Many medical and dental service providers rely upon outside assistance to invoice clients for their services, prepare insurance claims, and establish eligibility. Concern has arisen recently in this industry due to a proposed administrative change in interpretation by Texas Comptroller, potentially causing these services to be taxable. However, when the Texas Legislature took up the issue in their current session, they affirmatively decided these billing services would not be subject to Texas sales tax.
History: Who is doing the work – the computer or the provider?
Presumably, billing services will be performed with the use of a computer. As such, these services will fall under the umbrella of data processing services subject to sales tax under Texas law. Tex. Tax Code Ann. Sec. 151.0035. However, professional, highly technical services that rely to a greater degree on the individual service provider’s expertise are not considered data processing. For instance, payroll processing is considered a taxable service in Texas. Whereas income tax preparation is deemed to be requiring of a greater degree of skill than payroll processing. Therefore, income tax preparation is nontaxable. Likewise, the knowledge required by the service provider performing medical billing services – coding, verification of insurance eligibility, and claims preparation – elevates this service to a higher technical level than data processing, making it nontaxable. This is the case even though a computer may be used.
Recent developments: Comptroller’s new proposed policy.
In late 2019, Comptroller issued an administrative memo indicating that a new policy would be adopted. Effective January 1, 2020, the agency would treat medical billing services as subject to sales tax. Interestingly, the policy shift did not indicate these services would be treated as taxable data processing services (like other billing services). They would be considered taxable insurance services. STAR Accession No. 201911003L (Nov. 22, 2019). (Yes – insurance services are subject to sales tax in Texas. But it’s probably not what you think. We’re talking about services related to inspection, appraisal, investigation, etc. The insurance policy you purchase is nontaxable.)
Pushback from the proposed policy change was swift. The effective implementation date was extended from January 1, 2020, to April 1, 2020, to October 1, 2021. This second extension allowed the Texas Legislature to weigh in.
Texas 87 th Legislature: Makes a final determination in favor of taxpayers.
HB 1445 amended Tex. Tax Code Ann. Sec. 151.0035 (b) to exclude from insurance services a “medical or dental billing service performed before the original submission of: (A) a medical or dental insurance claim related to health or dental coverage; or (B) a claim related to health or dental coverage made to a medical assistance program funded by the federal government, a state government, or both.” It further amended the law to define “Medical or dental billing service” as “assigning codes for the preparation of a medical or dental claim, verifying medical or dental insurance eligibility, preparing a medical or dental claim form for filing, and filing a medical or dental claim.” The bill was passed by both the Texas House and Senate and signed by Governor Abbott on April 30, 2021.
Result: Some good news.
With ever-increasing costs – at an increasing rate – healthcare expenditures don’t look to be going down anytime soon. At least it’s good to know that Texas healthcare providers won’t be looking to cover additional costs associated with sales tax.