Is a medical transcriptionist's service of transcribing oral or taped medical dictation into a patient's records and letters subject to Texas sales tax as a data processing service?

Plain-English summary

This is an internal Texas Comptroller memo (from Karey Barton, Manager of the Tax Policy Division, dated June 4, 1996) plus an enclosed taxpayer letter and information package, all addressing the same development: a district court had ruled that a medical transcriptionist's transcription of medical dictation is not a taxable data processing service, and the Comptroller decided not to appeal that decision.

Because of the court ruling, medical transcriptionists could stop collecting sales tax immediately on their transcription services — the memo specifically covers transcribing oral or taped dictation into a patient's records and letters. The Comptroller was also in the process of amending Rule 3.330 (Data Processing Services) to add language stating that data processing "does not include ... the use of a computer by a medical transcriptionist to transcribe medical dictation." Internal staff were told to use that narrower, rule-based language when answering questions, rather than making a blanket statement that "medical transcription services" in general are nontaxable — because a transcriptionist could still provide other, separately taxable services.

The package also lays out how a transcriptionist that had been collecting the tax could get out of the tax system (cancel its permit, file a final report) and how both the transcriptionist and its customers could pursue refunds of sales tax already paid in error, subject to a four-year statute of limitations under Rule 3.325.

What this means for you

Medical transcriptionists and their customers

If you performed medical transcription services (transcribing oral or taped dictation into patient records and letters) and collected or paid sales tax on those charges, that tax was collected in error following the court decision. You could stop collecting the tax right away, and you (or your customers, if you passed the tax on to them) could seek a refund — but only within four years of the date the tax was originally due, and only after the transcriptionist refunds or credits the tax back to the customer first (unless the transcriptionist itself bore the tax without passing it on).

Businesses winding down their sales tax permit

If transcription services were your only reason for holding a sales tax permit, the memo describes how to cancel it (write "cancel permit" with the appropriate date based on your filing frequency) and reminds you that a final report must still be filed — failure to file can trigger a $50 penalty even when no tax is due.

Accountants and tax professionals

This letter is a good example of the Comptroller narrowing a broad taxability question to the specific facts of a court ruling: transcription of medical dictation isn't taxable data processing, but that doesn't mean everything a "medical transcriptionist" does is automatically exempt. Watch for the refund mechanics (Rule 3.325's five refund methods) and the Unjust Enrichment rule (Rule 3.3), which prevents a supplier from pocketing a refund it can't actually pass back to an identifiable customer.

Common questions

Q: Is sales tax due on charges for transcribing medical dictation into patient records and letters?
A: No. A district court ruled that this service is not a taxable data processing service, and the Comptroller decided not to appeal, so sales tax is not due on those charges.

Q: Does this mean everything a medical transcriptionist does is nontaxable?
A: Not necessarily. The memo specifically cautions staff against making a "blanket statement" that medical transcription services are not taxable, because transcriptionists could provide other services beyond transcribing medical dictation.

Q: Can a transcriptionist get back sales tax it already collected and paid over in error?
A: Yes, through one of several refund methods described in Rule 3.325 (Refunds, Interest, and Payments under Protest), but the transcriptionist generally must first refund or credit the tax to its customer, and any refund claim must be filed within four years of the date the tax was originally due.

Q: What if a customer who was overcharged tax can't be found or is out of business?
A: Under Rule 3.3 (Unjust Enrichment), if the tax can't be refunded to the customer because that customer cannot be located or is out of business, the state cannot refund the tax to the transcriptionist either.

Q: What should a transcriptionist do if it no longer needs its sales tax permit?
A: It can cancel the permit by writing "cancel permit" along with the applicable date (based on whether it's a yearly, quarterly, or monthly filer) and returning the permit to the Comptroller, but it must still file a final sales tax report.

Q: Was this rule change finalized as of this letter?
A: No — as of this June 1996 memo, the Comptroller was still in the process of amending Rule 3.330 (Data Processing Services) and the proposed language was going to be submitted to industry for comment.

Citations and references

• Rule 3.330 (Data Processing Services) — being amended to state that data processing does not include the use of a computer by a medical transcriptionist to transcribe medical dictation
• Rule 3.325 (Refunds, Interest, and Payments under Protest) — four-year statute of limitations and refund methods
• Rule 3.3 (Unjust Enrichment) — bars refunds where tax collected from a customer cannot be returned to that customer

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9606L1412G01

Original ruling text

Date: June 4, 1996
To: Sales Tax Policy and Tax Assistance
From: Karey Barton
Re: Medical Transcription Services

A recent court decision ruled that the transcription
of medical dictation is not taxable data processing service. The state will
not appeal that decision.

We are in the process of amending Rule 3.330, Data
Processing Services. The draft rule contains the following proposed language
that will be submitted to industry for comment:

"Data processing does not include.....the use of a
computer by a medical transcriptionist to transcribe medical dictation."

Please use similar language when you answer
questions on this issue rather than making the blanket statement that medical
transcription services are not taxable. It is possible that medical
transcriptionists could provide services other than transcribing medical
dictation.

I wrote to the Board of Directors of the Texas
Association for Medical Transcription explaining the impact of the court
decision. I enclosed information on how to obtain refunds of tax collected in
error, and I asked them to call Tax Assistance if they had any questions. If
you have questions about the taxability of services performed by medical
transcriptionists, please contact John Fitzgibbons in Sales Tax Policy Section
at 5-0892.

May 30, 1996

Dear ****:

Thank you for your recent letter regarding the
taxability of medical transcription services.

Only recently did we make the decision not to appeal
the district court decision. It is true that there was some lag time between
the date the judge announced his decision and the date we decided to forego
appeal, but we needed to review the findings of fact and the actual written
order before making our decision. It was several weeks before that material
was available to us.

As you know, the court ruled that the service of
transcribing medical dictation by a medical transcriptionist should not be
considered a data processing service. Therefore, sales tax is not due on
charges by a medical transcriptionist to transcribe medical dictation.

We are currently in the process of amending our rule
on data processing services to specify that the use of a computer by a medical
transcriptionist to transcribe medical dictation is not a data processing
service. This information will also be included in future issues of our Tax
Policy News and Sales Tax Update publications.

In addition, we have prepared the enclosed
information package for distribution to the members of your association which
includes information on how their customers may receive a refund of any sales
taxes paid on medical transcription services. It is important to note that the
law requires the transcriptionist to refund the tax to its customer before
obtaining a refund from the state, assuming the medical transcriptionist
collected the tax from the customer in the first place. A detailed explanation
of the refund process is in the information package.

If you have any further questions, please contact me
at 463-4987.

Sincerely,

Karey W. Barton, Manager
Tax Policy Division

TEXAS SALES TAX RESPONSIBILITY FOR MEDICAL TRANSCRIPTIONISTS

Current Tax Responsibility

Effective immediately, medical transcriptionists can
discontinue collecting tax on medical transcription services. If the business
does not need to collect sales tax for any other reason the sales tax permit
can be canceled by writing "cancel permit" [out of business] and the date and
returning the sales tax permit to the local Comptroller office or mailing it to
Austin. The Austin address is Comptroller of Public Accounts, Austin, TX
78774-0100. Based on the type of filer the following "cancel permit" date
should be used:

1) Yearly filer 12-31-95
2) Quarterly filer 3-31-96
3) Monthly filer 4-30-96

Do not forget to file your final report. A person
with an active sales tax permit is required to file sales tax reports even when
tax is not collected and failure to file can result in a $50 penalty.

Statute of Limitations on Refunds

Rule 3.325- Refunds, Interest, and Payments under
Protest [Attachment 4] provides that a taxpayer has four years from the date
the tax was due to file a claim for refund of taxes paid in error. After that
date, the state cannot refund the money. However, once the supplier (his
attorney, other representative, successor or assignee) mails or delivers a
complete refund request to the Comptroller, the clock stops running.

For example, taxes for May 1992 [for a monthly
filer] were due June 20, 1992. So, a refund request for the May 1992 period
has to be filed on or before June 20, 1996.

Getting a Refund from the State

There are five methods a medical transcriptionists
may use to recover sales and use taxes [Rule 3.325 - Refunds, Interest, and
Payments under Protest]: For Methods 1, 2, and 3, prior to seeking
reimbursement from the state, sales tax must be refunded or a credit memo
issued to and accepted by the customer [Attachment 3].

Method No. 1 - Taking credit on current returns

The first is the easiest. The medical
transcriptionists will simply adjust the amount of taxable sales for state and
the applicable local taxing jurisdictions reported on a current return_taking
into account any changes in tax rates. This might not be practical since in
the future you will not be collecting tax.

Method No. 2 - Amending past returns

The second option is to reduce the amount of taxable
sales on an amended return for the period in which the tax collected in error
and originally reported.

Method No. 3 - Service provider requesting refund

The refund request should include a taxpayer number,
a letter stating the reason for the refund and the amount of the refund [or a
reasonable estimate]. Also, included in the package should be copies of
canceled refund checks or the credit memo and credit memo acceptance form and
scheduled invoice information containing the information in Attachment 1.

Method No. 4 - Assignment of refund to the customer

The fourth method is to assign the refund to the
customer by completing the Vendor's Request for Refund and Assignment of Right
to Refund [Attachment 2]. The customer would send a request including a letter
with the medical transcriptionist's taxpayer number, reason for a refund and
the schedule of invoices [Attachment 1].

Method No. 5 - Refund for payments by taxpayer

The medical transcriptionists who paid the tax and
did not collect tax from its customers can use Methods 1, 2, or 3 to obtain a
refund. To meet this requirement, the medical transcriptionists should not
have charged its customers tax on either original invoices or on separate
invoices. A statement should be included that tax was not collected from the
customer.

The information should be sent to Credits
Verification Section, PO Box 13528, Austin, TX 78711-3528.

Unjust Enrichment

Rule 3.3, Unjust Enrichment, states that a taxpayer
cannot keep tax refunds due to customers. If you cannot refund the tax because
a customer cannot be located or is out of business we cannot refund the tax to
you.

Questions

If you have any questions please call toll free
1-800-252-5555 or in Austin call 463-4600.

Attachments

1) Attachment 1 - Schedule of Invoices
2) Attachment 2 - Vendor's Request for Refund and Assignment of Right to Refund
3) Attachment 3 - Customer's Acceptance of Credit Memo
4) Attachment 4 - Rule 3.325 - Refunds, Interest, and Payments under Protest

NOTE: Previous Accession Number 9606261L