Is a company taxable on fees it charges a hospital for managing, arranging, or sub-contracting the maintenance and repair of the hospital's clinical equipment?

Plain-English Summary

A clinical equipment asset-management and consulting firm asked the Comptroller whether the fees it charges hospitals are taxable. The firm places a salaried asset manager inside a hospital who arranges for maintenance and repair of the hospital's equipment, either in-house or through outside vendors, and bills the hospital in one of two ways: (1) contract management, where the firm sub-contracts the maintenance work, pays the vendors, and bills the hospital its cost plus a fee, or (2) asset management, where the firm collects vendor bids, adds its own fee, and bills the hospital a single flat annual fee.

The Comptroller ruled that management fees charged to a hospital for managing the maintenance/repair of its equipment are taxable, as a charge for repair or service to tangible personal property — and that conclusion applies regardless of which billing method (contract management or flat-fee asset management) is used. The billing structure itself doesn't change the tax result.

There are two carve-outs. First, if the equipment being maintained is itself exempt medical equipment under Rule 3.284, then the repair or maintenance of that equipment (and, by extension, the fee for arranging it) is exempt. Second, if the firm also performs real property maintenance (as defined in Rule 3.357(a)(3)) and separately states that charge, that portion is not taxable. The Comptroller noted the firm's letter didn't specify what kind of equipment or maintenance was involved, so the ruling is necessarily general — the firm was invited to write back with specifics if this didn't answer its questions. The firm was also reminded that it owes tax on taxable items/services it purchases from vendors unless those items/services are resold to the hospital customer.

What This Means For You

If you manage or arrange equipment maintenance for hospitals (or similar customers) in Texas: Don't assume that billing your customer a "management fee" instead of a straightforward repair invoice avoids sales tax — the Comptroller looks through the billing label to what's actually being charged for (repair/service of tangible personal property) and taxes it accordingly, whether you bill cost-plus or a flat annual amount.

Check what equipment you're servicing. The taxability turns heavily on whether the underlying equipment qualifies as exempt medical equipment under Rule 3.284. If it does, maintenance/repair charges for that equipment (and the associated management fee) are exempt; if it doesn't, they're taxable.

Separately state real property maintenance. If part of your service is maintenance of real property (per Rule 3.357(a)(3)) rather than tangible personal property, break that charge out separately on your invoice — bundling it into a single fee risks having the whole charge treated as taxable.

Watch your own purchases too. Amounts you pay to sub-contractor vendors for maintenance are themselves taxable purchases unless you're reselling those services to the hospital (e.g., under a valid resale certificate) — you can't assume a pass-through cost is automatically tax-free on your end.

Q&A

Q: Does it matter whether we bill the hospital cost-plus-a-fee versus a flat annual fee?
A: No. Both billing structures described in the ruling — contract management (cost plus fee) and asset management (flat annual fee) — are treated the same: fees for managing the maintenance/repair of the hospital's equipment are taxable as repair or service to tangible personal property, unless an exemption applies.

Q: Is maintenance of hospital medical equipment always exempt because it's "medical equipment"?
A: No. Only equipment that specifically qualifies as exempt medical equipment under 34 Tex. Admin. Code Rule 3.284 gets the exemption for its repair/maintenance. Equipment that doesn't meet that rule's definition is taxable like any other tangible personal property.

Q: What if some of the work is maintaining real property rather than equipment?
A: Real property maintenance as defined in Rule 3.357(a)(3) is not taxable, but only if that charge is separately identified/stated from the taxable tangible personal property service charges.

Q: Do we owe tax on what we pay our sub-contractor vendors?
A: Yes, unless those items or services are actually resold to your hospital customer (e.g., under resale certificate treatment). You can't treat a pass-through vendor cost as automatically tax-exempt.

Citations

• 34 Tex. Admin. Code Rule 3.284 (exempt medical equipment)
• 34 Tex. Admin. Code Rule 3.357(a)(3) (real property maintenance)

Subject

Medical Equipment — Exempted Vs. Therapeutic — Repair/Maintenance Services Or Management Fees Charges

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9407L1307G08

Original ruling text

July 6, 1994

Dear **:

Thank you for your letter dated June 24, 1994, regarding
sales tax as it applies to services provided by your firm.

FACTS: Your business provides clinical equipment asset
management and consulting services. You go into hospitals
and advise them as how to reduce costs of managing and
maintaining their equipment through a number of different
means, most effectively with an in-house asset manager.
Should the hospital accept this method of management, you
put in your salaried asset manager who would then be
responsible for the equipment by handling maintenance and
repairs himself or through outside vendors.

You would bill the hospitals for your services in one of two
ways:

1. Contract management whereby you sub-contract out the
   maintenance, you pay billings from the subs and in turn
   charge the hospital your cost plus a fee; or

2. Asset management where bids are collected from vendors
   for maintenance and you in turn add your fee and bill the
   hospital a flat annual fee.

RESPONSE: Although your letter did not provide specific
details regarding the kind of maintenance being provided,
the following may be sufficient to answer your questions. If
not, please write again with details.

Management fees charged to the hospital for management of
tangible personal property will be subject to tax as repair
or service to tangible personal property. The repair or
maintenance of any exempt equipment as provided for in
the enclosed Rule 3.284 would be exempt. If you perform real
property maintenance as defined in the enclosed Rule
3.357(a)(3) and the charge is separately identified, that
charge will not be taxable.

You owe tax on all taxable items and service purchased from
vendors unless the items or service are actually being
resold to your customer.

This opinion is based on the facts you submitted. Other
facts, though similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0330. The
direct line is 512/475-0330. You may also write to Tax
Administration, Comptroller of Public Accounts.

Sincerely,

Bettie Peterson
Tax Administration Division

NOTE: Previous Accession Number 9407460L