This Administrative Notice advises the public of the policy the Tax Division will follow when applying the West Virginia consumers sales and service tax and use tax to charges for computerized medical billing services.

THE CONSUMERS SALES AND SERVICE TAX

Under sections 11-15-1 and 3 of the West Virginia Code, the State of West Virginia imposes a consumers sales and service tax on sales of tangible personal property and taxable services. Under section 11-15- 4 of the West Virginia Code, the purchaser is required to pay the consumers sales and service tax, and the vendor is required to collect the tax and remit it to the State. If the vendor fails to collect and remit the tax, the vendor becomes personally liable for the outstanding tax under section 11-15-4a of the West Virginia Code.

There is an extensive list of exemptions and exceptions from the consumers sales and service tax and use tax. These are mainly found in sections 11-15-8 and 9 and 11-15A-3 of the West Virginia Code.

There is no exemption for billing services.

Often computerized medical billing services involve extensive use of computer processing and electronic data interchange in rendering their services. Typically, the medical care provider will perform medical services for the patient, and will transmit the treatment information and pertinent billing and insurance information relating to the individual patient to the computerized medical billing service. The computerized medical billing service will receive the information and "code" the information, i.e., translate the information into insurance billing codes relating to diagnosis, treatment, medications, etc. The computerized medical billing service will typically transmit the coded information, often in computer readable format, to the insurance company, and simultaneously generate and send a notice of the insurance billing to the patient. Where an insurer is not involved, or where the medical service is not covered by insurance, the computerized medical billing service will typically generate a billing document which will be sent to the patient for the medical services rendered.

In addition to providing basic billing services, some computerized medical billing services will collect payments from insurers or from patients, as appropriate, and will distribute the proceeds to the medical care provider. There may be an arrangement where the billing service will retain a portion of the proceeds as its service fee for providing the billing and collection service.

The type and extent of service provided by computerized medical billing services can vary. Thus, the extent to which computerized processing and electronic data interchange may occur can vary, depending on the type and extent of service offered.

Under West Virginia law, sales of tangible personal property and services are subject to the consumers sales and service tax and the use tax. West Virginia companies which provide computerized billing services for medical care providers are providing a taxable service and should collect and remit the West Virginia consumers sales and service tax or the West Virginia use tax on the service charge or fee for performing the billing service.

There is an exemption set forth in section 11-15-9(a)(22) of the West Virginia Code for electronic data processing services. That section exempts:

Sales of electronic data processing services and related software: Provided, That for the purposes of this subsection "electronic data processing services" means: (A) The processing of another's data, including all processes incident to processing of data such as keypunching, keystroke verification, rearranging or sorting of previously documented data for the purpose of data entry or automatic processing and changing the medium on which data is sorted, whether these processes are done by the same person or several persons; and (B) providing access to computer equipment for the purpose of processing data or examining or acquiring data stored in or accessible to such computer equipment.

The consumers sales and service tax and use tax regulations, Title 110, Series 15, Section 76, addresses the electronic data processing exemption. That section reads as follows:

§ 110-15-76. Electronic Data Processing Services and Related Software.

76.1 Sales of electronic data processing services and related software to others are exempt from consumers sales and service tax and/or use tax. For purposes of this exemption, electronic data processing services means (1) the processing of another's data, including all processing such as key punching, keystroke verification, rearranging, or sorting of previously documented data for the purpose of data entry or automatic processing, and changing the medium on which data is sorted; and (2) providing access to computer equipment for the purpose of processing data or examining or acquiring data stored in or accessible to such computer equipment.

76.1.1 It is necessary to determine the nature of what is being purchased by the customer. For example, where a completely computerized billing service actually prints and mails the bills based on information provided by the client, receives collectibles and records the payments received, the service is taxable. The fact that a computer is utilized does not result in the service being exempt.

76.1.2 The purchase by customers of specialized computer software which allows the customers terminals to communicate directly with a central processing unit of another is exempt if that is the only use of such software.

76.1.3 The purchase of other software which merely provides information to assist the customer in making business decisions is taxable.

Emphasis added.

Section 110-15-76.1.1 contains an example, underlined in the above quotation, which specifically discusses billing services. It appears that a portion of the services rendered by computerized medical billing services arguably comes within the exemption for electronic data processing. Even though the billing service is a taxable service, the component of the service which consists of electronic data processing, as defined in the above quoted provisions, is exempt from the West Virginia consumers sales and service tax and use tax.

It is necessary to determine what portion of the gross proceeds from a computerized medical billing service represents gross receipts from a taxable billing service, and what portion of the gross proceeds represents gross proceeds from exempt data processing service.

In circumstances where a transaction involves a mix of taxable and nontaxable services, the Department of Tax and Revenue may establish guidelines or "safe harbors" for the consumers sales and service tax and use tax treatment of such transactions.

Section 110-15-3.4.1.1 of the consumers sales and service tax and use tax regulations reads as follows:

3.4.1.1 Apportionment of sales price. - In instances where a transaction involves the sale of taxable personal property or taxable services, and the sale of nontaxable property or services, and the method of billing does not delineate what portion of the sales price is taxable, the Tax Commissioner may establish safe harbors which will assist in the development of uniform apportionment calculations for similarly situated taxpayers. The Tax Commissioner must file appropriate administrative [notice] filed in the State Register at least thirty (30) days prior to the effective date of the subject matter of the safe harbor being established.

Tax Division staff have reviewed a sample of the records of West Virginia computerized medical billing services to determine what portion of the transactions of computerized medical billing services are typically subject to the consumers sales and service tax and use tax.

SAFE HARBOR

Staff has recommended that the safe harbor percentages for taxable and nontaxable components of total billings by computerized medical billing services be set as follows:

Taxable component: 15% of total service charges.

Exempt component: 85% of total service charges.

Pursuant to this determination, the Tax Commissioner hereby notifies the public that Tax Division examiners have been directed to use the safe harbor rule whereby computerized medical billing services may calculate the West Virginia consumers sales and service tax and use tax as fifteen percent (15%) of total charges (including reimbursements and all other charges) and may collect and remit the tax based upon this calculation. Fifteen percent of total charges will be deemed taxable, and eighty five percent of total charges will be deemed not taxable.

If the computerized medical billing service provider fails to use the safe harbor calculation set forth herein, it will be necessary for the computerized medical billing service provider to specifically account for the tax based upon taxable and nontaxable sales and services. If this percentage calculation and collection method is used, the computerized medical billing service provider need not specifically determine the taxable and nontaxable components of total gross proceeds.

In circumstances where an itemized billing is generated for a purchaser, the consumers sales and service tax should nevertheless be applied to 15% of total sales shown on the itemized billing or invoice. In any circumstance where a purchaser feels that this procedure results in an overpayment of the consumers sales and service tax or use tax, the purchaser should be informed that the tax has been applied pursuant to the requirements of the safe harbor rules of the Tax Division, and the purchaser may seek a refund of any consumers sales and service tax or use tax overpayment by applying for a refund of the overpayment and submitting proof of such overpayment to the Tax Commissioner within the two year statute of limitations.

USE TAX

Computerized medical billing services are often rendered across state lines through electronic communications media. The State of West Virginia imposes a complimentary use tax under sections 11-15A-1a and 2 of the West Virginia Code on the use of tangible personal property and services purchased outside of West Virginia, but used or consumed in West Virginia.

The use tax is applicable to West Virginia medical care providers who purchase computerized medical billing services from computerized medical billing service providers outside of West Virginia. Because the service is in part performed outside of West Virginia (but consumed in West Virginia), the use tax is applicable. The service is treated as having been consumed in West Virginia because:

(1) West Virginia is the jurisdiction where the medical care provider is located,

(2) West Virginia is the jurisdiction where the medical services which give rise to the billings were rendered, and where the patients who pay the bills (either directly or indirectly through insurance coverage) are typically located,

(3) West Virginia is the jurisdiction in which the proceeds of billings (i.e., the ultimate benefits of the billing service) are received by the medical care provider, and

(4) West Virginia is typically the jurisdiction in which any judicial proceedings may be brought to collect debts or to resolve disputes arising out of the billings or out of the medical procedures that gave rise to the billings.

These several factors with relation to computerized medical billing services substantially constitute use of a taxable service in the State of West Virginia by the medical care provider. The medical care provider would be liable for the West Virginia use tax, even though the service is performed by a computerized medical billing service located outside of West Virginia through electronic communications media or other means. Though the service may be performed in part outside of West Virginia, the service is used by the medical care provider in West Virginia.

REMITTANCE OF USE TAX TO THE STATE

Unlike the consumers sales and service tax, the use tax is not necessarily collected by the vendor. The use tax is typically paid directly to the State by the purchaser of the tangible personal property or service subject to the tax. However, where the vendor has nexus with the State of West Virginia, or where the vendor voluntarily elects to collect the tax for the convenience of the vendor's customers under section 11-15A-7 of the West Virginia Code, the vendor collects the use tax from the purchaser and remits it to the Department of Tax and Revenue in the same manner as the consumers sales and service tax.

Nexus will typically be found to exist where the vendor is substantively doing business in West Virginia. A company may be found to be engaging in business in the State by having a sales office, business facility or other business property in West Virginia, by having employees, salesmen, agents or representatives in West Virginia who substantially engage in business in West Virginia, or by customarily and routinely having employees in West Virginia to install hardware or software, resolve communications problems or other problems, provide training, or explain billing procedures. The character and extent of business activities in West Virginia will determine whether nexus exists.

The safe harbor percentages here specified apply to both the West Virginia consumers sales and service tax and the West Virginia use tax.

In circumstances where the West Virginia use tax is not collected by the computerized medical billing service provider, the medical care provider must pay the West Virginia use tax directly to the State of West Virginia. Medical care providers may elect to calculate the West Virginia use tax liability using the safe harbor percentages set forth herein.

If the medical care provider fails to use the safe harbor calculation set forth herein, it will be necessary for the medical care provider to specifically account for the tax based upon taxable and nontaxable sales and services. If this percentage calculation and collection method is used, the medical care provider need not specifically determine the taxable and nontaxable components of total payments to the computerized medical billing service provider.

APPLICATION OF THIS ADMINISTRATIVE NOTICE

The provisions of this Public Notice shall apply to any matter or assessment of tax currently pending before the Department of Tax and Revenue, and shall apply to any audit or review henceforth undertaken or any assessment henceforth issued by the Tax Division of the Department of Tax and Revenue. 

Issued: May 1996	James H. Paige III Secretary/Tax Commissioner West Virginia Department of Tax & Revenue
Department of Tax & Revenue Taxpayer Services Division P.O. Box 3784 Charleston, WV 25337-3784	Operator on duty 8:30 am - 4:00 pm Monday through Friday Phone: (304) 558-3333 or 1-800-982-8297 Fax (304) 558-3269 TDD Service/Hearing Impaired 1-800-282-9833