Are copies of medical records taxable in Connecticut, and does it matter whether they're delivered on paper, by online access, by fax, or by email?

Plain-English summary

A business contracts with healthcare providers to handle, on their behalf, all requests for patients' medical records from patients, insurers, other providers, attorneys, and government agencies ("Requesting Parties"). The business validates HIPAA authorizations, gathers the records (paper, electronic, or microfilm), and delivers them — as hard copy, through an online database, by fax, or by email — invoicing the Requesting Party for the copies. It asked how Connecticut sales and use tax applies to each delivery method.

DRS gave a method-by-method answer:

• Hard copy → taxable (tangible personal property). Ordinarily, photocopies sold by professional service providers (law firms, medical offices) are non-taxable because they're incidental to the provider's main service. But a vendor in the business of selling hard copies of medical records is selling tangible personal property, which is taxable — the professional time spent filtering HIPAA-protected information doesn't convert it into a non-taxable service. (DRS cited its earlier Ruling No. 91-22 to the same effect.)
• Online database access → taxable at 1% (computer and data processing service). Letting a Requesting Party download records from the vendor's online system is providing access to a database, which is a computer and data processing service taxable at the 1% rate.
• Fax → not taxable. When records are faxed, the true object is furnishing the records, not a computer service. The mere use of computers to transmit data isn't enough to make it a taxable computer service (DRS quoted Ruling No. 96-1), and faxed documents aren't a sale of tangible personal property either — so no tax.
• Email → not taxable. Same reasoning: emailing the records furnishes neither taxable tangible personal property nor an enumerated taxable service.

In short, the medium determines the tax: paper is taxable goods, database access is a 1% computer service, and fax/email are neither.

What this means for you

Medical-records and document-retrieval companies

Your Connecticut tax treatment changes with how you deliver. Charge tax on paper copies (taxable tangible personal property) and on online-database access (1% computer and data processing service), but fax and email deliveries of the same records are not taxable. If you offer multiple delivery options, your billing system should apply tax by delivery method — not a single flat rule.

Healthcare providers and others requesting records

Expect to see sales tax on paper record copies and a 1% charge on online-portal access, but not on records faxed or emailed to you. If tax is applied to a fax/email delivery, question it.

Accountants and tax professionals

The analysis runs through Conn. Gen. Stat. § 12-407 (tangible personal property plus enumerated services) with exemptions under § 12-412 preserved. Computer and data processing services are defined in Conn. Agencies Regs. § 12-426-27(b)(1) (including "retrieving or providing access to information"; see Policy Statement 2006(8)) and are taxed at 1%. The fax/email result turns on the true-object test articulated in Ruling No. 96-1 — transmitting via computer isn't, by itself, a taxable computer service; and the hard-copy result follows the "vendor in the business of selling copies" line from Ruling No. 91-22.

Common questions

Q: Are copies of medical records taxable in Connecticut?
A: It depends on delivery. Paper copies from a records-selling vendor are taxable tangible personal property; online-database access is a 1% computer service; faxed and emailed records are not taxable.

Q: Why is a paper copy taxable but an emailed copy isn't?
A: A paper copy sold by a business in the business of selling records is tangible personal property (taxable). An emailed copy furnishes no tangible property and isn't an enumerated taxable service, so it's not taxed.

Q: What is the 1% charge on online access?
A: Providing download access to records through the vendor's online database is a computer and data processing service, which Connecticut taxes at the reduced 1% rate.

Q: Isn't filtering HIPAA-protected data a service that makes it non-taxable?
A: No. DRS held that the professional time spent filtering information doesn't convert the sale of hard-copy records from taxable tangible personal property into a non-taxable service.

Q: Does this ruling apply to my business?
A: Not automatically. A Connecticut Ruling binds DRS only for the taxpayer and facts it addressed. Different services, delivery methods, or billing arrangements could change the result.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407 (sales tax on tangible personal property and specifically enumerated services)
• Conn. Gen. Stat. § 12-412 (exemptions from sales and use taxes)

Regulations:

• Conn. Agencies Regs. § 12-426-27(b)(1) (computer and data processing services, including retrieving or providing access to information)

Administrative guidance and prior rulings:

• Policy Statement 2006(8), Sales and Use Taxes on Computer-Related Services and Sales of Tangible Personal Property
• Ruling No. 91-22 (sale of hard copies of medical records as taxable tangible personal property)
• Ruling No. 96-1 (true-object test for computer services)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2012-2

Original ruling text

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