The Texas Comptroller issued an advisory opinion reversing a longstanding policy relating to Texas sales taxation of medical billing services that will impact all Texas medical management and medical billing companies. Originally set to be effective January 1, 2020, the Comptroller last week delayed the implementation of the new position until April 1, 2020. However, the opportunity exists to work with the Comptroller to amend Texas’ tax law in the 2021 session of the Texas Legislature and prevent the new position from being implemented.

The potential impact of this policy cannot be understated. For both third-party medical billing companies and Texas medical management companies (even those wholly-controlled by the physicians, dentists, and other medical professionals it manages), the scope of “medical billing services” and the extent to which consideration flows for such services needs to be analyzed and a determination made, if required, to begin withholding and charging Texas sales tax on the required component next year. For example, the need to separately account for and state the taxable versus nontaxable component of any agreement that provides for a lump-sum fee is important (the “separately stated” strategy for sales tax compliance). With many management agreements, a fixed amount is paid to cover a broad spectrum of services.

Management companies and third party billing companies have historically not collected or paid Texas sales tax on their charges to clients/customers for services rendered in connection with what is generally described as “medical billing services.” Since 2002, through advisory opinions issued by the Texas Comptroller, the position has been that such services were not “taxable services” subject to Texas sales tax rules. The Texas Tax Code does not have a statutory definition for “medical billing services.” Rather, the statute provides that Texas may tax various categories of “taxable services.”[1]

Certain relevant categories of “taxable services” include “debt collection services,” “insurance services,” and “data processing services.”[2] The struggle between, on the one hand, providers of “management services” (undefined in the Texas laws) and, on the other hand, the Texas Comptroller, has been the attempt to squeeze components of management services fees into one of the three potentially “taxable service” categories listed.

The most potentially applicable category was “insurance services.” The Texas Administrative Code Rule 3.355(a)(3), arising out of the Texas Comptroller’s authority to interpret the statute, expanded on the definition of taxable “insurance services” to include “insurance claims adjustment or claims processing” which in turn included “any activities to supervise, handle, investigate, pay, settle, or adjust claims or losses.” [3]

In prior Comptroller Letters, the position was that medical billing services, so long as the services were provided prior to receipt of an actual claim by an insurance company, were not considered taxable “insurance services.” For example, under the now-superseded (and surprisingly recent) Comptroller Letter 201807025L (July 16, 2018), the Comptroller held that the medical coding and billing services provided by a billing company, to the extent provided before submission of the claim, are nontaxable.

Despite this prior Comptroller Letter, In Comptroller Letter 201911003L, the Texas Comptroller issued a “Statement of Policy” reversing this previous policy and states specifically that the agency would now hold, effective January 1, 2020, that “medical billing services are insurance services” and thereby, a taxable service subject to Texas sales tax. The Comptroller stated:

“The preparation of an insurance claim must occur prior to the claim being submitted to the insurance company. Preparation of a claim is an inherent part of the insurance claim process. Medical billing services to prepare a medical insurance claim for filing constitute insurance claims adjustment or claims processing. Thus, medical billing services are insurance services.”

For more information on this Texas development, please contact a member of the Texas Husch Blackwell Healthcare Law team.

[1] Texas Tax Code § 151.0101 (“Taxable Services.”). This section also provides that the Texas Comptroller shall have “exclusive jurisdiction” to interpret the terms listed in this section for “taxable services.”

[2] Id. § 151.0101(a)(8), (9), and (12).

[3] The Texas Comptroller expanded on this provision further by stating that “insurance services” are taxable regardless of whether the purchaser of services are the insurance company, policy holders, or others. Comptroller Op. Ltr. 9801459L. Medical billing falls under the general category of “insurance services” because the nature of the work entails submissions of claims to insurance companies for medical services.