How does Texas tax the different service lines of a national medical-records and health-information-management company: record retrieval and copies, clinical data services sold to insurers vs. life sciences companies, medical coding, EMR scanning/storage, and data abstraction?

Plain-English summary

A national health-information company runs three separate service lines for hospitals, insurers, and other healthcare-industry clients, and asked the Comptroller how each is taxed.

⚠️ Note on superseded guidance: STAR's own records flag this ruling as partially superseded as of May 28, 2021. When issued in 2020, the ruling said medical coding/billing services performed before an insurance claim is submitted were untaxed under then-current policy, but warned that policy was scheduled to flip to taxable on October 1, 2021. That flip never happened as described — instead, the 2021 Texas Legislature passed H.B. 1445, which amended the insurance-services statute to permanently exclude pre-claim medical/dental billing and coding from the taxable insurance-services category, and the Comptroller applied that exclusion right away. So the bottom line on that one narrow point is the opposite of what the ruling predicted: pre-claim medical/dental coding and billing remains untaxed by statute, not because it flipped to taxable. Everything else in this ruling appears unaffected.

Release of Information (records requests): When a patient (or someone with the patient's authorization) pays for a copy of their own medical records — whether electronic or paper — that charge is not taxable, even when a hospital outsources its records department to this company. But when the hospital itself pays the company for scanning, data storage, or electronic record retrieval as part of running its records department, those charges are taxable data processing (80% of the charge, after the standard 20% data-processing exemption). Photocopies billed to the hospital (rather than released under patient authority) are a taxable sale of tangible personal property. Storage of physical paper records, either way, is not taxable.

Clinical Data Acquisition and Insights (bulk records retrieval): When this service is sold to insurance companies for actuarial analysis or claims work, it's a taxable insurance service. When the same kind of record-gathering is sold to non-insurance clients like life sciences companies, it's a taxable information service instead (also 80% taxable after the 20% exemption). Costs the company passes through to its customer follow the taxability of whatever they're billed alongside — taxable if bundled into a taxable charge, nontaxable if bundled into a nontaxable one.

Healthcare Information Management (coding, scanning/storage, data abstraction): Coding audits, denial-management, and other post-claim coding review work are taxable insurance services (claims adjustment/processing). The company's SaaS tools (for coding reference data and EMR audit management) are taxable data processing, and so is any software training or professional-services configuration work billed alongside them. EMR scanning, format conversion, and electronic storage are taxable data processing (physical-only storage is not). Data abstraction — building a searchable database of extracted, redacted clinical data — is also taxable data processing.

Additional fees: Shipping, postage, and labor charges follow the taxability of what they're billed with (taxable alongside a taxable item, nontaxable alongside a nontaxable one). Notary, certification, affidavit, and deposition fees are never taxable — they're simply not on Texas's enumerated list of taxable services. Genuine late-payment penalties (not disguised discount forfeitures), separately stated, are also not taxable.

What this means for you

Health-information management and records-retrieval companies

The same underlying activity (retrieving, copying, or storing medical records) can be taxed differently depending on who's paying and why: a patient-authorized release is untaxed, but a hospital paying you to run its records department for it is taxable data processing. Structure your billing and contracts to reflect which category each charge falls into.

Companies selling clinical data to both insurers and non-insurance clients

Expect a different tax label (insurance service vs. information service) depending on your customer, even for functionally similar records-gathering work — and expect actuarial/claims-adjustment-flavored analysis (like HCC/RAF risk coding for insurers) to specifically trigger the insurance-service category rather than the information-service one.

Accountants and tax professionals

This ruling is a rare comprehensive multi-service-line breakdown, but treat the medical/dental pre-claim coding-and-billing conclusion with care — it's the one part legislatively overtaken since 2020. For current guidance on that narrow point, this corpus's separately enriched 2024 ruling on medical pre-authorization/pre-certification services (tx/202408013l) reflects the post-H.B. 1445 state of the law directly.

Common questions

Q: If my hospital outsources its medical-records department to a vendor, do patients pay tax on their own record requests?
A: No — charges to a patient or their authorized representative for their own records are not taxable, regardless of who technically operates the records department or whether the copy is electronic or paper.

Q: Is medical coding done before an insurance claim is filed taxable today?
A: No. Despite this ruling's original 2020 prediction that it would become taxable in October 2021, the Legislature instead passed a law excluding pre-claim medical/dental billing and coding from Texas's taxable insurance-services category, and the Comptroller has applied that exclusion since 2021.

Q: Does this ruling apply to my records-management or health-data company?
A: Not automatically, and treat the coding/billing timing analysis with extra caution given the 2021 statutory change described above. This is a private letter ruling binding only on the Comptroller as to this taxpayer's specific facts; confirm current law with a Texas tax professional, especially for anything touching medical/dental billing services.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051, § 151.010 (sales tax imposition; taxable item)
• Tex. Tax Code § 151.0101(a)(9), (10), (12) (insurance; information; data processing as taxable services)
• Tex. Tax Code § 151.0035 (Data Processing Service); § 151.0038 (Information Service)
• Tex. Tax Code § 151.0039 (Insurance Services), incl. (b)(5) medical/dental billing exclusion added by H.B. 1445 (2021, 87th Legislature)
• Tex. Tax Code § 151.007(a), (a)(2) (Sales Price or Receipts); § 151.351 (20% information/data-processing exemption)
• 34 Tex. Admin. Code § 3.330(a)(1) (Data Processing Services); § 3.342(a)(6) (Information Services); § 3.355(a)(7), (a)(8), (b) (Insurance Services); § 3.303 (Transportation and Delivery Charges)
• STAR Accession Nos. 9605L1409B13 (1996); 202003007L (2020); 200602595L (2006); 201803004L (2018); 200805095L (2008); 9309L1256B03 (1993); 200006413L (2000); 9406L1306A06 (1994); 8712L0846A05 (1987)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202008008L

Original ruling text

STAR Superseded Information

Supersede type: partial

Document superseded on: 05/28/2021

Issue(s) that caused the document to be superseded: Medical or dental billing services and reference to STAR 202003007L

Reason(s): H.B. 1445, 87th Reg. Legislature (2021) amended Texas Tax Code 151.0039 by adding subsection (b)(5) to exclude medical or dental billing services from the definition of taxable insurance services when performed prior to the submission of a medical or dental insurance claim. Although the bill is not effective until 01/01/2022, the Comptroller will immediately exclude these services from the definition of taxable insurance services. See STAR 202106003L.

August 14, 2020

RE: Private Letter Ruling No. 20190219095143

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters [ENDNOTE 1] We are responding to your request dated Feb. 15, 2019, supplemental correspondence received on Sept. 5, 2019, Feb. 12, 2020, and telephone call on Jan. 17, 2020. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of your client’s release of information services, clinical data acquisition and insights services, and healthcare information management services provided to medical service providers and others.

Facts Presented

** (Taxpayer) is a national provider of information management services to healthcare providers, patients, insurers, and other entities involved in the healthcare industry. Taxpayer operates three service lines that provide independent service offerings for their respective clients.

Release of Information Services (ROI): The ROI group operates the medical records departments of medical services providers (e.g., hospitals, doctor’s offices) across the nation. These service providers do not typically pay Taxpayer for operating these departments. Instead, Taxpayer utilizes this position to provide the service of medical records retrieval, for a fee, to others who request a copy of these records.

A records requestor (i.e., a patient of the medical service provider, the patient’s authorized representative, insurance company or other medical provider) pays Taxpayer a fee for the service of retrieving medical records, with delivery in electronic format or paper format.

Additionally, the ROI group offers medical service providers data storage, photocopying, scanning, record retrieval, and provision of information. The provision of information is the importation of data from a provider to Taxpayer’s system and exportation of data out of Taxpayer’s system to a provider. Taxpayer also stores physical medical records at their storage facility located out of state. Taxpayer bills separate itemized charges for these services.

Clinical Data Acquisition and Insights: This group provides records retrieval services primarily to health insurers and other entities involved in the health care industry. The requestor electronically submits a list of requested records to be retrieved wherever they are located.

Records are retrieved by the ROI group when the records are located in a database it operates. When the Taxpayer does not operate the medical records department of the provider, Taxpayer retrieves the records by remotely logging into the provider’s Electronic Medical Records (EMR). The medical records are received from the provider, either by fax, mail or a dropped file onto the Taxpayer’s online portal. If the Taxpayer is required to pay for the records, Taxpayer passes this cost on to its customer with no mark up.

After obtaining the records, Taxpayer may also perform additional processing on the records such as specialized coding and data extraction before delivering the records to the requestor. These records are delivered to the requestor as electronic records.

Taxpayer’s specialized coding is classified as Hierarchical Condition Category (HCC) coding. HCC coding is a risk-adjustment model designed to estimate future health care costs for patients. HCC coding relies on International Classification of Diseases (ICD-10) coding to assign risk scores to patients. Each HCC is mapped to an ICD-10 code. Along with demographic factors (such as age and gender), insurance companies use HCC coding to assign patients a risk adjustment factor (RAF) score. Using algorithms, insurance companies can use a patient’s RAF score to predict costs.

HCC coding helps communicate patient complexity and paint a picture of the whole patient. In addition to helping predict health care resource utilization, RAF scores are used to risk adjust quality and cost metrics. Taxpayer’s customers use this HCC coding information for their Medicare risk adjustment compliance audits.

Healthcare Information Management (HIM): This group provides solutions for healthcare providers and researchers for the collection, management, storage, and use of healthcare data. HIM facilitates the extraction of actionable information from that data. There are three primary service options in this area; medical records coding services, scanning and storage services, and data abstraction services.

Each of the different services are sold independently and each service has separate identifiable product SKUs. Taxpayer will never bill for these services with a lump sum price on their billing invoices to customers. Typically, a customer’s business needs would not require these types of services at the same time. Therefore, a customer would never purchase all three services.

Coding services: Medical records coding services involve translating medical information into industry-standard codes for use in EMR, risk adjustment services, insurance claim processing, and other uses. HIM’s coding products and services include; providing coding outsourcing services, coding audits, and a Software-as-a-Service (SaaS) version of HealthSource Gym that allows referential and industry guidance data to be accessed from any device with an internet connection and web browser.

HIM also provides audit management services and offers a SaaS tool which assists health care providers and insurers in accessing and managing their records and EMR audits conducted by various agencies.

Taxpayer provides software training and online support for software that resides on Taxpayer’s servers and implementation and integration services and professional services for the configuration of electronically delivered software.

Scanning and Storage services: This service involves converting and updating an EMR to a new EMR. These services may include; combining several records and/or formatting records, scanning services to convert paper medical records to EMRs and storage of both physical and electronic records.

Data Abstraction services: This service includes data mining of clinical data to extract and summarize relevant data from a population of medical records. Taxpayer reviews voluminous records to identify and extract the relevant information.

The data gathered assist Taxpayer’s clients with tasks such as reporting for government disease registries, extracting specific data from old medical records during electronic conversion, and extracting other information such as drug success rates, drug interactions, and health outcome data from medical records. The output of these abstraction services results in a database of clinical data or modern electronic medical records with summaries of specific data useful to the requesting client. For many data abstraction projects, Taxpayer’s team develops the database tool for data collection and performs redaction of personal health information from the medical record.

Additional Charges: In providing its major service offerings, Taxpayer charges various additional fees. These fees include: shipping, postage, shipping and handling, notary/certification/affidavit/deposition fees, labor charges for special projects, and late fees.

Questions, Rulings, and Analysis

Our restatement of your questions is shown below, followed by our responses and analysis.

Question One: Are Taxpayer’s Release of Information Services subject to Texas sales and use taxes?

Ruling One: Charges for records retrieval and the provision of medical records that are released to a patient or persons that have appropriate evidence of authority from the patient to receive the medical records prior to the records being released are not taxable. Photocopies of medical records provided in this manner are not taxable.

Charges to medical service providers for scanning, data storage, and electronic record retrieval are taxable data processing services. Eighty percent of the charge for data processing services is taxable.

Charges to medical service providers for photocopies of medical records are taxable sales of tangible personal property unless released under the authority of the patient as stated above.

A charge for storage of physical records is not subject to Texas sales or use taxes.

Analysis for Ruling One: Texas imposes a tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). The term “taxable item” includes tangible personal property and taxable services. Section 151.010 (Taxable Item). Section 151.0101 (“Taxable Services”) provides the list of taxable services in Texas.

A charge for medical records billed to a patient, or an authorized agent of the patient, by a medical service provider is not taxable when the medical records are provided as part of the medical service provider's professional service. This is true even if the medical service provider contracts with a third-party to provide the copies of the medical records to the patient. See STAR Accession No. 9605L1409B13 (May 13, 1996). Medical records provided in this manner are not taxable regardless of whether they are electronic or physical photocopies.

Data processing services are included in the list of taxable services. See Section 151.0101(a)(12).

Data processing specifically includes computerized data and information storage or manipulation. See Section 151.0035 (“Data Processing Service”). Data processing services are defined in Rule 3.330 (Data Processing Services) as the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information.

Converting paper medical records into electronic medical records requires scanning (i.e., data entry) the information and electronically storing it for later retrieval. These activities meet the definition of data processing as defined in Section 151.0035 and Rule 3.330. Taxpayer’s charges to medical providers identified as “Data Processing,” “Data Storage,” “Photocopy Fees – Electronic,” “Record Retrieval,” “Labor - Department Outsource,” and “Provision of Information” are taxable data processing services.

Section 151.351 (Information Services and Data Processing Services) exempts 20 percent of the sales price of data processing services. Taxpayer is responsible for collecting tax on 80 percent of the charge for its data processing services.

Paper copies of medical records meet the definition of tangible personal property. Photocopy fees to medical service providers for paper copies of medical records are taxable, unless released under the authority of the patient as discussed above.

Charges for storage of paper copies of medical records would not be a Texas sale subject to Texas sales and use tax.

Question Two: Are Taxpayer’s Clinical Data Acquisition and Insights services subject to Texas sales and use taxes?

Ruling Two: Charges for Taxpayer’s Clinical Data Acquisition and Insights service to insurance companies are taxable insurance services.

Charges for Taxpayer’s Clinical Data Acquisition services to requestors, such as life sciences companies and other organizations, who are not using the records for insurance purposes are taxable as information services.

Taxpayer’s pass-through charges are taxable if passed on to a customer as part of the sales price of a taxable item. Pass-through charges passed on to a customer as part of a nontaxable item are not taxable.

Analysis for Ruling Two: Insurance services and information services are included in the list of taxable services in Texas. See Sections 151.0101(a)(9) and (10).

Under Section 151.0039 (“Insurance Services”), taxable insurance services include insurance loss or damage appraisal, insurance inspection, insurance investigation, insurance actuarial analysis or research, insurance claims adjustment or claims processing, and insurance loss prevention service.

Rule 3.355(a)(7) defines “insurance or annuity actuarial analysis or research” as any activity performed in connection with the calculation of rates for a policy of insurance or annuity rates, reserves, refunds, dividends, insurance benefits, or other similar activities. Rule 3.355(a)(8) defines “insurance claims adjustment or claims processing” as any activities to supervise, handle, investigate, pay, settle, or adjust claims or losses. Insurance services are taxable when performed on behalf of an insurance carrier, its insured, its policyholders, or others pertaining to a policy or policies of insurance for monetary fees, dues, or other consideration.

Section 151.0038 (“Information Service”) defines an “information service” to mean “electronic data retrieval or research.” Rule 3.342(a)(6) defines “taxable information services” as information that is gathered, maintained, or compiled and made available by the provider of the information service to the public or to a specific segment of industry for a consideration.

When performed for insurance companies, the Clinical Data Acquisition and Insights service involves providing large volumes of medical records meeting requested parameters to the insurance companies for their actuarial analysis. The Clinical Data Acquisition and Insights service includes obtaining the medical records necessary to provide a structured clinical data set used to make informed decisions. Taxpayer may also perform HCC coding to these medical records. This coding is used to develop Risk Adjustment Factor (RAF) scores and to predict costs.

The research required to compile medical records into a structured data set and HCC coding meet the definitions of taxable insurance services; “insurance or annuity actuarial analysis or research” or “insurance claims adjustment or claims processing” under Section 151.0039 and Rule 3.355. The Clinical Data Acquisition and Insights service is therefore a taxable insurance service when provided to an insurance company, its insured, its policyholders, or others pertaining to a policy. Rule 3.355(b).

However, if the insurance company’s request is for medical records only, requiring no actuarial research or coding to be included, and not related to an insurance policy, the charge for the medical records is a taxable information service.

Section 151.007(a) (“Sales Price” or “Receipts”) defines the term “sales price” for a taxable item. Under Section 151.007(a)(2), sales price includes the materials used, labor or service employed, interest, losses, or other expenses. Any pass-through charges related to Clinical Data Acquisition and Insights services to insurance companies are taxable as part of the sales price of the taxable insurance service.

When performed for entities other than insurance companies, such as life sciences companies, the provision of medical records or information extracted from medical records under the Clinical Data Acquisition and Insights service meets the definition of information services under Section 151.0038 and Rule 3.342(a)(6) and is taxable at 80 percent of the charge. Any pass-through charges related to taxable Clinical Data Acquisition and Insights services to these entities are taxable as part of the sales price of the taxable information service.

Section 151.351 exempts 20 percent of the sales price of information services. Taxpayer is responsible for collecting tax on 80 percent of the charge for its information services.

Question Three: Are the Coding services, Scanning and Storage services, and the Data Abstraction services provided by Taxpayer’s Healthcare Information Management group subject to Texas sales and use taxes?

Ruling Three: Taxpayer’s initial Coding Services in relation to the initial submission of an insurance claim are currently not subject to tax. Coding audits and reviewing codes related to insurance claims are taxable insurance services.

The SaaS applications provided under the Coding Services are taxable as data processing services.

Taxpayer’s Scanning and Storage services are taxable as data processing services.

Taxpayer’s Data Abstraction services are taxable as data processing services.

Analysis for Ruling Three:

Coding Services:

Current agency policy provides that medical coding services provided prior to the submission of an insurance claim are not taxable insurance or data processing services. See STAR Accession No. 202003007L (March 19, 2020). Taxpayer’s services identified as “Medical Records Coding” are not taxable when performed prior to the submission of an insurance claim.

Please note however, the agency has reconsidered this policy and provided guidance that the policy is scheduled to change. Medical billing and coding services will become taxable on Oct. 1, 2021. See STAR Accession No. 202003007L (March 19, 2020).

Taxpayer’s “Audit Services,” “Coding Audit Report of Findings,” and “Denial Management Services” involve the review and correction of prior coding determinations and the appealing of denied charges. These services are performed after an insurance claim has been submitted and meet the definition of insurance claims adjustment or claims processing under Rule 3.355(a)(8). See also STAR Accession Nos. 200602595L (Feb. 21, 2006) and 201803004L (March 5, 2018). These services are therefore taxable insurance services.

Taxpayer provides two SaaS applications. One allows access to referential and industry guidance data. The other assists health care providers and insurers in managing their EMR audits conducted by various agencies.

SaaS constitutes the remote access of software provided by another. The Comptroller has determined that SaaS is taxable as a data processing service. See STAR Accession No. 200805095L (May 28, 2008).

Taxpayer’s “Audit Management Services” is a charge for accessing a database to manage EMRs for audit review by various agencies. This service meets the definition of data processing under Section 151.0038 and Rule 3.330(a)(1) and is taxable.

Software training includes training and online support for software that resides on Taxpayer’s servers and implementation and integration services. Professional services involve the configuration of electronically delivered software. Taxpayer’s “Software Training” and “Professional Services” are part of the sales price of the SaaS applications under Section 151.007 and are taxable as data processing services.

Scanning and Storage Services:

These services involve converting and updating existing EMRs to new EMRs, converting paper records to EMRs, and physical and electronic records storage. Other than physical records storage, these services meet the definition of data processing under Section 151.0035 and Rule 3.330(a)(1). Taxpayer’s services identified as “Data Processing,” “Data Storage – Electronic,” and “Provision of Information” are taxable data processing services.

Taxpayer’s service identified as “Data Storage – Physical” does not fall under the list of

taxable services under Section 151.0101 and is not subject to tax.

Data Abstraction Services:

Data Abstraction Services involve the development of a database of clinical data or modern electronic medical records with summaries of specific data useful to the requesting client. To develop the database, Taxpayer’s employees review and enter key clinical data into a clinical database or electronic medical record. Personal health information is redacted, and metadata tags are added to aid in extraction of data. These activities are the compilation and manipulation of electronic data and information and meet the definition of data processing under Section 151.0035 and Rule 3.330(a)(1). Taxpayer’s services identified as “Abstraction Services” are taxable data processing services.

Section 151.351 exempts 20 percent of the sales price of data processing services. Taxpayer is responsible for collecting tax on 80 percent of the charge for its data processing services.

Question Four: Are Taxpayer’s charges for additional fees subject to Texas sales and use taxes?

Ruling Four: Taxpayer’s charges for shipping, handling, postage, and labor are taxable when they are billed in connection with the sale of a taxable item. Taxpayer’s charges for these items billed in connection with the sale of nontaxable items are not taxable.

Taxpayer’s notary/certification/affidavit/deposition fees are not taxable.

Separately stated late fees that are a penalty and not a forfeiture of a discount are not taxable.

Analysis for Ruling Four: Taxpayer’s additional charges include shipping, postage, shipping and handling, notary/certification/affidavit/deposition fees, labor charges for special projects, and late fees. The taxability of the charges depends on whether the charges are billed in connection with the sale of a taxable item. Each are discussed below.

Delivery, postage, and shipping and handling charges connected with the sale of taxable items are part of the sales price and are taxable. See Rule 3.303 (Transportation and Delivery Charges). Conversely, when nontaxable items are sold, these charges are not taxable.

Notary public fees paid to the notary are not taxable and charges to certify and serve legal documents (certification/affidavit/deposition fees) are not taxable. These fees do not fall under the list of taxable services under Section 151.0101 and are not subject to tax. See STAR Accession Nos. 9309L1256B03 (Sept. 8, 1993) and 200006413L (June 20, 2000).

Separately stated late charges that are a penalty and not a forfeiture of an early or prompt payment discount are not taxable. See STAR Accession Nos. 9406L1306A06 (June 28, 1994) and 8712L0846A05 (Dec. 1, 1987).

STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20190219095143.

Sincerely,

Tax Policy Division – Indirect Taxes Texas

Comptroller of Public Accounts

ENDNOTE

[1] Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.