Does Texas sales tax apply to independent insurance claims investigation and adjustment services, and does it matter who hires the firm?

Texas AG Opinion JM-1016: Are Insurance Claims Investigation Services Taxable in Texas?

Plain-English summary

In 1987 the Legislature expanded the Texas sales tax to cover a batch of services it had not taxed before, and "insurance services" were on the list. Comptroller Bob Bullock came to the Attorney General with a practical enforcement question. A lot of firms make their living investigating and adjusting insurance claims: figuring out whether a covered accident really happened, and how much the damage is worth. Are those firms' services subject to the new tax, and does the answer change depending on who hires them?

The Attorney General's answer was straightforward: yes, those services are taxable, and no, it does not matter who hires the firm.

The interesting part is the argument the Attorney General rejected. The statute that defines "insurance service" has a carve-out. It says "insurance service" does not include "insurance coverage for which a premium is paid." Someone could try to read that broadly: an insurance company pays claims out of the premiums it collects, so maybe anything the insurer spends premium money on is part of "coverage for which a premium is paid" and therefore excluded. The Attorney General said no. That exclusion means only one thing: the act of buying an insurance policy, paying a premium for coverage, is not itself a taxable event. It does not follow that everything the insurer later spends that premium money on escapes tax. Reading it that way would swallow the tax whole, because claims investigation and adjustment are exactly the services the statute lists as taxable. A reading that makes the tax meaningless is an absurd result the Legislature could not have intended.

From there the rest of the questions answered themselves. It does not matter whether the firm is hired before or after the insurer makes a settlement offer or gets sued; timing is irrelevant. And it does not matter who the customer is. The statute gives no basis for treating the same service differently depending on whether the buyer is the insurance company, the insured person, or an attorney. The service is taxable across the board.

Currency note

This opinion was issued in 1989. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The taxability of insurance services still lives in the Tax Code (the definition discussed here is section 151.0039, and insurance services remain a taxable service under chapter 151), but the tax rules, Comptroller rules, and the treatment of specific transactions have been amended and interpreted many times since 1989. A business buying or selling claims investigation or adjustment services today should check the current Tax Code sections and the Comptroller's current rules and guidance rather than rely on the 1989 framework here.

Who this opinion affected (as of 1989)

The Comptroller of Public Accounts: The opinion confirmed the Comptroller could collect sales tax on independent claims investigation and adjustment services and did not have to carve out exceptions based on who bought the service or when.

Independent claims investigation and adjustment firms: The opinion told them their services were taxable insurance services, regardless of whether an insurer, an insured, or an attorney was the customer.

Insurance companies, insureds, and their attorneys: The opinion clarified that buying these services meant paying sales tax, and that the premium-coverage exclusion did not shield those purchases.

Common questions

Are independent insurance claims investigation and adjustment services subject to Texas sales tax?
Yes. In this opinion the Attorney General concluded they are taxable "insurance services" under section 151.0039 of the Tax Code, because the statute expressly lists insurance investigation and claims adjustment.

Doesn't the exclusion for "coverage for which a premium is paid" cover them?
No. That exclusion means only that paying a premium for insurance coverage is not itself a taxable event. It does not exempt the money an insurer later spends on claims services.

Does it matter when the firm is hired, for example after a lawsuit is filed?
No. The Attorney General concluded the timing of the engagement makes no difference to taxability.

Does it matter whether the insurance company, the insured, or an attorney hires the firm?
No. The statute provides no basis for distinguishing among purchasers, so the service is taxable regardless of who buys it.

Background and statutory framework

The second called session of the 70th Legislature amended the Texas Limited Sales, Excise, and Use Tax Act (chapter 151 of the Tax Code) to create several new categories of taxable services, including insurance services (Tax Code section 151.0101(a)(9); Acts 1987, 70th Leg., 2d C.S., ch. 5, art. 1, pt. 4, section 12). The Legislature defined "insurance service" to mean insurance loss or damage appraisal, insurance inspection, insurance investigation, insurance actuarial analysis or research, insurance claims adjustment or claims processing, or insurance loss prevention service; the definition excludes "insurance coverage for which a premium is paid" and commissions paid to insurance agents for the sale of insurance or annuities (Tax Code section 151.0039, as added by Acts 1987, 70th Leg., 2d C.S., ch. 5, art. 1, pt. 4, section 6).

The Comptroller noted that many businesses specialize in providing independent claims investigations and adjustments for insurance companies, for individuals pursuing claims, and for attorneys representing insurance companies or claimants, and that such firms investigate whether a covered accident occurred and the cause and extent of the covered damages. On the first question (services retained by an insurance company to resolve a claim), the Attorney General concluded the exclusion of "coverage for which a premium is paid" simply means that a transaction consisting of the payment of a premium for insurance coverage is not a taxable event; it does not mean that any expenditure for which the premium is ultimately used by the insurer is non-taxable. Because the definition expressly includes the listed services, the contrary reading would render the provision making insurance services taxable meaningless, an absurd result the Legislature cannot have intended (City of Houston v. Allred, 71 S.W.2d 251 (Tex. 1934)).

On the remaining questions, the Attorney General concluded that the timing of the engagement of an insurance service firm makes no difference (so services retained after a settlement offer and suit are still taxable); that the statute provides no basis for distinguishing among purchasers of insurance services (so services retained by the insured are taxable as well); and that the statute provides no ground for the distinctions the Comptroller asked about among a private individual, an attorney, and an insurance company.

Citations

Statutory authority:

• Tax Code § 151.0039 (definition of "insurance service" and its exclusions), as added by Acts 1987, 70th Leg., 2d C.S., ch. 5, art. 1, pt. 4, § 6
• Tax Code § 151.0101(a)(9) (insurance services as a taxable service); Acts 1987, 70th Leg., 2d C.S., ch. 5, art. 1, pt. 4, § 12

Cases:

• City of Houston v. Allred, 71 S.W.2d 251 (Tex. 1934) (statutes are not construed to produce an absurd result)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1016
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1989/jm1016.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor OCR errors may remain; the linked PDF is authoritative.

THE ATTORNEY GENERAL OF TEXAS

February 13, 1989

Honorable Bob Bullock
Comptroller of Public Accounts
L.B.J. State Office Building
Austin, Texas 78774

Opinion No. JM-1016

Re: Whether certain activities of an independent claims investigator or adjustor constitute a taxable insurance service under section 151.0039 of the Insurance Code, and related questions (RQ-1564)

Dear Mr. Bullock:

The second called session of the 70th Legislature amended the Texas Limited Sales, Excise, and Use Tax Act, chapter 151 of the Tax Code, to create several new categories of taxable services, including insurance services. Tax Code § 151.0101(a)(9). See Acts 1987, 70th Leg., 2d C.S., ch. 5, art. 1, pt. 4, § 12.

The legislature defined "insurance service" as follows:

(a) 'Insurance service' means insurance loss or damage appraisal, insurance inspection, insurance investigation, insurance actuarial analysis or research, insurance claims adjustment or claims processing, or insurance loss prevention service.

(b) 'Insurance service' does not include insurance coverage for which a premium is paid or commissions paid to insurance agents for the sale of insurance or annuities. (Emphasis added.)

Tax Code § 151.0039, as added by Acts 1987, 70th Leg., 2d C.S., ch. 5, art. 1, pt. 4, § 6.

In your letter requesting an opinion, you note that a number of businesses specialize in providing independent claims investigations and adjustments for insurance companies, individuals pursuing claims against insurance companies, and attorneys representing insurance companies or claimants. You also note that such firms investigate whether an accident covered by insurance or workmen's compensation occurred and the cause and extent of the damages covered by an insurance or workmen's compensation policy.

You first ask:

If these services are retained by an insurance company in connection with the resolution of an insurance claim, is this a taxable insurance service under § 151.0039 of the Tax Code?

We think that the exclusion of "coverage for which a premium is paid" from the definition of "insurance service" simply means that a transaction that consists of the payment of a premium for insurance coverage is not a taxable event. It does not mean that any expenditure for which the premium is ultimately used by the insurer is not a taxable event.

Further, the definition of "insurance service" expressly includes the items you ask about. Thus, the suggested reading of the plain language of the Tax Code would render the provision making insurance services a taxable item meaningless. The legislature cannot have intended such an absurd result. See, e.g., City of Houston v. Allred, 71 S.W.2d 251 (Tex. 1934).

You next ask:

If question 1 is answered "yes," if these services are retained by an insurance company after it has made an offer of claims settlement and has been sued by the insured, would this still be a taxable insurance service under § 151.0039 of the Tax Code?

We do not believe that the timing of the engagement of an insurance service firm makes any difference.

You next ask:

If these services are retained by the insured as an aid to his determination of whether he has a valid claim or should accept an insurance company's settlement offer rather than being retained by the insurance company, would this be a taxable insurance service under § 151.0039 of the Tax Code? (Our emphasis.)

The statute provides no basis for distinguishing among purchasers of insurance services.

Finally, you ask:

Does taxability turn on whether the services are retained by a private individual, by an attorney, or by an insurance company?

Again, the statute provides no ground for the distinctions you suggest.

SUMMARY

The exclusion of "insurance coverage for which a premium is paid" from the definition of "insurance coverage" simply means that a transaction that consists of the payment of a premium for insurance coverage is not a taxable event. It does not mean that any expenditure for which the premium is ultimately used by the insurer is not a taxable event.

Very truly yours,

JIM MATTOX
Attorney General of Texas

MARY KELLER
First Assistant Attorney General

LOU MCCREARY
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by D. R. Bustion, II
Assistant Attorney General