Which insurance-related investigations were taxable under Florida's tax on detective and protection services?

Plain-English summary

Florida divided the investigator's work according to the underlying insurance relationship. Investigations performed for insurance companies were insurance services under SIC 6411 and were not covered by the statute taxing SIC 7381 and 7382 detective and protection services.

The same nontaxable treatment applied to formal self-insurance funds organized to provide coverage to members of industry groups. The Department treated those funds like insurers for this tax because the broad SIC 6411 description included insurance investigation services.

The result changed for businesses informally described as "self-insured." When a business had no insurance contract and no formally established fund set aside for losses, an investigation of its claims did not concern an insurance issue. The Department classified that work as taxable private investigation services under SIC 7381.

Common questions

Were investigations for insurance companies taxable? No. They were classified as SIC 6411 insurance services.

Were investigations for formal self-insurance funds taxable? No. The Department treated those organized funds like insurers for this purpose.

Was every investigation for a self-insured business exempt? No. A business paying occasional claims from operating accounts without a formal fund did not satisfy the ruling's insurance-based classification.

Why did the SIC code matter? The taxing statute expressly reached activities within SIC 7381 and 7382, not SIC 6411.

Citations and references

• Fla. Stat. § 212.05(1)(j)1.a.
• Fla. Admin. Code r. 12A-1.0092
• Fla. Stat. §§ 624.02, 624.031, and 213.22

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-098

Original ruling text

SUMMARY

An investigator provides investigative services to
insurance companies, formal self-insurance funds, and to
companies that are "self-insured." The taxing statute that
applies to investigative services only imposes tax on
activities falling under SIC codes 7381 and 7382.
Insurance investigations appropriately fall under SIC code
6411 and are not subject to tax. The services that the
investigator provides to insurance companies and to formal
self-insurance funds fall under SIC code 6411 and are not
subject to tax. In order for an investigation to fall
under the purview of SIC 6411, the subject matter of the
investigation must involve an insurance issue. Insurance
involves a contractual relationship or the establishment of
a formal fund. Since the "self-insured" companies do not
have an insurance contract, nor have they established
formal funds, investigations for these companies are not
for insurance purposes. Accordingly, those investigations
are private investigations falling under SIC code 7381 and
are subject to tax.

Dec 28, 1998

Re: Technical Assistance Advisement 98A-098
Sales and Use Tax
Insurance Investigations
Rule 12A-1.0092, F.A.C.
Section 212.05(1)(j)1.a., F.S.

Dear :

This is in response to your request for a Technical
Assistance Advisement regarding the application of sales tax on
investigative services that are performed by your client XXX
(hereinafter "Investigator"). Your request describes the
activities of Investigator as follows:

[Investigator] provides private investigative services to
insurance companies in the State of Florida. These
investigative services are provided on a contract fee basis
and involve the collection of data as it relates to
possible insurance fraud by individuals or entities. This
information may be used by insurance companies to adjust or
settle certain insurance claims.

[Investigator] also provides investigative services to
"Self-Insurance Funds" in the State of Florida. These
self-insurance funds are incorporated in the State of
Florida. Self-insurance funds are formed for the benefit of
a specific industry group, such as restaurants, and are
reinsured by third party insurance companies. These selfinsurance funds are treated as insurance companies for
federal tax purposes and will therefore file Form 1120-PC.

[Investigator] also provides investigative services for
clients who are self-insured. These clients generally have
very few liability claims throughout the year, and
therefore find it more economical to self-insure.
Therefore, for investigative services provided to these
clients, fees are received directly from the client.

Your specific inquiry is about Investigator's status under
the court case Prospective Tenant Report v. Department of State,
629 So.2d 894 (Fla. 2nd DCA 1993), and whether Investigator is
liable for the collection and remittance of sales tax on the
above-described investigative services.

DETERMINATION

Background.

In 1992 the Legislature passed Senate Bill 26-H, which was
enacted as Chapter 92-319, Laws of Florida. Section 16 of that
session law imposed a tax on detective, burglar protection, and
other protection services as found in SIC Industry Numbers 7381
and 7382, effective September 1, 1992. In the process of
creating emergency rules and the subsequent permanent
administrative rules for the newly created tax on services, the

Department needed to address the issue of which persons'
activities would become subject to the tax. It was then
determined that providers of investigative services were
licensed pursuant to Chapter 493, F.S. Accordingly, licensure
pursuant to that chapter was used as the Department's benchmark
to identify those persons that would be subject to the tax.

In 1996, the Department reviewed the issue of who was
subject to the tax on investigative services. It was then
discovered that Prospective Tenant Reports, supra, precluded the
Department of State from imposing licensing requirements on
agencies who perform services that are subject to the provisions
of the Federal Fair Credit Reporting Act (FCRA). Essentially,
the court determined that activities subject to FCRA were credit
reporting services, not investigative services. Accordingly,
the Department of Revenue modified its position on who was
subject to tax on investigative services by following the
restrictions on the Department of State's licensing activities.
Namely, where the Department of State could not require an
agency to be licensed pursuant to Chapter 493, F.S., because
such agency was considered a credit reporting agency, the
Department of Revenue likewise could not tax the activities of
that agency.

The tax on investigative services is administered under the
provisions of Rule 12A-1.0092, F.A.C. In 1997 and 1998, during
the amendment process for that rule, it was ultimately
determined that the issue of taxability of investigative
services could not be based on licensing provisions of Chapter
493, F.S., or the activities of the Florida Department of State,
nor based on court cases affecting that agency. Accordingly,
the findings of the court in Prospective Tenant Reports, supra,
are immaterial to the determination as to the taxability of
Investigator's activities.

Activities subject to tax.

Section 212.05(1)(j)1.a., F.S., which imposes the tax on
detective, burglar protection, and other protection services,
expressly states that the tax will apply to SIC (Standard
Industrial Classification) industry numbers 7381 and 7382.

Although the SIC industry numbers are clear and unambiguous,
the activities described within those codes are subject to
interpretation. For example, similar activities on the part of
an investigator could be considered a private investigation (SIC
7381), a credit report (SIC 7323), or an insurance investigation
(SIC 6411). Accordingly, the court's findings in the matter of
Department of Revenue v. Brookwood Associates, 324 So.2d 184
(Fla. 1st DCA 1975) cert. denied 366 So.2d 600 (Fla. 1976), are
pertinent. In that case, the court stated:

Taxing statutes... are to be strictly construed. When such
statutes are... unclear then it is the duty of the taxing
authority,... to construe such statutes or ambiguities
liberally in favor of the taxpayer or citizen and strictly
against the taxing authority. If a taxing statute... is
susceptible of two meanings, the meaning most favorable to
the taxpayer should be adopted. This is particularly true
in instances wherein one meaning results in imposing the
tax and the other relieves imposition of the tax.

It is also important to note the similar findings by the
Florida Supreme Court in the matter of Overstreet v. Ty-Tan,
Inc., 48 So.2d 158 (Fla. 1950). There, Justice Terrell states:

A cardinal rule for construing taxing statutes requires
that they impose the tax in clear and specific terms,
otherwise they will be held not to impose it.

In consideration of the above court cases, when an
investigation is susceptible to two meanings, one taxable and
the other not taxable, the Department must select the meaning
which finds that the investigation is not subject to tax.
Accordingly, where an investigation may be reasonably classified
as either a private investigation (SIC 7381) or an insurance
investigation (SIC 6411), the Department must accept the
classification which finds the activity as not subject to tax.

Insurance Issues.

SIC industry group 6411 is entitled "Insurance Agents,
Brokers, and Service." Although this classification primarily

concerns insurance agents and brokers, the SIC manual states
that "[t]his industry also includes independent organizations
concerned with insurance services." The classification goes on
to specifically enumerate insurance claim adjusters, insurance
information bureaus, and insurance inspection and investigation
services. Clearly, for an investigation to be reasonably
classified under SIC industry number 6411, the subject matter of
the investigation must concern an insurance issue. Section
624.02, F.S., defines "insurance" as "a contract whereby one
undertakes to indemnify another or pay or allow a specified
amount or a determinable benefit upon determinable
contingencies." Similarly, Black's Law Dictionary defines
"insurance" in part as "[a] contract whereby, for a stipulated
consideration, one party undertakes to compensate the other for
loss on a specified subject by specified perils...."

The subject of "self-insurance" must also be considered.
Section 624.031, F.S., defines "self-insurance" in part as "any
plan, fund, or program which is communicated or the benefits of
which are described in writing to employees and which has
heretofore been or is hereafter established... for the purpose
of providing for employees or their beneficiaries... benefits in
the event of sickness, accident, disability, or death. Selfinsurance does not include: (1) Any plan with respect to which
benefits are insured or reinsured by an insurance company...."

Black's Law Dictionary defines "self-insurance" in part as
"[t]he practice of setting aside a fund to meet losses instead
of insuring against such through insurance. A common practice
of business is to self-insure up to a certain amount, and then
to cover any excess with insurance."

The above definitions of self-insurance focus on the
establishment of a fund. From an accounting standpoint, funds
are assets that are set aside for specific purposes. When set
aside, the assets that comprise a fund are unavailable for
ordinary operations of the business.

Taxability of Investigator's activities.

The Department considers the investigations that

Investigator provides to insurance companies as insurance
investigations. As such, those activities should be classified
as coming under the purview of SIC industry number 6411. Since
SIC industry number 6411 is not an industry number that is
enumerated within the taxing statute, such activities are not
subject to tax.

The self-insurance funds that Investigator performs
services for are legal entities organized for the purpose of
providing insurance coverage to members of specific industry
groups. Although these funds do not conform to the definition of
"self-insurance" provided by Section 624.031, F.S., and are not
viewed as "insurers" under the Florida Insurance Code, for the
purposes of the administration of the tax on investigative
services, the Department considers these self-insurance funds to
be the same as insurance companies or carriers due to the broad
language in SIC industry number 6411, which would appear to
encompass the activities of these self-insurers. Accordingly,
the services performed by Investigator for the self-insurance
funds are not subject to tax.

As stated previously, in order for an investigation to fall
under the purview of SIC industry number 6411, the subject
matter of the investigation must concern an insurance issue.
Further, insurance involves a contractual relationship where one
party agrees to indemnify another for a loss. Businesses that
"self-insure" are not a party to a contractual relationship. By
statutory definition and according to Black's Law Dictionary
self-insurance involves the formal establishment of a fund to
meet anticipated losses. Such funds should be set aside and not
available for ordinary operations of the business.

Your letter describes these "self-insured" businesses as
generally having "very few liability claims throughout the
year." Considering the low volume and most probably the low
financial impact of these claims, it is doubtful that these
businesses have established formal funds, which have been set
aside, to meet these losses. Most probably, these losses have
been paid out of current operational accounts. Therefore, since
no formal insurance contract exists and no formal fund is
evident, the investigations Investigator performs for these

businesses are private investigations properly classifiable
under SIC industry number 7381. As such, these transactions are
subject to tax.

This response constitutes a Technical Assistance Advisement
under Section 213.22, F.S., which is binding on the Department
only under the facts and circumstances described in the request
for this advice as specified in Section 213.22, F.S. Our
response is predicated on those facts and the specific situation
summarized above. You are advised that subsequent statutory or
administrative rule changes, or judicial interpretations of the
statutes or rules, upon which this advice is based, may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of Section 213.22,
F.S. Your name, address, and any other details which might lead
to identification of the taxpayer must be deleted by the
Department before disclosure. In an effort to protect the
confidentiality of such information, we request you notify the
undersigned in writing within 15 days of any deletions you wish
made to the request or response.

Sincerely,

Jeffery L. Soff
Tax Law Specialist
Technical Assistance &
Dispute Resolution

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