96-063
Response April 17, 1996
Request
Mr. W. Val Oveson, Chairperson
Utah State Tax Commission
210 N 1950 W
Salt Lake City, Utah 84134
Re: Request for Sales/Use Tax and Income Tax Letter Ruling
Dear Mr. Oveson:
On behalf of my client, XXXXX ( “XXXXX”), I appreciate your staff
talking the time to discuss the taxability of electronic processing of health
care claims. Enclosed for your review
is a copy of the service agreement XXXXX would enter into with their
customer. We respectfully request a
ruling concerning the application of Utah sales/use tax and income tax law as
it pertains to the following issues.
FACTS
XXXXX, which is qualified to do business in Texas, is primarily engaged
“in the electronic receipt and transmittal of claims” on behalf of their
customers. XXXXX does not have an office or any employees in Utah. The company
plans to send employees into Utah to install computer software and train
customer employees in the future.
XXXXX moves claims electronically between providers of health care
(XXXXX business entities, XXXXX (XXXXXs), and XXXXX (XXXXXs)) and payors of the
claims. We have described three potential
cases below that illustrate the paperless claim flow.
1. XXXXX will Supply a computer
software interface program to be installed at the customer's corporate
headquarters in Utah; However, the
customer's branches and retail stores are located in various states. All of the insurance claim forms will be
sent to the corporate headquarters in Utah for processing.
Along with this program, XXXXX may provide a scanner to be utilized in
scanning the claim form into a personal computer at the provider's (customer's)
Utah location. The data is edited at the provider's location and then
transmitted electronically to XXXXX's computer located in Texas. XXXXX would
change the file format but would not make any decisions regarding the
information contained on the claim. The data would be processed, and
transmitted electronically to the payor of the claim. The payor of the
insurance claim may be located anywhere in the United States. The insurance
provider (customer) of XXXXX was located in Utah.
2. This case is similar to
number 1 except that the customer's branches and retail locations send the
insurance claim forms directly to XXXXX's location in Dallas, Texas for further
processing. The claims are not handled by the customer's corporate location in
Utah
After receipt of the claim by XXXXX, the claim is processed in the same
manner as case number one.
3. This case differs from the
other cases, in that the claims are not scanned into the computer at the
corporate headquarters located in Utah. The claims are filed electronically by
the insurance provider (XXXXX's customer) using a local clearinghouse. The
claims are sent electronically from various states through the existing
electronic claim networks (i.e. XXXXX and others) to XXXXX. XXXXX processes the
claim and transmits the claim electronically to the payor.
REQUEST FOR A LETTER RULING
Based on the facts contained herein, we request your opinion regarding
the sales/use tax status of the following items as it relates to cases 1, 2,
and 3 as described above:
ITEMS BILLED (INVOICED) TO CUSTOMERS BY XXXXX:
Please address the taxability of the following items and provide
authoritative support for your conclusion:
A. Claims conversion fee
This is a fee charged to the customer for scanning the healthcare claim
form and creating an electronic image which is stored on the customer's
computer. The image is then transmitted to XXXXX and finally to the payor of
the claim. XXXXX would invoice their customer for this service on a per claim
basis. This fee includes data analysis and reporting.
This would apply to cases 1 and 2 above. Please address each of these
cases in your response.
ITEMS BILLED (INVOICED) TO CUSTOMERS BY XXXXX (cont'd):
B. One-Way transaction fee
This is a fee charged to the customer for transmitting the claim from
XXXXX to the payor.
This revenue item would apply only to case 3. Please address this case
in your response.
C. Clearinghouse fee
This is a fee charged to the customer for transmitting claims from the
customer to XXXXX, repricing the claim and transmitting the claim to the payor.
This fee includes data analysis and reporting.
This revenue item would apply only to case 3. Please address this case
in your response.
D. Archival fee
This is a fee for charged to the customer converting the claim from an
electronic image to a CD. The CD is sent to the customer located in Utah.
This revenue item is applicable to cases 1, 2, and 3 above. Please
address each of these cases in your response.
ITEMS NOT BILLED (INVOICED) TO CUSTOMERS BY XXXXX:
I. License of Computer
Software:
XXXXX will install and furnish computer software to their customers
located in Utah but will not charge a license fee or maintenance fee. The
charges are included in the fees listed above. The software and source code
will be owned by XXXXX. Depending upon your response to items A-C above, will
any use tax be applicable for the computer software located in Utah?
II. Computer Hardware:
XXXXX will lease computer hardware from vendors. The equipment will be
leased exempt from sales tax because Texas has ruled that the processing of
insurance claims is taxable in the State of Texas. XXXXX will accept delivery
of the equipment in the State of Texas. Subsequently, XXXXX will ship the
equipment to customers located in various states.
Although XXXXX may furnish computer hardware and scanners to their
customers located in your State, the sales invoice will not list a charge for
this equipment. The charges are
included in the fees listed above.
Depending upon your response to items A-C above, will any use tax be
applicable to the rental fees charged to XXXXX by the owner of the equipment
located in Utah?
Can XXXXX pass the tax along to the customer and identify the use tax
on their sales invoice?
UTAH INCOME TAX
a. When XXXXX acquires
customers located in Utah, will it be subject to Utah income tax. If XXXXX is subject to income tax, how
should the sales listed above be apportioned to Utah?
In order to be most useful to XXXXX, we would appreciate a response as
soon as possible.
Please contact me directly if you have any questions concerning the
above. Thank you for your assistance with this matter.
Very truly yours,
XXXXX
XXXXX
Re: Advisory opinion-
application of sales and use tax to Utah transactions of XXXXX (XXXXX)
Dear XXXXX
We have received your request for an opinion as to the application of
sales and use tax to the transactions of XXXXX. We find as follows:
We begin by answering your last two sales tax questions first because
the answers to those questions effectively dispose of the other issues:
License of computer software and use of computer equipment - Utah imposes
sales and use tax on the purchase or lease of computer equipment and non-custom
software. Charges for program
maintenance, consultation in connection with sale or lease, enhancements, or
upgrading of canned or prewritten software are also taxable. §59-2-103 Utah
Code Ann. and Utah Admin. R. R865-19S-92.
Therefore, charges to XXXXX’s customers for the use of the equipment and
software are taxable. Furthermore,
non-taxable charges, if any, must be separately stated from taxable charges or
the entire amount is taxable. Because
XXXXX lumps these taxable charges together with the other fees described in
your request, the entire charge is taxable.
Other charges billed to the customer -
The archive fee for converting electronic information to a CD
for Utah customers is taxable because the real object of the sale is the
CD. The services to produce the CD are
considered incidental.
Because a charge to receive information or data via a terminal is
generally considered a non- taxable service, the one-way transaction fee
and the clearinghouse fee are non-taxable services so long as the
charges for these services are separately stated on the invoice or receipt.
Sales tax license - XXXXX is responsible for collecting and remitting Utah sales tax on
the taxable charges described above.
XXXXX may use the enclosed form to apply for a sales tax license.
Utah income tax - If XXXXX is incorporated here or authorized to do business here, it is
subject to franchise tax. If not, XXXXX
is liable for Utah income tax if it has sufficient Utah nexus and if it has
income which is apportionable to Utah under Utah’s UDITPA provisions. XXXXX has nexus in Utah because it owns
computer software and hardware in Utah and because it performs services in
Utah, such as training.
The amount of XXXXX’s business income that is apportioned to Utah is
determined on the basis of the property
factor, the sales factor, and the payroll factor.
1. The Property Factor. The property factor is a fraction which is
calculated on the basis of the average value of XXXXX’s real and personal
property in this state during the tax period compared to the average value of
all of XXXXX’s real and personal property. The value of XXXXX’s computer
property in Utah as well as the value of any other real or personal property
which is owned by XXXXX and situated in Utah during the tax period must be
included in the property factor.
2. The Sales Factor. XXXXX must include in the income
attributable to the lease of computer software and hardware used in Utah. XXXXX must also include income derived from
its accounts with Utah clients if performance of XXXXX’s service to those
clients occurred predominately in Utah.
When the income-producing activity is performed both in Utah and
elsewhere, the income is allocated to the Utah sales factor if the greater
proportion of the income- producing activity takes place here, as measured by
costs of performance. §59-7-319 Utah
Code Ann
With regard to the charges described, we offer the following guidance:
a. If the conversion fee
covers activities by Utah customers who scan documents on a scanner located in
Utah, the fee must be included in the Utah sales factor. If the document is delivered by the Utah
customer to XXXXX, scanned by XXXXX outside of Utah, then transmitted back to
the Utah customer, the fee may be attributable to the Utah sales factor if the
cost of performance is predominately associated with activities in Utah.
b. The one-way transaction fee
is not attributable to Utah’s sales factor.
c. The Clearinghouse fee may be
attributable to the Utah sales factor if the cost of performance is
predominately associated with activities in Utah.
d. The archive fee amounts to
income from the sale of tangible personal property to a Utah customer. As such receipts from these sales must be
included in the Utah sales factor.
Please contact us if you have further questions.
For
the Commission,
Alice
Shearer,
Commissioner