In a Private Letter Ruling released by the Texas Comptroller’s Office, the Comptroller ruled that a Taxpayer’s pre-authorization services for insurance eligibility are not taxable as insurance services, data processing services, or information services. The decision comes despite a recent proposal by the Comptroller’s Office to effectuate a paradigm shift related to taxable data processing services from an “essence of the transaction” approach to a test that examines the seller’s actions over the product the buyer is purchasing.
“... Taxpayer performs activities that may meet the definition of a data processing service. However, these activities are performed to facilitate the pre-authorization service ... [thus] not a taxable data processing service. ”
facts presented
Taxpayer provides health insurance pre-authorization approvals or denials to medical service providers including hospitals, clinics, and doctors whose patients have healthcare plans administered by insurance companies. To provide this service, Taxpayer utilizes proprietary software along with manual human review to issue a pre-authorization answer. The software is an internal database and software program comprised of rules that are applied to pre-authorization requests to determine if the request can be approved or denied.
Taxpayer maintains the software, it is not downloaded, sold, or used by any other party. Further, the Taxpayer does not grant any licenses to use it, it is used only by the Taxpayer’s staff. About 90% all pre-authorization requests are automatically approved using the software.
When a pre-authorization request is not automatically approved, Taxpayer’s staff of medical doctors, nurses, and other licensed healthcare professionals conduct a manual review, which includes reviewing the request as applied to the patient’s individual healthcare plan to determine coverage. The Taxpayer also employs administrative employs who can receive pre-authorization requests by phone or fax and enter the request into the Solution.
insurance, information & data processing
The Comptroller’s Office reviewed three potential taxable services for classifying the Taxpayer’s services: insurance, information, and data processing.
Texas imposes sales tax on taxable services, including insurance services. Insurance services involve “insurance loss or damage appraisal, insurance inspection, insurance investigation,” and other insurance-related activities. However, explicitly excluded from the definition is a “medical billing service” performed before an insurance claim is submitted for coverage. Due to this exclusion, the Taxpayer’s service is not a taxable insurance service. The Comptroller also ruled out taxable information services, stating that information services are services in which general or specialized news or information is furnished or made available to the public.
As for data processing, the Comptroller’s Office stated that the Taxpayer’s service is not a taxable data processing service because any data processing activities that are performed are done in order to facilitate the pre-authorization service, an “essence of the transaction” approach. The Taxpayer’s employees are trained individuals who merely use the computer as a tool to providing the ultimate service. As such, the service is not a taxable data processing service.
Recently, however, the Comptroller’s Office proposed changes to the section of the Texas Administrative Code covering data processing services. According to the Comptroller’s Office, the changes would clarify existing definitions and add relevant examples of taxable and nontaxable services, along with adding new applicable definitions. Among those changes include a shift from an “essence of the transaction” approach to an approach centered more on the seller’s business activities. Critics have observed that these changes could potentially expand what is considered a taxable data processing service under the Code. If the changes are adopted, they could go into effect within days.
the impact
Taxability of digital software has drastically changed in recent years as technology has developed, creating unique challenges for companies utilizing evolving software.
Libertas can assist you in determining the taxability of your digital goods or services by interpreting complicated tax law or submitting a letter ruling request on your behalf. Let us guide you through the world of digital products and sales taxability determinations.