June 25, 2019

Colorado Court of Appeals: Obtaining Medical Record Copies Is Obtaining Intangible Information Contained Within by Purchasing the Services Necessary to Retrieve and Copy Them

The Colorado Court of Appeals issued its opinion in Treece, Alfrey, Musat & Bosworth, PC v. Dep’t of Finance, City and County of Denver on November 23, 2011.

Tax Dispute—Use Tax on Costs of Obtaining Medical Records for Litigation.

The Department of Finance of the City and County of Denver (Department) appealed the district court’s judgment reversing a hearing officer’s determination that Treece, Alfrey, Musat & Bosworth, P.C. (law firm) owed use tax on the cost of obtaining copies of medical records from health-care providers for the law firm’s use in litigation. The judgment was affirmed.

The law firm represents clients in civil litigation. As part of its practice, it often must acquire photocopies of medical records. Generally, the law firm receives authorization to release records from the opposing party or its own client, provides the authorization to pertinent health-care providers, receives paper copies, and pays an invoice generated by the health-care provider. The law firm then receives reimbursement from an insurer of its client or directly from the client. The health-care provider does not charge sales tax when providing the records and the law firm does not pay sales tax, nor does it charge a sales tax to its client or the insurer. The records, kept in the law firm’s files, are owned by the law firm, the insurer, or the individual client.

The Department conducted a routine tax audit of the law firm from January 1, 2006 through December 31, 2008 and assessed use tax, penalties, and interest on the law firm’s costs paid to obtain medical records. The law firm contested the assessment and the hearing officer upheld it, concluding that the law firm “purchased tangible personal property for use in Denver in connection with its business and did not pay sales tax.”

The law firm appealed to the district court, which found an abuse of discretion and reversed the hearing officer’s judgment. The Department argued that the hearing officer’s decision was correct, and appealed. The Court of Appeals disagreed and affirmed the trial court’s judgment, albeit on different grounds.

The Court looked to the applicable tax provision, Denver Revised Municipal Code § 53-96, which essentially requires businesses that purchase tangible personal property in Denver for use and do not pay sales tax to pay use tax. The parties agreed that the physical documents obtained from health-care providers constituted tangible personal property. The parties disagreed on three points: (1) whether the copies were “sold” or “purchased at retail” because hospitals and doctors are not in the business of selling medical records at retail; (2) whether the photocopying of records for litigation purposes is a retail sale for consideration because they must be furnished without charge on presentation of authorization and they are not sold; and (3) whether the charge for photocopying reflects provision of a service versus a product.

The Court examined the nature of medical records. It found that a patient or authorized representative who seeks copies of a medical record receives, on payment of reasonable costs, both an item of tangible personal property (the documents) and the services or rights that are other than tangible (the labor involved in physical retrieval and copying, as well as the information in the record).

Neither statutory provisions nor the record allowed for a meaningful separation of the cost of providing the services and intangible property from the cost of providing the actual paper document. The Court therefore applied the “true object” test in which the Court analyzes the “totality of the circumstances” to determine whether the true object, dominant purpose, or essence of the transaction is the acquisition of tangible personal property or the acquisition of intangible services. The Court concluded the obtaining of medical record photocopies is not a transaction for the furnishing of tangible personal property, but that the true object is obtaining intangible information contained within the medical records by purchasing the services necessary to retrieve and copy them.

This summary is published here courtesy of The Colorado Lawyer. Other summaries for the Colorado Court of Appeals on November 23, 2011, can be found here.

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