Some insurance companies (especially out-of-state ones) refuse to pay Texas sales tax on medical case management services performed for a Texas resident — is that tax actually owed, and who's on the hook if it isn't collected?

Plain-English summary

A sole-proprietorship rehab service company providing insurance case management services (plus vocational services) to insurance companies — some in Texas, some outside — was running into insurance companies refusing to pay Texas sales tax on those services, especially the out-of-state ones, even when the client being case-managed lives in Texas. The company asked whether sales tax applies to all its services.

The Comptroller's answer: Texas sales tax doesn't apply to all services, but it does apply to insurance services under Tex. Tax Code §§ 151.0039 and 151.0101(a)(9). Case management services specifically are taxable as insurance claims adjusting and insurance claims processing services under that statute and Rule 3.355(a)(5) and (b). Rule 3.355(d) requires collecting sales tax on insurance case management services in two situations: (1) the purchaser is an "insurance carrier" as defined in Rule 3.355(a)(7), OR (2) if not a carrier, the purchaser is doing business in Texas AND the object of the insurance service (the person/claim being managed) is located in Texas. It doesn't matter where the insurance company itself is headquartered — an out-of-state insurer whose Texas-resident claimant is the object of the case management service still triggers the tax.

The letter also lays out the collection mechanics: the seller must collect and the buyer must pay sales tax on taxable purchases; the Comptroller can go after either the seller or the buyer (or both) when tax goes unpaid, within a four-year liability period for assessment; and if a seller failed to collect tax at the time of sale, Texas courts have held the seller may still collect it from the buyer afterward (citing Sterling Construction Co. v. West Texas Equipment Co., 597 S.W.2d 515 (Tex. Civ. App. 1980)).

What this means for you

Case management, rehab, and disability management providers serving insurance companies

Don't let an insurance company's refusal to pay sales tax convince you the service isn't taxable — case management services performed for a Texas resident's claim are taxable insurance services regardless of whether the insurance carrier itself is based in Texas or elsewhere. If a client refuses to pay the tax at the time of billing, you may still be able to go back and collect it later, per the Sterling Construction precedent — but you (or the buyer) remain exposed to Comptroller assessment either way.

Out-of-state insurance companies with Texas claimants

Being headquartered outside Texas does not exempt you from Texas sales tax on case management services if the claimant/object of the service is located in Texas — Rule 3.355(d)'s "doing business in Texas + object of service in Texas" test reaches you.

Accountants and tax professionals

Useful for the insurance-services collection-liability mechanics generally: both seller and buyer are exposed to a four-year assessment window, and a seller's failure to collect at the point of sale doesn't waive its ability to seek reimbursement from the buyer later under Texas case law.

Common questions

Q: Are medical case management services performed for insurance companies taxable in Texas?
A: Yes, they're taxable as insurance claims adjusting/processing services under Tex. Tax Code §§ 151.0039, 151.0101(a)(9), and Rule 3.355(a)(5)/(b).

Q: Does it matter that the insurance company is located outside Texas?
A: No. If the insurer is doing business in Texas and the object of the service (the claimant) is in Texas, the tax still applies — Rule 3.355(d).

Q: If my insurance company client refuses to pay the sales tax, can I collect it later?
A: Texas courts have held a seller may collect from the buyer taxes it failed to collect at the time of sale (Sterling Construction Co. v. West Texas Equipment Co.).

Q: Who is liable if sales tax on these services goes unpaid?
A: The Comptroller can pursue either the seller or the buyer, or both, within a four-year liability period, plus applicable penalty and interest.

Q: Can I rely on this letter for my own case management business?
A: No. This opinion is based on the facts presented; additional or different facts may change the opinion.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0039 (insurance service definition)
• Tex. Tax Code § 151.0101(a)(9) (insurance services — taxable services)
• 34 Tex. Admin. Code Rule 3.355(a)(5), (a)(7), (b), (d) (insurance services — case management, insurance carrier definition, collection requirement)

Case law: Sterling Construction Co., Inc. v. West Texas Equipment Co., Inc., 597 S.W.2d 515 (Tex. Civ. App. 1980)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200003143L

Original ruling text

March 29, 2000

Subject: Rule 3.355

Dear **:

Thank you for your recent email concerning the refusal of some insurance
companies to pay sales tax on case management services.

You are a rehab service company (a sole proprietorship) providing insurance
case management to insurance companies, both in and outside Texas. Many of the
insurance companies do not want to pay you sales tax on your services,
especially if they are outside Texas, even though the client you are seeing on
their behalf resides in Texas. In addition to the case management services, you
also provide vocational services.

Question: Does sales tax apply to all services?

Answer: Texas sales tax does not apply to all services; however, sales tax does
apply to insurance services [see Texas Tax Code Sections 151.0039 and
151.0101(a)(9)]. Case management services are taxable as insurance claims
adjusting and insurance claims processing services under the statute and Rule
3.355(a)(5) and (b). Rule 3.355(d) requires the collection of sales tax on
insurance case management services when the purchaser of the insurance service
is an insurance carrier as defined in Rule 3.355(a)(7), or if not an insurance
carrier, is doing or engaged in business in Texas and the object of the
insurance service is in Texas.

The sales tax law requires the seller to collect and the buyer to pay sales tax
on the purchase of taxable items. The sales tax law authorizes the Comptroller
to take action against either the seller or purchaser, or both, when sales tax
is due but is not paid. The liability period for unpaid taxes is four years.
When we audit a seller or buyer and assess taxes that were not collected, the
seller or buyer becomes liable for the payment of the tax plus applicable
penalty and interest.

Texas courts have ruled that a seller may collect taxes it failed to collect
from the buyer. See Sterling Construction Company, Inc. v. West Texas Equipment
Company, Inc. (Civ. App. 1980) 597 S.W.2d. 515.

The referenced Comptroller rule is available at
.

You may view or down load the sales tax law at and
then click on the following:

1. State Government
2. Texas Statutes
3. Tax Code
4. Chapter 151
5. Scroll down to the referenced statutory section

You may view or down load letter rulings, hearings, etc., on this and other
subjects at: and then click on the following:

1. Texas Taxes
2. Topical Index (type in "medical case management" and
3. Search

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free 1-800-531-5441, extension 3-4683, if you have any
questions or need more information. You may write to Tax Policy Division,
Comptroller of Public Accounts, P.O. Box 13528, Austin, Texas 78711-3825. My
e-mail address is .

Sincerely,

Eddie C. Washington
Tax Policy Division