May 7, 2012

 

On behalf of your client **************** and its affiliates (the “Company”), you have requested a letter ruling with respect to the Massachusetts sales and use tax as it applies to Company’s sales to Massachusetts customers.  Specifically, you request a ruling on whether such sales are subject to the sales tax on prewritten software imposed under G.L. c. 64H, §§ 1, 2.  The following is your representation of the facts upon which we base this ruling.  No single fact is determinative in the conclusions reached in this ruling
 

I.  FACTS


The Company is a publicly traded Delaware corporation with an address ********************************.  You state that the Company is a leading provider of business services for physician practices.  The Company’s business is based on four components that are integrated to provide its offerings: proprietary Internet-based software, a continually updated proprietary database of pay reimbursement process rules, back-office service operations that perform administrative aspects of billing and clinical data management for physician practices, and automated and live patient communication services.  Although the four components are currently available separately, you indicate that the business plan for the future would bundle all four into a package for a single price.

 

The Company offers assistance to physician practices that conduct business in an industry where third-party insurers are a significant source of customer payments.  Company’s offerings are intended to allow its clients to achieve faster reimbursement from payers, to reduce error rates, to increase collections, to lower operating costs, to improve operational workflow controls, to improve patient satisfaction and compliance, and to more efficiently manage clinical and billing information.

The graphical user interface between the Company and its clients is exclusively Internet- based.  The Company does not offer or sell computers or other hardware, or any specialized software platform to its clients, and does not require its clients to purchase any particular hardware or specialized software from third parties.   Physician practice data is maintained on the Company’s servers, and the Company does not charge clients separately for data storage or data transmission.  Clients access data through built-in reporting functions or through custom reports that are prepared by the Company for the client. 

When a customer purchases one or more offerings from the Company, it typically signs a contract requiring it to pay initial implementation fees as well as an ongoing monthly service charge.  The initial fees cover the set-up of the practice on the Company’s systems as well as assistance from Company’s personnel to facilitate both the set-up process and initial user training at the client practice.  Monthly service charges are typically set at a percentage of the practice’s collections, and in some cases at a flat rate per medical service provider or per claim processed.

No software is installed on customer computers as part of the set-up process, and apart from Java software “applets” that are sometimes downloaded onto users’ computers in the course of a Web-based browser session, no Company-related software is ever resident or used on customer computers.  The software “applets” that are downloaded have no independent value or use apart from facilitating the Web browser session, and users have no control over the downloading or use of those applets.  While not determinative of taxability, we note also that the contract between Company and its customer does not grant a software license to the customer. The Company’s Web-based offerings include the following components:


(a) ********* (“Clinicals”)

The Clinicals component of the Company’s offerings automates and manages medical-record and patient workflow-related functions for physician practices and includes an electronic health record, or “EHR,” platform.  This application organizes the core clinical workflows of a practice including documenting patient encounters, order entry, results viewing, patient call tracking, clinical reminder tracking, and workflow task management. 

Clinicals includes a global library of information called Clinical Content, available to all of the Company’s clients.  The Clinical Content software includes: specialty-specific templates for physical exam and procedures and test interpretations, among others; a drug database that includes drug-to-drug, drug-to-allergy and drug-to-diagnosis interactions; a Clinical Provider (pharmacies, laboratories, facilities, providers) database; clinical terminology and mapping libraries for clinical terminology; an order type database containing commonly placed orders; and basic clinical paper forms. Clinicals also includes an e-prescription service that enables physicians to electronically transmit patient prescriptions to pharmacies, reducing paperwork while enhancing patient care. This application includes an “inbox” that tracks tasks and documents, pre-configured patient encounter and chart layouts, history, exam, and order set templates, lab result interfaces, and other functionality.  This offering also includes the recording and management of incoming and outgoing facsimiles and other communications. 

Physicians and their office staff can enter patient data directly into the computer during patient visits, and throughout the day, as patients are seen by the doctor and information becomes available.  Such patient data includes, among other things, patient symptoms reported, height and weight, blood pressure, and any tests ordered or results received as well as any follow-up appointments scheduled.  While electronic data entry during a patient encounter at a client’s office is performed by the physician or staff member seeing the patient, the data entry is facilitated by templates created by Company and those templates are often custom designed and maintained by Company for specific specialties or clients.

In many instances, physicians’ offices document patient encounters on paper and such documentation is subsequently imported into the Company’s database by Company personnel as part of the Clinicals offering.  In these cases, the Company’s Document Services Team processes incoming documents and routes them to the physician’s practice via document routing rules defined by the physician’s practice.  The Company may also send out (either electronically or via fax) prescription renewals, referrals, consultation letters and authorizations, relieving the physician’s staff of these activities when asked to do so.  Documents that the Company has access to are classified by type (e.g., lab result, consult letter, etc.), matched to the correct patient chart, tied to outstanding orders (if applicable), verified for classification, and entered into the Company’s database. 

Thus, through the Company’s co-sourcing model, data entry tasks are completed through a combination of Company’s services and the efforts of a client’s medical practice staff.  The Clinicals services incorporate approximately four million paper documents into the database each month, including between one million and 1.3 million facsimiles received from lab service providers and others.  Each facsimile is reviewed, coded and integrated into the database by a staff of nearly 400 Company employees and contractors, using a multi-level, multi-reviewer scanning, categorization and data entry process. 

 

(b)  ************* (“Collector)

 

The Collector component of the Company’s offerings is a practice and revenue management offering that automates and manages administrative and billing-related functions for physician practices.  Physician practices frequently purchase Collector together with Clinicals, described above.  In providing Collector among its offerings, the Company uses its proprietary software to simplify patient registration, scheduling, check-in, coding, referral management, checkout, appointment follow-up, collections, accounting and reporting.  A key component of Collector is a database of payer-specific reimbursement requirements, owned and constantly updated by the Company, that facilitates the full and accurate payment by health insurers of patient bills.  The main services provided by the Company with this component include sending claims, receiving, processing and posting payments from patients, and working the customer’s accounts receivable, which consists of tracking claims, investigating claims that have been denied by the insurance company, and investigating and handling insurance underpayments and zero-pays.


(c) **************** (“Communicator”)


The Communicator component of the Company’s offerings is a communication portal that offers secure and compliant messaging via the Web, email and cell phones, and expanded accessibility for patients after hours and on weekends.  This component provides live operators for after-hours patient calls redirected from the Company’s automated messaging platform and facilitates the elimination of paper-based mailing campaigns.  This component includes ReminderCall, an automated appointment reminder system that allows patients to either confirm the appointment or request rescheduling through a live operator.  Communicator is centrally hosted, so that physician practices do not need software, servers, or phone lines to use it. 

(d) ***************  (“Analytics”)


The Company offers a business intelligence platform called ********************** (“Analytics”) that organizes and displays practice performance data for decision makers at client medical practices.  This offering is available on a standalone basis or as an enhancement to the Collector offering.  The product includes a process by which the Company extracts, transforms and loads its clients’ revenue-cycle data and makes it available via the Internet.

The extracted data is transformed, mapped to conform to the ********************* platform’s database architecture, and loaded onto the Anodyne Analytics servers.  The Company then runs calculations on the data and indexes the data in many different ways so that when the client makes a query request, the data is delivered to the client quickly and efficiently.  While the underlying data values are taken from the client’s practice management system, the resulting database is significantly different from the client’s practice management system database in both content and structure.  The extraction services are provided by Company personnel who provide any reasonable and necessary programming and other services to assist with the data extraction in order to reformulate and rearrange the data in a way that will be the most meaningful to the customer. 
 

II.  ISSUES

 

1)   Whether Massachusetts customers’ purchases of Clinicals are subject to the Massachusetts sales and use tax.

2)   Whether Massachusetts customers’ purchases of Collector are subject to the Massachusetts sales and use tax.

3)  Whether Massachusetts customers’ purchases of Communicator are subject to the Massachusetts sales and use tax.

4)  Whether Massachusetts customers’ purchases of Analytics are subject to the Massachusetts sales and use tax.
 

III.  RULINGS


Based on the facts that have been presented, the Department rules that each of the components described above, sold alone or bundled with one or more of the others, is not subject to Massachusetts sales or use tax for the reasons discussed below.
 

IV.  LAW AND ANALYSIS


Massachusetts imposes a 6.25% sales tax on sales of tangible personal property and telecommunication services within the Commonwealth, including sales of prewritten (also called “canned” or “standardized”) software regardless of the method of delivery.  The rules relating to tax on computer hardware and software are contained in the Computer Industry Services and Products Regulation, 830 CMR 64H.1.3.  Section (3) provides the following:
 

                  (3)  General Rules.
 

(a)  Sales Tax.  Sales in Massachusetts of computer hardware, computer equipment, and prewritten computer software, regardless of the method of delivery, and reports of standard information in tangible form are generally subject to the Massachusetts sales tax.  Taxable transfers of prewritten software include sales effected in any of the following ways regardless of the method of delivery, including electronic delivery or load and leave: licenses and leases, transfers of rights to use software installed on a remote server, upgrades, and license upgrades.  The vendor collects sales tax from the purchaser and pays the sales tax to the Commissioner.
 

Charges for prewritten software, whether it is electronically downloaded to the customer or accessed by the customer on the seller’s server (including the “Software as a Service” business model) are generally taxable.  However, the marketing description of a product as “software-as-a-service” does not determine taxability of that product, nor does the fact that customers do not download software or otherwise install software on their own computers or other devices.

The sale, license, lease or other transfer of a right to use software on a server hosted by the taxpayer or a third party, as described in 830 CMR 64H.1.3(3)(a), is generally taxable under Massachusetts sales and use tax law.  However, where there is no separate charge for the use of the software and the object of the transaction is acquiring a good or service other than the use of the software, sales or use tax on software generally does not apply.  See 830 CMR 64H.1.3(14)(a); LR 10-1.  Where use of a software application is bundled with substantial non-taxable personal or professional services or non-taxable services such as database access or data processing, the object of the transaction will frequently be the non-taxable service rather than a sale of software.

We first address Clinicals, which is described as a management tool designed to help physician practices manage documents from many sources, report data for clinical quality control and follow up on orders.  This offering involves a combination of database access and data processing facilitated by pre-written software that is hosted on the Company’s server.  Although the physician practice may access the Company’s platform to assist in the management of its patients’ registration, scheduling, check-in, coding, referral management, checkout, appointment follow-up, billing and collections, accounting, reporting and contact information, we have concluded that the object of the transaction in a physician practice’s purchase of Clinicals is to receive a practice management service rather than use of the underlying software.  

The Company’s staff performs personal and professional services for its customers by entering data and matching patient records, etc.  Data entered into Clinicals from any source is automatically integrated into a clinical in-box of alerts, tasks and follow-up clinical reminder items used on a daily basis by physicians and their staff.  The Company maintains that the doctors’ staff does not perform all of the tasks within the workflow.  Instead, through Company’s co-sourcing model, the tasks are completed through a combination of Company’s services and medical practice staff efforts.

The Clinicals offering includes a global library of information called Clinical Content, which provides customers with on-line database access.  Other components of Clinicals provided by the Company include e-prescription services which enable physicians to electronically transmit patient prescriptions to pharmacies as well as an application that tracks tasks and documents and provides pre-configured patient encounter and chart layouts, history, exam, and order set templates, lab result interfaces, and other functions.  The Department has previously ruled that e-prescription services are not subject to sales or use tax.  See LR 08-6.  We rule here, as in Letter Ruling 08-6, that e-prescription services involve database access rather than a sale of telecommunication services or software, and therefore they are not subject to the sales or use taxes. 

Although the physicians’ staff does enter data with respect to the physicians’ patients and uses the Company’s software to more efficiently access, manage and track patient information, the Company provides substantial personal and professional services to its physician practice customers.  Such services are integrated or bundled with non-taxable database access and the sale of a right to use prewritten software by physicians and their staff to manage their practices for a single subscription price.  We rule that the object of the transaction in the sale of Clinicals is the purchase of the services provided by the Company.

Second, the Collector offering provides Web-based services that manage and track patients’ billing information.  Customers use these services so that they can receive full and accurate payment by health insurers; the Company constantly updates the database of payer-specific reimbursement requirements.  Once the physician practice enters the patients’ personal data, the Company organizes it, maintains and manages it from the database to ensure accurate patient billing.  The object of the transaction in acquiring this component is to purchase a vendor-managed billing service, which is a personal or professional service that is not subject to the sales tax. 

Third, the Communicator offering provides customers with operators for after-hours patient calls redirected from the Company’s automated messaging platform.  This offering includes ReminderCall, an automated appointment reminder system that allows patients to either confirm the appointment or request rescheduling.  Communicator is centrally hosted and controlled by the provider, so that physician practices do not need software, servers, or phone lines to use it.  While some of what the Communicator offering provides to customers is automated and software-based, we rule that because of the substantial human involvement in providing services, including in the provision of operators who make patient calls, document delivery of test results, GroupCall services, extended-hour staffing, GroupCall collection campaigns via phone, e-mail, and portal, and on-line credit and debit card payment processing, this component is a combined answering and billing service that is not subject to the Massachusetts sales tax.

Finally, the Company’s “Software-as-a-Service” business offering called Analytics organizes and displays practice performance data for decision makers at client medical practices.  As part of this offering, Company extracts data from a client’s “practice management system,” maps the data to conform to the Analytics platform’s database architecture, and loads the data into the Analytics platform.  Company then runs calculations on the data and extensively indexes the data so that when the client makes a query request, the data is delivered to the client quickly and efficiently.

Pursuant to this offering, healthcare business professionals may access the software’s visualization tools and view data pertaining to their particular practice to help manage their practices and increase their revenues.  Accordingly, we rule that, in offering Analytics, Company is providing reports of individual information and data processing services that are accessed by the Company’s clients on the Company’s server.  Because the object of the transaction is to obtain a service that organizes and displays practice performance data for medical practices with minimal manipulation of the data by physicians themselves, purchases of the Analytics offering are not subject to the Massachusetts sales and use tax.  See 830 CMR 64H.1.3(9).
 

V.  CONCLUSION


The Commissioner will consider all the facts and circumstances when determining whether a product is a personal or professional service or a sale of the right to use pre-written software.  In certain instances both services and the right to use software may be integrated or bundled in one transaction.  In that case, the Commissioner looks to an “object of the transaction” test to determine taxability.

Here, we rule that based on the facts that have been presented, none of the Company’s four offerings described above are subject to Massachusetts sales tax.  We conclude that the Company provides substantial personal and professional services to its physician practice customers in connection with each of the four offerings.  While such services are facilitated by software, the object of the transaction is the purchase of information management services performed by Company’s staff, database access, and data processing.  The fact that such services involve Company’s employees performing tasks such as calling, faxing, e-mailing, and entering substantial amounts of information, on a daily basis, weighs heavily in the determination that this is a non-taxable sale of services.  Although physicians and their staff access the software to a certain extent, incidental data entry and access will be deemed inconsequential when applying the object of the transaction test, if it can be shown that substantial personal or professional services are performed by the seller and the value of such services outweighs the value attributable to use of software by the customer.

Very truly yours,

/s/Amy Pitter

Amy Pitter
Commissioner of Revenue


AP:MTF:wm

LR 12-5