Were ABC's healthcare claims, patient-statement, network, and compliance-software charges taxable in SC PLR 04-1?

Plain-English summary

The South Carolina Department of Revenue ruled that ABC's customer-specific healthcare information services qualified for the statutory data-processing exclusion rather than taxable sales of reports or communication services.

The excluded services included electronic patient statements, claims processing, coded-data archiving and retrieval, downloaded claims, and another claims workflow. The key facts were that the customer supplied the information, ABC manipulated it on a per-customer basis, and the result went back to that customer or to the customer's patient at the customer's direction and without a separate patient charge.

ABC's network connection, user/usage, and healthcare compliance software charges were also excluded when they provided access to information processed for that same customer. If an unrelated person paid to access information processed for someone else, the charge could instead be a taxable communication service.

The ruling also treated ABC as the taxable consumer of paper, tapes, diskettes, and other physical items it used to provide the excluded service.

What this means for you

Healthcare data and claims vendors

Customer-specific processing was central. The ruling did not protect a database product that sold access to information to unrelated hospitals, doctors, insurers, or other users.

Healthcare providers

The form of delivery—electronic transmission, tape, diskette, hard copy, or network access—did not by itself control. The source, processing, recipient, and access rights mattered.

Tax professionals

Separate the excluded manipulation and return of customer-furnished information from taxable access to a communication system or third-party database.

Common questions

Q: Were ABC's electronic patient statements taxable?
A: No, on the represented facts. They were customer-specific data processing even when the statement went to the customer's patient.

Q: Was network access automatically exempt?
A: No. It was excluded only when it provided the customer access to information processed for that customer or its patient.

Q: What if unrelated users could pay to access the information?
A: The ruling said that could become a taxable communication service rather than excluded data processing.

Q: Were ABC's paper and storage media purchases exempt?
A: No. ABC was the user or consumer of the physical items used to provide its service.

Citations and references

• S.C. Code Ann. §§ 12-36-910(A) and 12-36-1310(A) — sales and use tax
• S.C. Code Ann. §§ 12-36-910(B)(3) and 12-36-1310(B)(3) — taxable communications
• S.C. Code Ann. § 12-36-910(C) — data-processing exclusion
• S.C. Code Ann. § 12-36-60 — tangible personal property and communications
• S.C. Code Ann. § 12-36-110 — retail sales

Source

• Landing page: SC Advisory Opinion Search
• Original PDF: PLR04-1.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214
Website Address: http://www.sctax.org

SC PRIVATE LETTER RULING #04-1

SUBJECT:

Data Processing
(Sales and Use Tax)

REFERENCES: S. C. Code Ann. Section 12-36-910 (2000; Supp. 2002)
S. C. Code Ann. Section 12-36-1310 (Supp. 2000; Supp 2002)
S. C. Code Ann. Section 12-36-60 (2000)
S. C. Code Ann. Section 12-36-110 (2000)
AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (Supp. 2002)
SC Revenue Procedure #03-1

SCOPE:

A Private Letter Ruling is a written statement issued to a specific taxpayer by
the Department to apply principles of law to a specific set of facts or a
particular tax situation. A Private Letter Ruling is an advisory opinion; it does
not have the force and effect of law and is not binding on the person who
requested it or the public. It is, however, the Department’s opinion limited to
the specific facts set forth, and is binding on agency personnel only with
respect to the person to whom it was issued and only until superseded or
modified by a change in statute, regulation, court decision, or advisory
opinion, providing the representations made in the request reflect an accurate
statement of the material facts and the transaction was carried out as proposed.

Question:
Are the charges by ABC as described in the Facts subject to the sales and use tax?
Conclusion:
It is the Department’s opinion that the charges by ABC for Electronic Patient Statements,
Claims, Coded Data, Download Claims and the X Claims, as described in the Facts, are charges
for “data processing” as defined in Code Section 12-36-910(C) and not subject to the tax since
the information is (1) furnished and processed on a per customer basis; (2) the information (i.e.
statements, reports) is sent (electronically, by diskette or tape, by hard copy statement or report,
etc.), or accessible via ABC’s network, to the customer who originally submitted this
information or the information is sent to the patient of the customer who originally submitted this
information and the patient is receiving at the direction of the customer, at no additional charge
to the patient, a statement or invoice with respect to the services provided to the patient by the
customer of ABC: and, (3) the information is not provided for a charge to an unrelated party
(e.g., the information is not made a part of an online database where such information is
available for a charge to other hospitals, doctors’ offices, or insurance companies).
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Furthermore, the charges for Network Connection Services, Y Users/Usage, and the Healthcare
Compliance Software, as described in the facts, are charges for “data processing” as defined in
Code Section 12-36-910(C) and not subject to the tax provided such constitute charges for use of
or access to the information processed with respect to Electronic Patient Statements, Claims,
Coded Data, Download Claims and the X Claims, as described in the Facts. However, such
charges are subject to the tax under Code Section 12-36-910(B)(3) when the customer using or
accessing the information is not the customer for whom the information was processed (see
definition of “data processing”) or is not the patient of the customer who originally submitted
this information.
It is important to note that if the transaction or the taxpayer’s method of operation is not the same
as set forth in this advisory opinion, or if the transaction or the taxpayer’s method of operation
changes (e.g. information is not furnished and processed on a per customer basis; the information
is provided for a charge to an unrelated party, etc.), then the charges described in this advisory
opinion may be subject to the sales and use tax as sales of tangible personal property at retail (i.e.
statements, reports) or charges for the ways or means of communication (i.e. access to the
taxpayer’s network). Any determination as to the taxability of such charges could only be made
after a complete review of such new or revised facts.
Note: With respect to transaction excluded from the tax under Code Section 12-36-910(C), sales
to, or purchases by, ABC of diskettes, tapes, paper, and other items of tangible personal property
used to send the information to the customer are subject to the tax since ABC is the user or
consumer of these items in providing its data processing service.
Facts:
ABC provides the following services for its customers:

Electronic Patient Statements
ABC’s customers transmit electronic statements through the ABC network to the ABC host
computer. Once received, the data processing area expands, balances, summarizes, etc. the
data. When completed, this data is sent electronically to XYZ in Iowa. XYZ produces
hardcopy statements that are then folded, stuffed into envelopes, postage applied and
subsequently mailed to the appropriate party.
ABC charges its customers a fee for each statement, which includes the cost of goods and
services by XYZ and the postage cost of the mailing.
The statements are furnished and processed on a per customer basis, but the information is
not sent to the customer who originally submitted the information. The information generally
travels from the provider to XYZ via ABC to the patient.

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All Claims
ABC’s customers transmit individual documents, claims, explanations of benefits, detail
bills, attachments, etc., electronically through the ABC network to the ABC host computer.
These documents are expanded upon receipt, reformatted into a standard internal format,
edited, and then stored in holding files if correct. If errors are encountered, these are returned
and the customer is required to correct the document and resubmit. At periodic intervals, the
holding files are processed. These documents are then passed into the processing system
where bar coding for addresses is generated and dissimilar documents for the same service
are joined. These documents are then printed and the resulting hard-copy forms are burst,
decollated, stuffed into envelopes and mailed. ABC retains a back-up image of these
documents for at least seven years.
ABC charges its customers a fee per transaction, based on the information content and the
number of pages. This fee covers all of the ancillary costs of the document handling, such as
stock, additional staff time and postage. These costs cannot be separated since, whenever
possible, ABC mixes documents from various submitters into a single mailed entity and
therefore cannot determine the precise allocations for all these costs.
All Claims are furnished and processed on a per customer basis, but the information is not
sent to the customer who originally submitted the information. The information generally
travels from the provider to the clearinghouse directly and/or via ABC, then to the payer or
patient for payment.
Coded Data
ABC’s customers submit large volumes of reports or other historically significant electronic
information to ABC’s host computer either through the ABC network, or by sending tapes to
the ABC’s data center. These data files are then reformatted and archived in optical storage
media on the ABC’s host computer. ABC creates balance reports that are then returned to the
provider. Subsequently, ABC provides online transaction access, wherein the customer may
request access to and view this information. The customer’s access consists of electronic
transactions that allow them to drill down to precisely the information they wish to view
and/or print.
ABC charges its customers for the processing of the data into the archives, the storage costs,
and access fees to retrieve and review or print the information.
Coded Data is furnished and processed on a per customer basis and the information is only
sent or accessible via ABC’s network, to the customer who originally submitted the
information.

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Download Claims
ABC’s customers download print-image files of their Z1 and Z2 claims to the ABC
Download system, which resides at the customer’s site. The Download software translates,
edits and batches the customer’s claims for electronic transmission to the ABC network. The
customer specific input data is translated and reformatted into ABC’s common processing
format. Data can be manipulated according to written specifications provided by the
customer. After the data has been reformatted, it is edited and placed in claims batches for
further processing. Data entry screens allow the customer to change and correct data errors
reported during the edit process. Detail and summary reports can be printed to help the
customer balance their batches back to their host system reports. Claims can be archived for
later processing, including secondary billing. Once claims have been transmitted through
ABC’s network, they are distributed electronically to the appropriate payers. Payers not
accepting electronic formats are mailed hard-copy claim forms.
In addition to claims processing, the Download systems have eligibility inquiry, claims
status inquiry, check inquiry, and other inquiry functions. Additional per transaction fees are
charged for inquiry only transactions.
Download Claims are furnished and processed on a per customer basis, but the information
is not sent to the customer who originally submitted the information. The information
generally travels from the provider to the clearinghouse directly and/or via ABC, then to the
payor or patient for payment.
X Claims
ABC’s customers submit individual claims electronically through the ABC network. These
claims are expanded upon receipt, reformatted into a standard internal format, edited and
balanced for content and then stored in holding files if correct. If errors are encountered,
these are returned and the customer is required to correct the claim and resubmit. At periodic
intervals, the holding files are processed. This data is then passed into a distribution system
where the claims are separated into individually addressed files that are sent on to other
parties where the claims are processed for payment. ABC retains a backup image of this
claim-related information for at least seven years. ABC receives balancing information from
the other parties, as well as message files for return to the customers. These are reformatted,
stored and made available for retrieval through ABC’s network upon customer request.
ABC charges its customers a per claim fee for the submission of the claims where it is
charged a fee by the third parties to whom it sends this information.
X Claims are furnished and processed on a per customer basis, but the information is not
sent to the customer who originally submitted the information. The information generally
travels from the provider to the clearinghouse directly and/or via ABC, then to the payer or
patient for payment.

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Furthermore, ABC charges it customers the following fees:
Network Connection Services
ABC charges South Carolina providers for the ability to submit claims electronically to 123
of South Carolina.
Y Users/ Usage
Y customers are directly connected to ABC’s host computer via a dedicated connection.
Information requests are entered directly into screens programmed specifically for this
activity. These request transactions are interpreted, archived for reporting and summary
activity purposes, and then the interpreted, expanded requests are routed electronically to
information providers within, or accessible to, the ABC network. The responses from these
providers are received, reformatted, archived for reporting and summary activity purposes,
and the reformatted answers are then returned to the requesting node.
ABC charges its customers for each request, successful or otherwise, and for each response
returned to a request.
Healthcare Compliance Software
ABC Shared Hub customers have access to Healthcare Compliance Software, which is built
into ABC’s proprietary software. The purpose of the Healthcare Compliance Software is to
comply with the Medicare Mandate, which requires sites to check claims prior to billing, in
order to validate that the conditions being billed are valid for the services being rendered.
The claims are validated against the rules database which houses the Local Medical Review
Policies (“LMRP”). All Medicare claims are routed through the checker and if passed are
transmitted.
ABC charges its customers for each claim validated against the Healthcare Compliance
Software.
Discussion:
Code Section 12-36-910(A) reads:
A sales tax, equal to five percent of the gross proceeds of sales, is imposed upon every
person engaged or continuing within this State in the business of selling tangible personal
property at retail. (Emphasis added.)
Code Section 12-36-1310(A) imposes a use tax and reads:
A use tax is imposed on the storage, use, or other consumption in this State of tangible
personal property purchased at retail for storage, use, or other consumption in this State, at

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the rate of five percent of the sales price of the property, regardless of whether the retailer
is or is not engaged in business in this State. (Emphasis added.)
Code Section 12-36-60 defines the term "tangible personal property" to mean:
personal property which may be seen, weighed, measured, felt, touched, or which is in any
other manner perceptible to the senses. It also includes services and intangibles, including
communications, laundry and related services, furnishing of accommodations and sales of
electricity, the sale or use of which is subject to tax under this chapter and does not include
stocks, notes, bonds, mortgages, or other evidences of debt. (Emphasis added.)
Therefore, for the 5% sales or use taxes to apply, there must be a retail sale or retail purchase of
tangible personal property.
Code Section 12-36-110 defines the terms "sale at retail" and "retail sale,” in part, as follows:
Sale at retail and retail sale mean all sales of tangible personal property except those defined
as wholesale sales. The quantity or sales price of goods sold is immaterial in determining if
a sale is at retail.
The sale or use of communications is also subject to tax under Chapter 36 pursuant to Code
Sections 12-36-910(B)(3) and 12-36-1310(B)(3), which impose the tax on the:
gross proceeds accruing or proceeding from the charges for the ways or means for the
transmission of the voice or messages, including the charges for use of equipment furnished
by the seller or supplier of the ways or means for the transmission of the voice or messages;
...
In reviewing various communication issues in the past, the department has concluded that
charges for the ways or means of communication must be charges for access to, or use of, a
communication system, whether this charge is based on a fee per a specific time period or per
transmission.
Based on the above, the charges by ABC would be subject to the sales and use tax as sales of
tangible personal property at retail (i.e. statements, reports) or charges for the ways or means of
communication (i.e. access to the ABC network).
However, since July 1, 1995, Code Section 12-36-910(C) has excluded from taxation “the gross
proceeds accruing or proceeding from the charges for or use of data processing.” This section
defines “data processing” to mean:
the manipulation of information furnished by a customer through all or part of a series of
operations involving an interaction of procedures, processes, methods, personnel, and
computers. It also means the electronic transfer of or access to that information. Examples
of the processing include, without limitation, summarizing, computing, extracting, storing,
retrieving, sorting, sequencing, and the use of computers. (Emphasis added.)
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Based on the above, it is the Department’s opinion that the charges by ABC for Electronic
Patient Statements, Claims, Coded Data, Download Claims and the X Claims, as described in
the facts, are charges for “data processing” as defined in Code Section 12-36-910(C) and not
subject to the tax since the information is (1) furnished and processed on a per customer basis;
(2) the information (i.e. statements, reports,) is sent (electronically, by diskette or tape, by hard
copy statement or report, etc.), or accessible via ABC’s network, to the customer who originally
submitted this information or the information is sent to the patient of the customer who
originally submitted this information and the patient is receiving at the direction of the customer,
at no additional charge to the patient, a statement or invoice with respect to the services
provided to the patient by the customer of ABC: and, (3) the information is not provided for a
charge to an unrelated party (e.g., the information is not made a part of an online database where
such information is available for a charge to other hospitals, doctors’ offices, and insurance
companies).
Furthermore, it is the Department’s opinion that the charges for Network Connection Services, Y
Users/Usage, and the Healthcare Compliance Software, as described in the facts, are charges for
“data processing” as defined in Code Section 12-36-910(C) and not subject to the tax provided
such constitute charges for use of or access to the information processed with respect to
Electronic Patient Statements, Claims, Coded Data, Download Claims and the X Claims, as
described in the Facts. However, such charges are subject to the tax under Code Section 12-36910(B)(3) when the customer using or accessing the information is not the customer for whom
the information was processed (see definition of “data processing”) or is not the patient of the
customer who originally submitted this information.
It is important to note that if the transaction or the taxpayer’s method of operation is not the same
as set forth in this advisory opinion, or if the transaction or the taxpayer’s method of operation
changes (e.g. information is not furnished and processed on a per customer basis; the information
is provided for a charge to an unrelated party, etc.), then the charges described in this advisory
opinion may be subject to the sales and use tax as sales of tangible personal property at retail (i.e.
statements, reports) or charges for the ways or means of communication (i.e. access to the
taxpayer’s network). Any determination as to the taxability of such charges could only be made
after a complete review of such new or revised facts.

SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank
Burnet R. Maybank, Director

January 12
, 2004
Columbia, South Carolina

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