Thanks for your response LGarvin.
According to what I've read, a local SQL account must exist on the SQL server with sysadmin rights and a domain account needs to exist with sysadmin rights in the SQL server. This is what I've setup and I apologize for not fully detailing that in the initial post. The domain account is in a different domain, however a 2-way trust exists and I'm able to add the domain service account to the SQL server. I logged in as the service account that has sa rights to the SQL box to do the setup and pass along windows authentication. I am going to re-image the server that's going to be used for patch manager tomorrow to see if that has any effect.
Is it common to have this installed in a Server 2012 environment? Also any other suggestions would be greatly appreciated.