Important New Law Exempting Certain WC Medical Services from Sales and Use Taxes

On June 18, Governor Abbott signed into law Senate Bill 1122, an Act related to the exclusion of certain medical services performed to determine an appropriate level of workers’ compensation benefits from sales and use taxes.

On October 20, 2022, the Texas Comptroller of Public Accounts issued a ruling stating that charges for designated doctor exams under Texas Labor Code Section 408.0041 are subject to Texas sales and use tax. The ruling is based on specific sections of the Texas Tax Code and Texas Labor Code.

The Comptroller determined that designated doctor exams are not considered “medical services” but rather evaluations to determine workers’ compensation benefits. Therefore, they are classified as “insurance services” and are subject to sales and use tax.

However, on November 10, 2022, the Comptroller issued a memo delaying the implementation of this ruling until after the 2023 legislative session. This was done to allow DWC and participants in the workers’ compensation system to seek a legislative change. The memo also stated that designated doctors were currently not required to collect tax on charges for exams.

Senate Bill 1122 addresses the Comptroller’s decision regarding the classification of designated doctor exams as “insurance services” subject to taxes. It amends the definition of “insurance services” in the Tax Code to specify the exemption.

This new Act now exempts “a medical service, examination, or test required or authorized under Chapter 408, Labor Code, for the purpose of determining the appropriate level of benefits under that chapter.”

In its ruling regarding Designated Doctor examinations, the Comptroller referred to a previous ruling (Private Letter Ruling No. PRL20190613133913). That ruling explicitly discussed utilization review, peer review, and independent medical examination services. The Comptroller concluded that utilization review services meet the definition of an insurance claims adjustment or claims processing service. However, it is unclear whether SB 1122 addresses these services, as they are not entirely governed by Chapter 408 of the Labor Code. That said, Chapter 408, Subchapter B, does regulate “Medical Benefits” and Section 408.0043 provides for professional specialty certification required for a doctor performing a peer review, utilization review, and independent review.

Therefore, until further clarification is received from the Comptroller, it is advisable to consult a tax attorney regarding the scope of SB 1122 and its impact on services such as utilization review, peer review, and independent medical examination outside of those required or authorized under Chapter 408 of the Labor Code.