
Delivery Method One
1. Affidavit Fee: A separately stated flat fee charged for a written statement, confirmed
by oath or affirmation, for use as evidence in court.
2. Basic Fee: A separately stated flat, unregulated fee for searching, retrieving,
reviewing, and preparing copies of medical records for delivery to Customers.
3. Certification Fee: A separately stated flat fee to certify the medical records.
4. Deposition Fee: A separately stated fee to affirm that the information is suitable to
be utilized in a legal deposition.
5. Handling Fee: A separately stated flat fee distinct from the charge for postage, but
associated with mailing paper copies of the individual's medical record.
6. Labor Fee: A processing service fee (e.g., an additional fee charged for retrieving
records stored off-site).

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7. No Records Found Fee: A flat fee for conducting a search and no medical records
were found to provide to Customer.
8. Notary Fee: A separately stated flat fee to notarize the medical records.
9. Photo Fee: A separately stated fee for each page of the medical record that is
photocopied.
10. Per Page Fee: A separately stated fee for each page of the medical record that is
captured by scanning from microfilm.
11. Postage Fee: A separately stated fee for the actual postage cost associated with
mailing paper copies of the medical record when it is mailed via the United States
Postal Service or delivery fee when the records are shipped via FedEx. This fee
does not contain a markup for profit.
12. Retrieval Fee: A separately stated flat, regulated fee for searching, retrieving,
reviewing, and preparing copies of medical records for delivery to Customers.
13. Shipping and Handling Fee: A fee charged for postage or FedEx shipping and
handling. This fee does not contain a markup for profit.
14. Shipping (only) Fee: A fee charged for actual postage costs or FedEx shipping
costs. This fee does not contain a markup for profit.
Delive[Y_ Method Two - Invoice Line Items
1. Affidavit Fee: A separately stated flat fee charged for a written statement, confirmed
by oath or affirmation, for use as evidence in court.
2. Basic Fee: A separately stated flat, unregulated fee for searching, retrieving,
reviewing, and preparing copies of medical records for delivery to Customers.
3. Certification Fee: A separately stated flat fee to certify the medical records.
4. Deposition Fee: A separately stated fee to affirm that the information is suitable to
be utilized in a legal deposition.
5. Handling Fee: A separately stated flat fee distinct from the charge for postage, but
associated with mailing paper copies of the individual's medical record.
6. Labor Fee: A processing service fee (e.g.: an additional fee charged for retrieving
records stored off-site.)
7. No Records Found Fee: A flat fee for conducting a search and no medical records
were found to provide to Customers.
8. Notary Fee: A separately stated flat fee to notarize the medical records.
9. Photo Fee: A separately stated fee for each page of the medical record that is
photocopied.
10. Per Page Fee: A separately stated fee for each page of the medical record that is
captured by scanning or from microfilm.
11. Retrieval Fee: A separately stated flat, regulated fee for searching, retrieving,
reviewing, and preparing copies of medical records for delivery to Customers.
12. Quickview Delivery Fee: A separately stated flat fee to electronically access and
view the contents of the delivered information via our web portal.
13. Electronic FTP Fee: A separately stated fee to electronically receive medical
records pushed to the customer via FTP.

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Because Company's employees perform the enumerated services within Colorado,
Company concludes that it has sufficient nexus in Colorado for sales and use tax
purposes. Additionally, Company characterizes its release of information process as
essentially a simple retail photocopying process, and its business model as one of
selling copies of medical records as a retail enterprise with a profit-making objective.
Given their business model, Company states the true object of Customers is to obtain
the information contained in the medical record.
Discussion
The principal issue raised in this ruling request is whether the various charges
constitute taxable sales of tangible personal property or non-taxable sales of services.
We begin with the simple observation that Colorado levies sales and use tax on the
sale or use of tangible personal property, but not on services.1 However, there are a
number of important instances in which services are taxed. The first, and perhaps
most common, exception is when the price of a taxable good is a composite not only of
the manufacturer's cost of materials but also of labor and other costs incurred to bring
the product to market. Colorado law requires that the calculation of sales tax include
the manufacturer's labor costs.
... the sales tax is imposed on the full purchase price of articles sold after
manufacture or after having been made to order and includes the full
purchase price for the material used and the service performed in
connection therewith ... 2
This inclusion of labor costs in the sales tax calculation has exceptions. Labor costs
are not included in the tax calculation if the service is "separable" from the sale of the
taxable property. For example, a retailer of a finished dress who also performs
alteration services cannot collect sales tax on the alteration service because the sale of
the service is "separable" from the sale of the finished dress.3
Services incurred prior to bringing finished goods to market are generally considered
an inseparable part of the cost of goods. In such cases where the service component
is inseparable from the sale of goods, the question then arises whether the entire
transaction should be treated as the sale of a service or a sale of tangible personal
property. One common test for making this determination is the "true object" test.
The true test then is one of basic purpose of the buyer. When the product of
the service is not of value to anyone other than the purchaser, either
because of the confidential character of the product, or because it is
prepared to fit the purchaser's special need - a contract or will prepared by
a lawyer, or the accident investigation report prepared for an insurance
1
2
3

§§39-26-104(1)(a) and 202, C.R.S.
§39-26-102(12), C.R.S.
A.O. Stores v Department of Revenue, 19 P3rd 680 (Colo. 2001).

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company - this fact is evidence tending to show that the service is the real
purpose of the contract. When the purpose of the contract is to produce an
article which is the true object of the agreement, the final transfer of the
product should be a sale, regardless of the fact that special skills and
knowledge go into its production. Under this analysis, printing work, done on
special order, and of significant value only to the particular customer, is still
a sale. The purchaser is interested in the product of the services of the
printer, not in the services per se. Similarly, it would seem that contracts for
custom-produced articles, be they intrinsically valuable or not, should be
classified as sales when the product of the contract is transferred.

If the article sold has no value to the purchaser except as a result of
services rendered by the vendor, and the transfer of the article to the
purchaser is an actual and necessary part of the services rendered, then the
vendor is engaged in the business of rendering service, and not in the
business of selling at retail. If the article sold is the substance of the
transaction and the service rendered is merely incidental to and an
inseparable part of the transfer to the purchaser of the article sold, then the
vendor is engaged in the business of selling at retail, and the tax which he
pays ... [is measured by the total cost of the article and services]. If the
service rendered in connection with an article does not enhance its value
and there is a fixed or ascertainable relation between the value of the article
and the value of the service rendered in connection therewith, then the
vendor is engaged in the business of selling at retail and also engaged in
the business of furnishing service, and is subject to tax as to the one
business and tax exempt as to the other.4
In City of Boulder v. Leanin' Tree, 72 P3d 361 (Colo. 2003), the Colorado Supreme
Court reviewed a variety of tests, including the true object test, used by states to make
this distinction and concluded that,
"Varied as these analyses may be, they largely share in common some
attempt to identify characteristics of the transaction at issue that make it
either more analogous to what is reasonably and commonly understood to
be a sale of goods, or more analogous to what is generally understood to be
the purchase of a service or intangible right.
In Treece, A/fey, Musat & Bosworth, P.C. v. Denver Dept. Finance, Colo. Ct. App., Dkt.
No. 11CA0026, 11/23/2011, the Division II of the Colorado Court of Appeals
concluded, based on facts substantially similar to those set forth in this ruling request
and after reciting a number of the tests discussed in Leanin' Tree, that the true object
4

9 Vanderbilt Law Review 231 (1956), cited with approval in South Carolina Revenue Ruling 04-5,
03/30/2004.

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of the transaction is the sale of a service, not the sale of tangible personal property.
Among other conclusions, the court noted that the dominant cost in this transaction is
the labor and that the value of the paper was nominal. The court also emphasized that
the object of the transaction was information (i.e., patient data), which it characterized
as intangible, and that the use of the information was strictly controlled.
As in any case, and particularly with respect to cases involving application of the "true
object" test, the issues are not simple. For example, the principal thrust of the true
object test is to ask, "what does the buyer want?" The test is viewed, as noted in the
Vanderbilt Law Review article discussed above, from the buyer's perspective. In this
instance, the medical records are generally available to patients and their agents who
could, if they so choose, retrieve these records themselves. However, they choose to
pay for Company's service of compiling the medical information for them. Therefore,
what the lawyer or insurance company who purchase the record is principally
interested in is the service of compiling the medical information.
As noted above, there are a variety of factors to consider in making these
determinations and the applicability of those factors and their application to specific set
of facts are debatable. Although the Department is neither bound by nor does it
necessarily agree with the court's reasoning, the Department, nevertheless, concludes
that this is the sale of a service and not the sale of tangible personal property. This is
similar to custom compilations of data, such as a market survey made at the direction
of and for the specific use of a company (as opposed to a market survey generally
made for public distribution) which the Department has previously opined is a service
and not the sale of property. 5 The Treece decision is consistent with this approach.
Having ruled that the transaction is primarily for the sale of a non-taxable service, we
rule that all the fees associated with Method One and Two are non-taxable.
Miscellaneous
This ruling applies only to sales and use taxes administered by the Department. Please
note that the Department administers state and state-collected city and county sales
taxes and special district sales and use taxes, but does not administer sales and use
taxes for self-collected home rule cities and counties. You may wish to consult with
local governments which administer their own sales or use taxes about the applicability
of those taxes. Visit our web site at www.colorado.gov/revenue/tax for more
information about state and local sales taxes.
This ruling is premised on the assumption that Company has completely and
accurately disclosed all material facts. The Department reserves the right, among
others, to independently evaluate Company's representations. This ruling is null and
void if any such representation is incorrect and has a material bearing on the
5

Colorado General Information Letter GIL-07-27,12/04/2007. You can view this ruling at
www.colorado.gov/revenue/tax > Tax Library > Rulings > Topic by Number.

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conclusions reached in this ruling. This ruling is subject to modification or revocation in
accordance to Department Regulation 24-35-103.5.
Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this
redacted version of the ruling will be made public within 60 days of the date of this
letter. Please let me know in writing within that 60 day period whether you have any
suggestions or concerns about this redacted version of the ruling.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue

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