Was one bundled charge for hosted medical-practice software and claims-billing services taxable in South Carolina?

Plain-English summary

The South Carolina Department of Revenue ruled that one nonitemized monthly charge combining hosted medical-practice software with claims and billing services was nontaxable data processing on the specific facts presented.

The hosted software included electronic health records, scheduling, patient registration, accounts receivable, reporting, and messaging. The vendor's separate billing service reviewed coding, entered charges, posted payments, submitted and followed up on claims, handled patient receivables, and recorded all of that work in the customer's hosted software account.

Hosted software access by itself would have been taxable as an application service provider communication. But when sold together with the billing service for one undivided charge, the transaction's true object was the vendor's manipulation of the medical practice's claims and payment information. The software was the means for the customer to access the processed results.

Why the bundle was data processing

The ruling identified four connected facts:

• the medical practice furnished claims, charge, payment, and patient-account information;
• the vendor manipulated that information through personnel, procedures, and computers;
• the information displayed in the software reflected the vendor's billing and claims work; and
• the hosted software gave the practice electronic access to the processed information.

Those activities matched § 12-36-910(C), which excluded charges for manipulating customer information and electronically transferring or providing access to it.

Why standalone hosted software was different

South Carolina treated customer access to software on an ASP's website like taxable database or online-information access under the communications provisions cited in the ruling.

The medical practice could buy the hosted software without the billing service. If it did, the software-access charge was taxable. The reverse was not true: the billing service required the customer to use the software.

The PLR's nontaxable result therefore depended on the combined, nonitemized monthly charge and the true object of the full transaction. It did not announce a general exemption for hosted healthcare software.

What this means for bundled technology services

Medical billing vendors

Document the information received from the customer, the human and automated processing performed, and how the software displays the resulting claims and payment information.

Medical practices

The contract and invoice structure matters. A separately purchased software subscription may have different treatment from one undivided charge whose primary purpose is performed billing and claims processing.

Common questions

Q: Was the hosted practice software nontaxable by itself?

A: No. The ruling said standalone ASP access to that software was taxable.

Q: Why was the combined charge nontaxable?

A: The billing and claims service manipulated the customer's information, and the software mainly delivered access to those processed results.

Q: Would separately itemizing the two products produce the same result?

A: The ruling did not decide that situation. Its conclusion repeatedly relied on one nonitemized monthly charge.

Q: Can another vendor rely on this PLR?

A: No. It binds agency personnel only for the requesting taxpayer and exact facts presented.

Citations and references

• S.C. Code Ann. § 12-36-910(C) — data-processing exclusion and definition
• S.C. Code Ann. §§ 12-36-910(B)(3) and 12-36-1310(B)(3) — communications charges applied to ASP access
• S.C. Code Ann. § 12-36-60 — tangible personal property and specified taxable services or intangibles
• S.C. Code Ann. § 12-36-100 — sale includes a license to use or consume
• S.C. Regulation 117-329.4 — ASP and online-information examples cited by the ruling
• SC Revenue Rulings #03-5, #06-8, #89-14, and #04-15 — software and communications authorities cited by the ruling

Subject

Application Service Provider Software and Claims and Billing Services

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR12-2.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 #12-2

SUBJECT:

Application Service Provider Software and Claims and Billing Services
(Sales and Use Tax)

REFERENCES: S. C. Code Ann. Section 12-36-910 (2000; Supp. 2011)
S. C. Code Ann. Section 12-36-1310 (2000; Supp. 2011)
S. C. Code Ann. Section 12-36-1110 (Supp. 2011)
S. C. Code Ann. Section 12-36-60 (2000)
S. C. Code Ann. Section 12-36-100 (2000)
SC Regulation 117-329.4 (Supp. 2011)
AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2000)
S. C. Code Ann. Section 1-23-10(4) (2008)
SC Revenue Procedure #09-3

SCOPE:

A Private Letter Ruling is an advisory opinion issued to a specific
taxpayer by the Department to apply principles of law to a specific set
of facts or a particular tax situation. It is 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 another Departmental 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:
Is the nonitemized, monthly charge by Company A to Company B for use of its “X” and “Y”
products, as described in the facts, subject to the sales and use tax?
Conclusions:
The transaction between Company A and Company B, as described in the facts, is the sale of a
nontaxable data processing as defined in Code Section 12-36-910(C) since (1) “Y” is a service
where information furnished by Company B is manipulated by Company A through all or part of
a series of operations involving an interaction of procedures, processes, methods, personnel, and
computers; (2) the billing and claims information on “X” is the result of the “data processing”
performed by Company A as part of the “Y” service; (3) “data processing” includes “the

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electronic transfer of or access to that information;” and (4) “X” is the means through which
Company B has access to the “data processing” performed by Company A.
Therefore, the entire, nonitemized monthly charge by Company A to Company B, as described
in the facts, is for “data processing” - the manipulation of the customer’s information and “the
electronic … access to that information” - and is not subject to the tax based on the facts
presented. The portion of the charge for “X” software via an Application Service Provider, which
would be subject to the tax if purchased alone, is not subject to the tax in the transaction
described in the facts since the “true object” of the transaction where “X” and “Y” are sold
together for one nonitemized monthly charge is “data processing” as defined in Code Section 1236-910(C).
Facts:
Company B is a medical practice that has entered into a contract with Company A. Under this
contract, Company B has use of Company A’s “X” and “Y” products.
“X”:
“X” is a software product that can be sold to a customer as:

1. a one-time charge for software placed on the customer’s in-house server; or,
2. a periodic charge for software that the customer accesses via an Application Service
   Provider 1.
   Company B has purchased the right to use “X” via the Application Service Provider in
   conjunction with Company A’s “Y” service.
   “X” is Company A’s electronic health record (“EHR”), practice management and interoperability
   solution that provides a single-database platform for integration of clinical, financial and
   administrative functions. It makes information available in real time throughout a practice,
   giving a practice’s staff on-demand access to the data. Some of the features of “X”, with respect
   to the areas of EHR and Practice Management, are:
   EHR
   E-Prescribe: Provides the ability to submit a prescription electronically to the patient’s
   preferred pharmacy.
   User Settings: Allows settings of numerous chart preferences.

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Company A refers to this access to the software as via “the cloud.”

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Patients’Lists: Practice workflow-centered list of patients to be seen with role-specific
user filtering.
Clinical Alerts: Allows creation, modification of guidelines that trigger reminders.
Clinician Desktop: Provides key features on the main login page for quick provider
access.
Order Tracking: Allows order tracking straight from the desktop.
Customized Clinical Templates: Allows for any specialty.
Practice Management
Scheduling: Integrates scheduling capabilities, providing a complete, up-to-the-minute
view of schedules for the entire organization.
Patient Registration: Patient registration through an easy-to-use electronic template.
Accounts Receivables: Fully automates and optimizes workflows for all aspects of
accounts receivables, including billing, claims processing, applying payments, etc.
Reporting: Offers standardized and customizable reports.
Messaging: Provides a platform for messaging, enabling staff to track, categorize and
manage electronic communications.
“Y”:
“Y” is a medical billing service offered to Company A customers. Company A logs into their
customers’ “X” site (Company A’s software) and manages their revenue cycle. Company A’s
revenue cycle management service can be divided into four main functions: charge entry,
payment posting, insurance accounts receivables, and patient accounts receivables. The
following briefly outlines each of these functions:
Charge Entry: Company A reviews charges for correct coding and enters charges for
office, inpatient, and outpatient services.
Payment Posting: Company A reviews and posts insurance remittances and reviews and
posts patient payments.
Insurance Accounts Receivables: Company A submits electronic and/or paper claims to
public/private payers (directly or via a clearinghouse), accepts and verifies claims, and
reviews and follows up on outstanding claims.

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Patient Accounts Receivables: Company A reviews and submits patient statements weekly,
produces and submits collection letters to appropriate patients, and fields incoming calls
regarding patient accounts.
Every action that Company A performs as part of its “Y” service is recorded in the Company B’s
“X” account. Company A “adds” to Company B’s “X” account the charges to the visits, the
claims, payments both for insurance and patients, and notes related to both insurance and
patients. Company A also closes claims and/or makes adjustments and write offs.
Company A charges each customer a percentage of their total collections for the “Y” service.
Every fee is unique, but the fee ranges from 2.5% to 7% of collections.
The “Y” service cannot be purchased unless the customer has purchased “X”. However, the
customer who purchases “X” does not have to purchase the “Y” service. Some customers who
purchase the Application Service Provider version of “X” purchase “Y” at the same time for one
bundled monthly fee.
Company B pays a nonitemized, monthly charge for both “X” (via the Application Service
Provider) and “Y”.
Discussion:
Code Section 12-36-910(A) states:
A sales tax, equal to [six] 2 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) 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 the rate of [six] 3 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
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Code Section 12-36-1110 increased the sales and use tax rate by 1% beginning June 1, 2007.
See footnote #2.

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subject to tax under this chapter and does not include stocks, notes, bonds,
mortgages, or other evidences of debt. … (Emphasis added).
Therefore, the term tangible personal property includes the sale or use of intangibles, including
communications, that are subject to South Carolina sales or use taxes under Chapter 36 of Title
12.
Communications are subject to sales and use taxes under Chapter 36 of Title 12 pursuant to Code
Sections 12-36-910(B)(3) and 12-36-1310(B)(3) 4, 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 …. (Emphasis added.)
The Department has long held that Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3)
impose the sales and use tax on the total amount of money derived, exclusive of deductions, from
a commercial venture and accruing or proceeding from charges for the manner, method or
instruments for sending a signal of the voice or of messages. See SC Revenue Ruling #89-14, SC
Revenue Ruling #04-15 and SC Revenue Ruling #06-8.
Furthermore, the definition of tangible personal property, as defined in Code Section 12-36-60,
includes services and intangibles “the sale or use of which is subject to tax under [Chapter 36],”
such as “communications.” The Second College Edition of the American Heritage Dictionary
defines “communication,” in part, as “[t]he exchange of thoughts, messages or information, as by
speech, signals or writing.” “Communications” is defined, in part, as, “a means of
communicating esp.: a system of sending and receiving messages, such as mail, telephone and
television.” The Department has long used the definition found in the Second College Edition of
the American Heritage Dictionary for the term “communications.”
Based on the above discussion, it is the Department’s position that charges for the ways or means
of communication include charges for access to, or use of, a communication system (the manner,
method or instruments for sending or receiving a signal of the voice or of messages), whether
this charge is based on a fee per a specific time period or per transmission. This is further
supported by the definition of the terms “sale” and “purchase,” which are defined in Code
Section 12-36-100 to include “a license to use or consume.” See SC Revenue Ruling #89-14, SC
Revenue Ruling #04-15 and SC Revenue Ruling #06-8.
The Department of Revenue has taxed communication services such as telephone services,
paging services, cable television services, satellite programming services (includes, but is not
limited to, emergency communication services and television, radio, music or other
programming services), fax transmission services, e-mail services, and database access
transmission services (on-line information services), such as legal research services, credit
reporting/research services, and charges to access an individual website.
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See SC Revenue Ruling #06-8 for other statutes concerning communications subject to the sales and use tax. These
other communications statutes are not relevant to this discussion.

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Furthermore, SC Revenue Ruling #03-5 describes software received via an Application Service
Provider as follows:
… some Internet websites also allow a customer use of software on that website.
Companies that provide customers access or use of software in this manner are
generally referred to as Application Service Providers (ASP).
In this revenue ruling, the Department, in answering whether a charge by Application Service
Provider (ASP) that allows a customer to access the ASP website and use the software on that
website is subject to the sales and use tax, held that such charges by an Application Service
Provider are similar to charges by database access services and are therefore subject to the sales
and use tax under the provisions of Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3).
In addition, SC Regulation 117-329.4 states in part:
The following are examples of communication services that are subject to the
sales and use tax (unless otherwise listed as non-taxable in 117-329.5 or otherwise
exempt or excluded under the law):

(k) Database Access Transmission Services or On-Line Information Services,
including, but not limited to, legal research services, credit reporting/research
services, and charges to access an individual website (including Application
Service Providers) Emphasis added.

Based on the above, when sold separately, charges for use of the “X” software via an Application
Service Provider are subject to the sales and use tax under the provisions of Code Sections
12-36-910(B)(3) and 12-36-1310(B)(3).
Now, we must address the taxability of charges for use of “X” software via an Application
Service Provider when it is sold with “Y” as described in the facts.
Code Section 12-36-910(C) states:
Notwithstanding other provisions in this article or Article 13, Chapter 36, of this
title, the sales or use tax imposed by those articles does not apply to the gross
proceeds accruing or proceeding from charges for or use of data processing. As
used in this subsection, “data processing” means 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.
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Based on the above, “Y” is a nontaxable data processing service.
From time to time it is necessary to determine if the transaction is a sale or rental of tangible
personal property or the furnishing of a service. The so-called “true object” test is generally used
to delineate sales of services from sales of tangible personal property. In this case, the “true
object” test can assist in determining what is the “true object” of the transaction between
Company A and Company B when “X” and “Y” are sold together for one nonitemized monthly
charge as described in the facts.
The “true object” test is best described in 9 Vanderbilt Law Review 231 (1956), wherein it is
stated:
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 company - this fact is evidence
tending to show that the service is the real purpose of the contract. When the
purpose of a 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.
The Vanderbilt Law Review article, in quoting Snite v Department of Revenue, 398 Ill. 41, 74
N.E.2d. 877 (1947), also establishes the following general rule:
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 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.

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While the above quotes do not establish rigid rules, they do provide general guidance in
determining the purpose of a transaction, and are particularly helpful in addressing the issues at
hand.
Based on the above, the transaction between Company A and Company B, as described in the
facts, is the sale of a nontaxable data processing as defined in Code Section 12-36-910(C) since
(1) “Y” is a service where information furnished by Company B is manipulated by Company A
through all or part of a series of operations involving an interaction of procedures, processes,
methods, personnel, and computers; (2) the billing and claims information on “X” is the result of
the “data processing” performed by Company A as part of the “Y” service; (3) “data processing”
includes “the electronic transfer of or access to that information;” and (4) “X” is the means
through which Company B has access to the “data processing” performed by Company A.
Therefore, the entire, nonitemized monthly charge by Company A to Company B, as described
in the facts, is for “data processing” - the manipulation of the customer’s information and “the
electronic … access to that information” - and is not subject to the tax based on the facts
presented. The portion of the charge for “X” software via an Application Service Provider, which
would be subject to the tax if purchased alone, is not subject to the tax in the transaction
described in the facts since the “true object” of the transaction where “X” and “Y” are sold
together for one nonitemized monthly charge is “data processing” as defined in Code Section 1236-910(C).
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/James F. Etter
James F. Etter, Director
June 11
, 2012
Columbia, South Carolina

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