How did Illinois tax paper and electronic medical records, coding, training, abstraction, SaaS storage, and shipping?

Plain-English summary

A medical-records company worked at Illinois health facilities and provided paper copies, fax and email delivery, coding, training, abstraction, secure online storage, and mailing. It asked how each service and related postage or handling charge was taxed.

IDOR said the described activities appeared to be services. Viewing, downloading, or electronically transmitting text and other data was not a transfer of tangible personal property. Transactions with no transferred property generally avoided Retailers' Occupation, Use, Service Occupation, and Service Use Tax.

Hardcopy medical records did involve tangible property transferred with a service and could create liability under one of Illinois's four service-transaction methods: separately stated property price, 50% of the entire bill, Service Occupation Tax on cost for a registered de minimis serviceman, or Use Tax on cost for an otherwise unregistered de minimis serviceman.

The same no-property principle generally covered coding, training, and abstraction when no tangible property was transferred. For secure online storage and other SaaS, however, IDOR said it was still evaluating the taxability of SaaS, cloud computing, and similar transactions; any future determination would operate prospectively.

Handling charges were taxable business costs. Combined shipping-and-handling or delivery charges could be excluded only when separately contracted and actually reflected shipping cost; excess over shipping cost was taxable, and separate invoice statement alone did not establish a separate agreement.

What this means for you

Delivery format mattered. Electronic access and data work could remain pure services, while paper output introduced taxable property. The letter did not resolve SaaS and should not be read as an exemption for online storage.

Common questions

Were emailed or downloadable records tangible property? No.

Could paper records create tax? Yes.

Did IDOR decide the SaaS storage issue? No.

Citations and references

• 86 Ill. Adm. Code 140.101.
• 86 Ill. Adm. Code 130.410 and 130.415(d).
• 86 Ill. Adm. Code 150.201(i) and 150.801.
• Nancy Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0020.pdf

Original ruling text

ST 15-0020 GIL 03/18/2015 SALE OF SERVICE
If no tangible personal property is transferred to the customer, then no Illinois
Retailers’ Occupation Tax or Service Occupation Tax would apply. See 86 Ill.
Adm. Code Parts 130 and 140. (This is a GIL.)

March 18, 2015

Dear XXXX:
This letter is in response to your letter dated December 3, 2014, in which you
request information. The Department issues two types of letter rulings. Private Letter
Rulings (“PLRs”) are issued by the Department in response to specific taxpayer
inquiries concerning the application of a tax statute or rule to a particular fact situation.
A PLR is binding on the Department, but only as to the taxpayer who is the subject of
the request for ruling and only to the extent the facts recited in the PLR are correct and
complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General
Information Letter (“GIL”) is to direct taxpayers to Department regulations or other
sources of information regarding the topic about which they have inquired. A GIL is not
a statement of Department policy and is not binding on the Department. See 2 Ill. Adm.
Code 1200.120. You may access our website at www.tax.illinois.gov to review
regulations, letter rulings and other types of information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we
respond with a GIL. In your letter you have stated and made inquiry as follows:
Several years ago, my client (hereafter “Client”) submitted a ruling request
to Illinois regarding the taxability of particular types of sales made to
Client’s Illinois customers. A copy of the Department’s original response
is enclosed for your reference. In an effort to maintain compliance with
Illinois’ current taxing procedures, we would like to request an updated
ruling, based on any changes in Illinois’ tax law and any changes in
Client’s facts.
On behalf of Client, I would respectfully request the Illinois Department of
Revenue to respond to the questions we have identified below regarding
the Illinois sales and use tax.
Client, a STATE corporation, is engaged in the business of collecting and
furnishing health care information to requestors who wish to obtain copies
of medical records. Currently, Client has operations at various medical
facilities in Illinois and is registered and collecting sales tax on its charges
for medical records. In order to clarify the taxability of specific services, we
request a determination on the following issues:

1. Whether Client’s charges for services and the provision of medical
records are subject to sales or use tax when distributed in the
following formats:
a. Printed copy of the medical record(s)
b. Copy sent by fax
c. Copy sent in a PDF document electronically via e-mail

2. Whether Client’s charges for coding services are subject to sales
   tax.
3. Whether Client’s charges for training and education services are
   subject to sales tax.
4. Whether Client’s charges for abstraction services are subject to
   sales tax.
5. Whether Client’s charges for access to records stored in an online
   database (Software as a Service) are subject to sales tax.
6. Whether a separately stated charge for “Postage” would be subject
   to either the sales or use tax. In addition, whether a separately
   stated charge for “Postage and Handling” would be subject to either
   the sales or use tax.
7. What the proper application of sales or use tax is when the
   requesting party, such as an insurance company, has locations
   both in-state (origination) and out-of-state (destination).
   Client enters into agreements with various physicians, hospitals, and other
   health care facilities (collectively, “Health Care Providers”). These
   agreements require Client to respond on behalf of the Health Care
   Providers to all requests for medical records, data, and information
   relating to particular patients (collectively, “Medical Records”) that are
   made by or for patients, insurance companies, physicians, other health
   care providers, payers, attorneys, federal and state organizations, and
   others (collectively, “Requesting Parties”; individually, the “Requesting
   Party”). In turn, when Health Care Providers receive requests for Medical
   Records, they are obligated to refer the Requesting Parties to Client.
   Depending upon the scope of services being provided to a particular
   Health Care Provider, Client may:
   



Receive and review all incoming requests for Medical Records and
validate authorizations for release of medical records from
Requesting Parties for HIPAA and state law compliance and/or
request follow-up information as necessary to validate an invalid
authorization. A request may be rejected if, for example, fulfillment
would violate federal or state laws.
Pull files and/or review electronic records and/or microfilm for
Medical Records meeting the authorization request and either copy
the Medical Records to paper, scan and upload records to Client’s
Central Processing Center (CPC) located at its corporate
headquarters in STATE and then copy same to paper, or scan and
upload to Client’s CPC and make the Medical Records available
through its e-delivery system online for the Requesting Party to
download via a confidential pass code and print.








Log in and record pertinent information regarding the requests in
Client’s web-based information request management application
software system in order to provide tracking of the status of the
processing of the requests.
Mail records and/or make the records available through Client’s edelivery system online.
Bill the customer, if an invoice is mailed to that customer, for
postage charges with a separate line item on the invoice. The
customer is only billed for separately stated postage charges. In
certain situations, an invoice may be billed to a customer as
“postage and handling charge.”
Invoice the Requestor for copies made in accordance with relevant
state and federal regulations and collect payment of the invoices.

Typically, the pertinent Medical Records are identified and pulled by Client
employee on-site at the Health Care Provider, where they are copied
and/or scanned at the facility and then either mailed or made available at
the Health Care Provider location or Client’s headquarters. The billing and
collections are done from Client’s STATE office. The fees collected from
the Requesting Parties by Client are retained by Client as its primary
compensation for performing the services for the Health Care Provider,
although there are instances where the Health Care Provider may also
pay compensation to Client for its services.
The amount charged varies depending upon the Requesting Party, the
quantity of medical records requested, and the type of information
requested. Certain state and federal law may limit the amount that may
be charged to certain requestors, but not others. In addition, when a
proper request is submitted to the Health Care Provider by certain
Requesting Parties, the Health Care Provider is required by law to provide
a copy of the records requested within a reasonable period of time and
upon payment of the mandated charge.
In addition to these services, Client performs the following services:




Coding. Coding is the transformation of narrative descriptions of
diseases, injuries, and health care procedures into numeric or
alphanumeric designations (that is, code numbers). The code
numbers are detailed in order to accurately describe the diagnoses
(that is, what is wrong with the patient) and the procedures
performed to test or correct these diagnoses. Because medicine is
not always an exact science, codes were developed to identify all
reasons for seeking health care. Coding health-related data
permits access to health records according to diagnoses and
procedures for use in clinical care, research, and education.
Training and education. Training and education is provided for all
levels of coders, physicians, and ancillary hospital personnel. The
wide range of education services includes documentation
improvement, inpatient and outpatient coding assessments and
training, and revenue cycle management.





Abstraction. Abstraction is the process of taking important
medical information from handwritten and typed reports and
physically entering that information in an electronic medical record.
Client hires nurses and other credentialed health information
management people to do this type of work.
Software as a Service. Client provides customers secure, online
storage space in which the customer can store and access, at any
time, patient records and other sensitive documentation. The
customer uses a username and password to access the stored
files. The customer does not install any software and does not
store any data on the customer’s own server.

Some of the above services may be performed by Client’s employees onsite at the local Health Care Provider facility, and some of the services
may be provided from Client’s corporate headquarters located in STATE,
again depending on the scope of services chosen by the particular Health
Care Provider. The services performed by Client are invoiced to health
care providers, hospitals, clinics, etc.
Our anticipated responses are as follow:

1. The sale of a medical record when the information is transferred on
   a tangible medium (paper) is not subject to Illinois sales tax since
   the transaction is a service and the tangible personal property
   transferred is incidental to the sale of the service. In addition, the
   sale of a medical record when it is sent electronically via fax
   machine or in a PDF via e-mail is not taxable because there is no
   tangible medium involved. If it is determined by the Illinois
   Department of Revenue that the sale of the records would be
   subject to tax, only records that are transferred to a Illinois location
   are subject to the tax. Any records sent outside Illinois are not
   subject to Illinois tax even if the records were shipped from an
   Illinois location. To the extent records are shipped from outside
   Illinois (for example, STATE) to an Illinois location, they would be
   subject to the Illinois tax.
2. Charges for coding services are not subject to Illinois sales tax
   since they are considered to be exempt data processing services
   and no transfer of tangible personal property occurs.
3. Charges for training and education are not subject to Illinois sales
   tax since they are considered to be exempt professional services
   and no transfer of tangible personal property occurs.
4. Charges for abstraction services are not subject to Illinois sales tax
   since they are considered to be exempt data processing services
   and no transfer of tangible personal property occurs.
5. Charges for access to online document storage (Software as a
   Service) are not subject to Illinois sales tax since the information is

transferred by electronic means and no transfer of tangible
personal property occurs.

6. To the extent the copied information mailed to the customer is
   deemed taxable by the Illinois Department of Revenue, separately
   stated charges for postage would be taxable if the customer is
   required to pay the charges incurred to ship the records. A
   separately stated charge as a “postage and handling charge” would
   not be subject to Illinois sales and use tax to the extent any taxable
   property is billed or invoiced to a customer and charges are actually
   reflective of the cost of shipping.
7. The shipping destination, not the billing address of the requestor,
   determines the imposition of tax. Therefore, a sale that either
   originates from Illinois and is shipped to a location in Illinois or is
   shipped from out of state (STATE) and directly to an Illinois
   customer (destination basis) is taxed in the same manner for sales
   and use tax purposes (for the state and local tax rates). It is
   immaterial whether the sale originates in Illinois or is destined for
   sale in Illinois; the sale is treated the same for imposing the state
   tax and any local tax rates.
   We make the following representations for this request:
8. Client is not currently under audit by the Department.
9. Client has not been notified by the Department concerning a
   pending audit.
10. Client has not submitted a claim for refund containing transactions
    involving any issue contained in the request for declaratory ruling.
11. The same issue is not currently the subject of litigation with the
    Department.
12. Client has not previously submitted a ruling request on taxability of
    coding, training and education, abstraction services, and Software
    as a Service.
    Therefore, we kindly request your assistance in guiding us to the
    appropriate response to our inquiries above. If you have any questions,
    please feel free to contact me at [XXX-XXX-XXXX], or by email at
    NAME@EMAIL.
    DEPARTMENT’S RESPONSE:
    Tangible Personal Property
    The Illinois Retailers' Occupation Tax Act imposes a tax upon persons engaged
    in this State in the business of selling tangible personal property to purchasers for use
    or consumption. See 35 ILCS 120/2; 86 Ill. Adm. Code 130.101. In Illinois, Use Tax is
    imposed on the privilege of using, in this State, any kind of tangible personal property
    that is purchased anywhere at retail from a retailer. See 35 ILCS 105/3; 86 Ill. Adm.
    Code 150.101. These taxes comprise what is commonly known as "sales" tax in Illinois.
    If the purchases occur in Illinois, the purchasers must pay the Use Tax to the retailer at

the time of purchase. The retailers are then allowed to retain the amount of Use Tax
paid to reimburse themselves for their Retailers' Occupation Tax liability incurred on
those sales. If the purchases occur outside Illinois, purchasers must self assess their
Use Tax liability and remit it directly to the Department.
Service Transactions
Retailers' Occupation and Use Taxes do not apply to sales of service. The
transactions you have described appear to be service transactions. Under the Service
Occupation Tax Act, businesses providing services (i.e. servicemen) are taxed on
tangible personal property transferred as an incident to sales of service. See 86 Ill.
Adm. Code 140.101. The purchase of tangible personal property that is transferred to
the service customer may result in either Service Occupation Tax liability or Use Tax
liability for the servicemen depending upon his activities. The serviceman’s liability may
be calculated in one of four ways:
(1)
(2)
(3)
(4)

separately stated selling price of tangible personal property transferred
incident to service;
50% of the serviceman's entire bill;
Service Occupation Tax on the serviceman's cost price if the serviceman
is a registered de minimis serviceman; or
Use Tax on the serviceman's cost price if the serviceman is de minimis
and is not otherwise required to be registered under Section 2a of the
Retailers' Occupation Tax Act.

Note, the Department does not consider the viewing, downloading or
electronically transmitting of video, text and other data over the internet to be the
transfer of tangible personal property. However, if a company provides services that are
accompanied with the transfer of tangible personal property (e.g., medical records
delivered to a customer in a hardcopy version, rather than sent electronically), such
service transactions are generally subject to tax liability under one of the four methods
set forth above.
If the transactions you are inquiring about do not involve the transfer of any
tangible personal property to the customer, then they generally would not be subject to
Retailers’ Occupation Tax, Use Tax, Service Occupation Tax, or Service Use Tax.
Nexus
An “Illinois Retailer” is one who makes sales of tangible personal property in
Illinois. The Illinois Retailer is then liable for Retailers' Occupation Tax on gross receipts
from sales and must collect the corresponding Use Tax incurred by the purchasers.
Our regulations were recently amended in response to the Illinois Supreme Court’s
decision in Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130. The regulations specify the
selling activities that trigger Retailers’ Occupation Tax liability in Illinois.
Another type of retailer is the retailer maintaining a place of business in Illinois.
The definition of a “retailer maintaining a place of business in Illinois” is described in 86
Ill. Adm. Code 150.201(i). This type of retailer is required to register with the State as an
Illinois Use Tax collector. See 86 Ill. Adm. Code 150.801. The retailer must collect and

remit Use Tax to the State on behalf of the retailer’s Illinois customers even though the
retailer does not incur any Retailers' Occupation Tax liability.
The United States Supreme Court in Quill Corp. v. North Dakota, 112 S.Ct. 1904
(1992), set forth the current guidelines for determining what nexus requirements must
be met before a person is properly subject to a state's tax laws. The Supreme Court has
set out a 2-prong test for nexus. The first prong is whether the Due Process Clause is
satisfied. Due process will be satisfied if the person or entity purposely avails itself or
himself of the benefits of an economic market in a forum state. Quill at 1910. The
second prong of the Supreme Court's nexus test requires that, if due process
requirements have been satisfied, the person or entity must have physical presence in
the forum state to satisfy the Commerce Clause. A physical presence is not limited to an
office or other physical building. Under Illinois law, it also includes the presence of any
agent or representative of the seller. The representative need not be a sales
representative. Any type of physical presence in the State of Illinois, including the
vendor’s delivery and installation of his product on a repetitive basis, will trigger Use Tax
collection responsibilities. Please see Brown’s Furniture, Inc. v. Wagner, 171 Ill.2d 410,
(1996).
The final type of retailer is the out-of-State retailer that does not have sufficient
nexus with Illinois to be required to submit to Illinois tax laws. A retailer in this situation
does not incur Retailers’ Occupation Tax on sales into Illinois and is not required to
collect Use Tax on behalf of its Illinois customers. Illinois customers who do not pay tax
to a retailer and who are not registered as a retailer under Section 9 of the Use Tax Act
still incur Use Tax liability on the purchase of tangible personal property and must file
use tax returns. If the Illinois customer’s liability does not exceed $600 per year, the
returns and payments can be made annually, on or before April 15. Many retailers that
do not have nexus with the State have chosen to voluntarily register as Use Tax
collectors as a courtesy to their Illinois customers so that those customers are not
required to file returns concerning the transactions with those retailers.
Software as a Service
The Department is currently evaluating the taxability of Software as a Service
(SaaS), cloud computing, computer software Application Service Providers (ASPs) and
similar types of transactions. The Department has found that there is no universal
agreement regarding the nature of these transaction. When the Department makes a
determination regarding the taxability of these transactions, that determination will
operate prospectively only.
Shipping and Handling
The Retailers’ Occupation Tax is imposed upon persons engaged in this State in
the business of selling tangible personal property for use or consumption. Retailers’
Occupation Tax is based upon the “selling price” of the tangible personal property sold.
Section 1 of the Retailers’ Occupation Tax Act defines the term, “selling price,” as the
“consideration for a sale valued in money … and shall be determined without any
deduction on account of the cost of the property sold, the cost of materials used, labor
or service cost or any other expense whatsoever….” See 35 ILCS 120/1. As indicated
by this definition, a retailer’s cost of doing business is not deductible from his or her
gross receipts. This principle is articulated in Section 130.410 of the Department’s rules.

(86 Ill. Adm. Code 130.410) This rule states that in calculating Retailers’ Occupation
Tax liability, “labor or service costs” . . . “overhead costs” . . . “or any other expenses
whatsoever” are not deductible from gross receipts. The rule provides that these costs
of doing business are an element of a retailer’s gross receipts subject to tax even if
separately stated on the bill to the customer.
Handling charges represent a retailer's cost of doing business and consequently
are always includable in gross charges subject to tax. See, 86 Ill. Adm. Code 130.410.
However, such charges are often stated in combination with shipping charges. In this
case, charges designated as "shipping and handling," as well as delivery or
transportation charges in general, are not taxable if it can be shown that they are both
separately contracted for and that such charges are actually reflective of the costs of
shipping. To the extent that shipping and handling charges exceed the costs of
shipping, the charges are subject to tax. As indicated above, charges termed "delivery"
or "transportation" charges follow the same principle.
For example, if a seller delivers the tangible personal property to the buyer, and
the seller and the buyer agree upon the transportation or delivery charges separately
from the selling price of the tangible personal property which is sold, then the cost of the
transportation or delivery service is not a part of the "selling price" of the tangible
personal property personal property which is sold, but instead is a service charge,
separately contracted for, and need not be included in the figure upon which the seller
computes his or her tax liability. See the Department’s regulation at 86 Ill. Adm. Code
130.415(d).
A separate listing on an invoice of such charges, however, is not sufficient to
demonstrate a separate agreement. The best evidence that transportation or delivery
charges were agreed to separately and apart from the selling price is a separate and
distinct contract for transportation or delivery. However, documentation which
demonstrates that the purchaser had the option of taking delivery of the property, at the
seller's location, for the agreed purchase price, or having delivery made by the seller for
the agreed purchase price, plus an ascertained or ascertainable delivery charge, will
suffice. Note, as stated in Section 130.415 of the Department’s regulations, if the
charges for transportation or delivery exceed the cost of delivery or transportation, the
excess amount is subject to tax. For further information, see Nancy Kean v. Wal-Mart
Stores, Inc., 235 Ill. 2d 351, 919 N.E.2d 926 (2009).
I hope this information is helpful. If you require additional information, please
visit our website at www.tax.illinois.gov or contact the Department’s Taxpayer
Information Division at (217) 782-3336.
Very truly yours,

Debra M. Boggess
Associate Counsel
DMB:kd