NOTICE: Under IC 4-22-7-7, this document is required to be published in the Indiana Register and is effective on its date of publication. It shall remain in effect until the date it is superseded or deleted by the publication of a new document in the Indiana Register. The publication of this document will provide the general public with information about the department's official position concerning a specific issue.

Sales and Use Tax - Taxability of Records and Related Charges

Authority: IC 6-2.5-1-1; IC 6-2.5-1-5; IC 6-2.5-1-11.5; IC 6-2.5-1-26.5; IC 6-2.5-1-27; IC 6-2.5-1-27.5; IC 6-2.5-1-28.5; IC 6-2.5-2-1; IC 6-2.5-2-2; IC 6-2.5-4-1; IC 6-2.5-4-6; IC 6-2.5-4-15; IC 6-2.5-4-16.4; IC 6-2.5-4-16.7; 45 IAC 2.2-1-1; 45 IAC 2.2-4-2; Cowden & Sons Trucking, Inc. v. Indiana Dep't of State Revenue, 575 N.E.2d 718 (Ind. T.C. 1991).

A taxpayer ("Company") is seeking an opinion as to whether various revenue streams related to information management services are subject to sales tax.

Company is a corporation based in another state that provides information management services to healthcare providers, patients, insurers, and other entities involved in the health care industry. Company operates three service lines which provide independent service offerings for their clients depending on the needs of the client. Company provides the following information regarding its request, reproduced exactly as submitted in its request for a ruling with certain details redacted:

Following is a complete listing and description of each of the pertinent revenue streams of the company.

Based on the foregoing facts, Company requests a ruling as to whether its product service lines and other charges are subject to Indiana sales and use tax. Regarding the Product 1 service line, Company maintains that is responsible for providing information contained within a patient's medical records to the requesting entities, which may be hospitals, medical practices, individual physicians, or individual patients. Company explains that the Product 1 service line typically receives a request to retrieve and provide medical record information. This information is typically provided in the form of an EMR to healthcare providers and other non-patient requesters and in tangible form to individual patients.

Pursuant to IC 6-2.5-2-1(a) and IC 6-2.5-2-2(a), sales tax is imposed on retail transactions made in Indiana. IC 6-2.5-4-1(a) provides that "[a] person is a retail merchant making a retail transaction when he engages in selling at retail." A retail transaction is defined in IC 6-2.5-4-1(b) as the transfer, in the ordinary course of business, of tangible personal property for consideration. IC 6-2.5-4-1(c) goes on to provide in pertinent part:

"Tangible personal property" is defined in IC 6-2.5-1-27 as:

Except for certain enumerated services, sales of services generally are not retail transactions and are not subject to sales or use tax. 45 IAC 2.2-4-2 clarifies the taxability of services as follows:

The requirements for determining the "true object" of a transaction are not defined in statute. In Cowden & Sons Trucking, Inc. v. Indiana Dep't of State Revenue, 575 N.E.2d 718 (Ind. T.C. 1991), the Indiana Tax Court held that the determination of whether a sale was a retail transaction hinged on whether the "true object" of the transaction was service or property. In Cowden, the taxpayer was a hauler who only on occasion sold stone at cost to his customers as a convenience, and therefore the Court concluded that the "true object" of the transaction was the provision of service rather than the sale of stone.

Under IC 6-2.5-1-11.5(d)(1), there is no percentage test to determine whether the cost of the tangible personal property needs to be at a certain percentage relative to the cost of the service in order to qualify as a bundled transaction. Instead, in order to not qualify as a bundled transaction, the transaction would have to be comprised of a service that is the true object of the transaction, as well as tangible personal property that is essential to the use of the service and which is provided exclusively in connection with the service.

Based upon a review of the four prong standard established by 45 IAC 2.2-4-2, Company maintains that it is primarily a service provider, who does not specifically charge for any paper transferred, and who pays sales or use tax on purchases of all tangible property transferred in the course of its service. Company also asserts that tangible personal property, such as paper records from other providers, or paper products for copying services, are all "used or consumed" during the performance of their services. While the services provided by the Product 1 service line may at times result in a transfer of tangible property in the form of a paper record, Company asserts that this transfer is incidental and should not cause this transaction to become a retail transaction as defined by IC 6-2.5-1-2(a). Company instead believes that the "true object" of customers purchasing these services is to obtain the intangible data contained in a patient's medical record, and that the Company is providing a professional service retrieving this medical information. Therefore, Company believes that these services are not subject to Indiana sales tax.

The department disagrees with that conclusion. What the customer pays for is the record, and what is received by the customer is the paper which contains that record. The fact that the customer wants the record and not the paper itself is immaterial. Whether data, media, or some other intangible collection of information, such information is often delivered through physical means. When delivered on a disc, a cassette, or in this case, paper, the customer receives tangible personal property. Additionally, regarding the argument that the true object is the service, while the act of record retrieval is important and the retrieval of the record is not always simple in some cases where Company does not operate a provider's record retention department, the true object in the transaction for a record is not the service - it is the record itself. Even if the service is part of the larger service of maintaining records, Company is normally not paid by the service providers for operating their record retention departments, but instead retrieves medical records for a fee to others who request a copy of these records. This point further illustrates that the main focus of the enterprise in maintaining and retrieving records is the fees for the records.

However, when the records are transferred electronically, IC 6-2.5-4-16.4(b) provides that a person engages in making a retail transaction when the person (1) electronically transfers specified digital products to an end user and (2) grants to the end user the right of permanent use of the specified digital products that is not conditioned upon continued payment by the purchaser. "Specified digital products," as currently defined by IC 6-2.5-1-26.5, include only digital audio works (e.g., songs, spoken word recordings, ringtones), digital audiovisual works (e.g., movies), and digital books.Products "transferred electronically" are defined at IC 6-2.5-1-28.5 to mean products that are "obtained by a purchaser by means other than tangible storage media." As these records do not fit within any category of specified digital products, a fee for a digital record would not be subject to sales tax.

Regarding the Product 2 service line, Company states that this service line is similar in nature to the Product 1 service line, with the primary difference being that the Product 2 group deals with high volume records retrieval services. These services are often requested by insurance companies and/or law firms, and Company maintains that most of the records and information developed by this group are transmitted electronically, with no transfer of tangible personal property. As with the Product 1 line, Company contends that it is providing a professional service of record retrieval that is not subject to Indiana sales tax. For the same reasons listed above, the department concludes that the fee for the records is taxable if the record is not delivered electronically.

Regarding the Product 3 service line, Company states that services provided by the Product 3 service line are targeted to four distinct areas: 1) medical information coding services, 2) medical coding review and correction, 3) abstraction services and reports, and 4) audit management. Company claims that all of these services, described in more detail in the facts above, are provided to customers seeking specialized skills and knowledge to produce information and/or further provide a value added service. As such, Company believes that these transactions are services, and furthermore not taxable retail transactions.

The department would agree. The services involved, including remote storage of data and data processing, are exempt from sales tax. Regarding the latter, while transactions involving "telecommunication services" are subject to sales tax pursuant to IC 6-2.5-4-6, the term "telecommunication services" does not include the following:

Furthermore, while "SaaS" involves both the rendering of services and the provision of software, IC 6-2.5-4-16.7 provides that prewritten computer software sold, rented, leased, or licensed for consideration that is remotely accessed over the Internet, over private or public networks, or through wireless media, is not considered an electronic transfer of computer software and is not considered a retail transaction. Therefore the purchase, rental, lease, or license of that software is not subject to Indiana sales or use tax.

Finally, regarding the revenue categories in the table above, Company concludes that none of the charges are subject to Indiana sales and use tax. Company maintains that these charges are all for nontaxable services that relate to what they consider to be the overall nontaxable services in the different Product Lines. For instance, the Product 1 division may perform and separately bill for charges such as Data Storage, Photocopying, Scanning, Record Retrieval, and Provision of Information. Product 2 service line may also perform, and separately bill for, Data Storage, Photocopying, Scanning, Record Retrieval, Provision of Information, and Report services.

Company believes these transactions to be outside the scope of retail transactions as defined by IC 6-2.5-1-2(a), and therefore, are not be subject to Indiana sales tax. Company further states that the reason why these aspects of the service fee may sometimes be separately billed is due to certain invoicing and fee regulations applicable to the medical industry which require itemization of the overall service in order to apply mandated fee level caps. Company contends that being required to separate charges for these immaterial aspects of the non-taxable service does not convert these items to taxable sales of tangible personal property. However, the department disagrees that all of these charges are exempt. The department believes that the following itemized charges would be taxable:

• Concerning the photocopying fees, even though there is a physical output, Company believes the true object of the transaction is a non-taxable service, and the photocopying is provided merely as one of several methods via which the service may be delivered. As explained above, this is not correct, so this charge would be subject to sales tax. However, the photocopying fees for when the record is faxed or is otherwise electronically delivered are not subject to sales tax.

• Regarding the shipping (and shipping and handling) charges, IC 6-2.5-1-5 provides that "delivery charges," whether separately stated or not, are considered part of the gross retail income upon which a merchant is required to assess sales tax. Company argues that the shipping and handling charges should be exempt in this instance as they relate to the delivery of the aforementioned tangible photocopies which are incidental to what they consider the provision of a non-taxable service. As explained above, the provision of tangible photocopies is taxable, so the delivery charges would be subject to sales tax as well.

When Company provides paper records, the fees for such records are subject to Indiana sales tax. However, if the records are transferred electronically, they are not subject to sales tax. Further, fees for the delivery of paper records or for photocopying paper records are subject to Indiana sales tax.

This ruling is issued to the taxpayer requesting it on the assumption that the taxpayer's facts and circumstances as stated herein are correct. If the facts and circumstances given are not correct, or if they change, then the taxpayer requesting this ruling may not rely on it. However, other taxpayers with substantially identical factual situations may rely on this ruling for informational purposes in preparing returns and making tax decisions. If a taxpayer relies on this ruling and the Department discovers, upon examination, that the fact situation of the taxpayer is different in any material respect from the facts and circumstances given in this ruling, then the ruling will not afford the taxpayer any protection. It should be noted that subsequent to the publication of this ruling a change in statute, regulation, or case law could void the ruling. If this occurs, the ruling will not afford the taxpayer any protection.