Texas Comptroller Ruling Applies Sales Tax to Medical Record Retrieval and E-Discovery Services

4 minute read | September.11.2023

In a private letter ruling, the Texas Comptroller of Public Accounts determined that a pre-litigation medical records retrieval services provider must pay sales tax on “copy fees” – a broad term incorporating client charges related to copying, optical character recognition (OCR), electronic Bates labeling, bookmarking of records and more.

The ruling reads narrowly at first glance but implies a considerably more expansive scope that would meaningfully increase the cost of e-discovery and litigation as a whole.

Private Letter Ruling Analysis

The private letter ruling answers the question, “Are [a] Taxpayer’s custodian, authorization, and copy fees charged to customers for the retrieval of medical records pursuant to pending litigation subject to sales tax?” Two of these types of fees – custodian fees and authorization fees – are not subject to the sales tax per the ruling.

A “custodian fee” is the amount the taxpayer (the records retrieval service provider) charges its client for reimbursement of any fees paid to a medical service provider on behalf of the client in exchange for the records.

An “authorization fee” is the amount a taxpayer charges the client to prepare requests for records from medical service providers, review records for accuracy and completeness and transfer the record to the customer.

The Comptroller’s ruling determined that “copy fees” are subject to the sales tax. The Texas sales tax is 6.25 percent for the sale of “tangible personal property” while “data processing” sales are taxed at 80 percent of that rate.

“Copy fees” relate to “any additional tasks performed once the medical records have been received.” The ruling states that tasks like making physical or electronic copies of documents, X-rays and other medical imaging, or CDs and DVDs are taxable as sales of tangible personal property. And OCR, Bates labeling, records bookmarking, and any other document data entry, compilation, or manipulation are taxable as data processing.

In simple terms, acquiring the original documents will not trigger this sales tax, but copying or modifying these materials in any way that would be necessary to prepare for litigation will trigger the sales tax.

Ruling Application and Impact on Litigation Costs

The ruling refers to tax applicability only in the context of medical records requests. But the cited sections of the Texas Tax Code do not provide any such context limitation, suggesting that the copying, Bates stamping, OCR, etc. of all pre-litigation documents will now be subject to the state’s sales tax.

Without a clear guiding policy, it is difficult to anticipate whether any particular pre-litigation document service component will be subject to the sales tax until a specific private letter ruling is issued or clarifying piece of legislation is adopted.

In addition to the questions raised related to the substantive applicability, the ruling also raises questions regarding its jurisdictional and sourcing applicability in the data processing context. (For tangible personal property, such as electronic or physical copies of medical records, X-rays, CDs or DVDs, etc. Texas assesses tax based on the location of the shipping destination.)

The Texas Comptroller provides very general guidance on this point, that:

  • A Texas data processing service provider may provide their service to customers inside and outside of Texas, and that only the part of service “used” in Texas is taxable.
  • If a service is used to support a separate part of a customer’s business – other than general administration or operation of the business – the service is used where the business is conducted.
  • If part of the client’s business is conducted at locations both within and outside of the state, the service is not taxable to the extent it is used outside of Texas.
  • A multi-state customer may use any reasonable method for allocation that is supported by business records.

This still leaves room for interpretation in the medical records context. Is the information “used” where the party to a lawsuit is located? Or is it determined by the location where the pre-litigation medical records retrieval services provider – or outside legal counsel for the party in litigation – is located?

In a world where records requests can involve hospitals, legal counsel and pre-litigation medical records retrieval services providers in different states, additional clarity is needed to understand where, and by whom, the information will be considered “used.” Texas’ piecemeal approach to sales tax has led to a notoriously confusing mixed-sourcing application of tax liability.

Ultimately, the ruling raises serious questions with the potential to significantly impact the cost of litigation in Texas. Law firms, medical services providers, records retrieval service providers, litigants, and constituents in Texas would all be well-served by additional clarity and policy consistency from the state on this issue.