Was a medical billing and practice-management company's percentage fee taxable merely because it used outside computer services?

Plain-English summary

A medical billing and practice-management company used skill and expertise to decide how clients' medical services should be billed. It also managed personnel, acquired furniture and supplies, answered patient calls, interviewed patients, obtained billing information from hospitals, and provided general business consultation.

The Comptroller concluded the company's basic percentage fee was not taxable data processing. Computers were tools used to deliver the broader management service rather than the service for which the company was hired.

Insurance-claim preparation and collection of delinquent accounts were taxable when separately billed. If not separately billed, the entire charge became taxable when those taxable services exceeded 5% of the overall services.

The outside company that computerized and sent patient bills provided taxable data processing. The letter said an intercorporate exemption would apply if that company was the service provider's wholly owned subsidiary, as represented.

What this means for you

Under this 1988 analysis, extensive computer use did not itself make a skilled management engagement taxable data processing. Separately identifiable taxable components and the ownership relationship with an outside processor still mattered.

Common questions

Was the core medical billing and management fee taxable? No.

Were insurance-claim preparation and delinquent-account collection taxable? Yes, when separately billed.

What if those services were bundled? The entire charge was taxable if they exceeded 5% of the overall services.

Was the outside computer service taxable? Yes, unless the stated intercorporate exemption applied.

Citations and references

The letter did not cite a rule or statute by number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8803L0935E03

Original ruling text

BOB BULLOCK
COMPTROLLER OF PUBLIC ACCOUNTS
AUSTIN, TEXAS 78774

March 25, 1988

Dear*****:

After meeting with you, Willis Whatley and I have concluded the basic
services provided by * (*) are not data processing services and
are not taxable.

From our discussion, it became clear * provides services requiring
skill and expertise in making decisions as to how medical services provided by
*'s clients are to be billed. This part of *'s services are
integral to the overall billing services provided by *.

In addition, ** provides a number of services such as hiring and
management of personnel, acquiring furniture and supplies, answering phone
inquiries from patients, interviewing patients, physically obtaining the
billings from the hospitals, and providing general business consultation.

They also bill their client's patients and prepare collection reports
using computer services provided by another company, prepare insurance claims,
and collect delinquent accounts receivable. Each of these services standing
alone would be taxable.

** is compensated for their services based upon a percentage of the
collections.

Their billing services are one of the main reasons ** is hired.
The central question is whether the fact data processing is used in handling
this facet of their overall service makes their entire service subject to tax.

Willis and I have concluded * is not hired to perform data
processing services in sending out their clients' bills but merely uses the
data processing services to carry out the overall services for which they were
employed. Therefore, their basic fee is not subject to tax. However, any
charges for insurance claim preparation or collection of delinquent accounts
will be taxable if separately billed. If not separately billed, the entire
charge will be taxable if charges for these services exceed 5% of the overall
services provided by *.

We also understand * obtains its computer services from another
company. This company prepares the patient billings once * provides it
the information allowing the accounts receivable to be computerized and sent
out. We do consider this taxable data processing services upon which tax
should be paid. However, in a telephone conversation with me, you stated this
outside data processing company was a wholly owned subsidiary of **. If
so, the intercorporate exemption would apply.

Thank you again for taking the time to more fully explain the operating
of **. I am happy we were able to resolve this before it went any
further.

Sincerely,
Wade Anderson
Executive Counsel