Is a company's fee for representing claimants in Social Security disability applications and appeals a taxable 'insurance service' in Texas?

Plain-English summary

A managed-care company that helps control health care costs for the workers'-compensation industry has a division that separately represents Social Security disability (SSDI) claimants. That division gets its clients through referrals from long-term disability insurers, self-insured employers, and third-party administrators, and is paid a contingency fee by the referring entity ONLY if it successfully wins the claimant an award — nothing is paid, by anyone, if the claim doesn't succeed. Staff handle the initial application, appeals, medical-record gathering, and claim-status checks; if a hearing is needed, an attorney takes over representation before the Administrative Law Judge.

The Comptroller asked a threshold question: does this service fall within any of the six specific categories Rule 3.355 defines as taxable "insurance services" — loss/damage appraisal, inspection, investigation, actuarial analysis/research, claims adjustment/processing, or loss prevention? It doesn't. Since SSDI representation isn't one of those six defined categories at all, the ruling never needs to reach the rule's separate follow-on test (whether the service was performed "on behalf of" an insurance carrier, insured, or policyholder for a fee) — a service that isn't a listed insurance service in the first place is nontaxable regardless of who pays for it or why.

Note on the ALERT banner: The Comptroller's STAR system has since added an alert to this ruling's record noting that Senate Bill 1122 (2023 legislative session) separately excluded certain workers'-compensation medical exams from the definition of taxable insurance services, effective June 18, 2023. That 2023 change concerns a different category of service (medical exams under Labor Code Chapter 408) and doesn't change this ruling's own SSDI-representation holding — but it's a reminder that insurance-services taxability in Texas has continued to evolve since 2014.

What this means for you

SSDI representation firms and disability-claims advocates

If your business model matches this one — contingency-fee SSDI application/appeal representation, referred by insurers or employers, with no fee unless benefits are won — this ruling supports treating your fees as nontaxable, because the service simply isn't one of Rule 3.355's six enumerated insurance-service categories.

Managed-care companies and TPAs referring SSDI cases

Referring SSDI cases to a representation service and paying a contingency fee doesn't create a taxable "insurance service" transaction on this ruling's reasoning — the threshold question is always whether the underlying service matches one of the rule's specific definitions.

Accountants and tax professionals

This ruling is a clean example of Rule 3.355(b)'s two-step structure: first ask whether the service fits one of the six enumerated categories in (a)(1)-(6); only if it does do you move on to whether it was performed "on behalf of" an insurer for consideration. Failing step one ends the inquiry.

Common questions

Q: Is helping someone apply for or appeal a Social Security disability denial a taxable service in Texas?
A: Per this ruling, no — it doesn't fall within any of the six categories Rule 3.355 defines as taxable insurance services.

Q: Does it matter that the fee is paid by an insurance company or employer rather than the claimant?
A: Per this ruling, that question never had to be answered here — since the service itself doesn't match any enumerated taxable insurance-service category, who pays and why doesn't matter.

Q: Does the 2023 legislative alert on this ruling change its holding?
A: No — the 2023 change (Senate Bill 1122) addresses a different topic, workers'-compensation medical exams under Labor Code Chapter 408, not SSDI representation services.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0101(a)(9) (taxable insurance services)
• Tex. Tax Code § 151.0039 (definition of insurance services)
• 34 Tex. Admin. Code Rule 3.355(a)(1)-(6) (the six enumerated categories of taxable insurance services)
• 34 Tex. Admin. Code Rule 3.355(b) ("on behalf of" test, reached only if a service matches subsection (a))
• 34 Tex. Admin. Code Rule 3.1; Rule 3.10 (Taxpayer Bill of Rights — detrimental reliance)

Prior guidance referenced (no analysis provided there):

• STAR Document 9308L1255A09 (August 20, 1993)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201412006L

Original ruling text

ALERT: Senate Bill 1122 (88th Leg. Session, 2023) excluded from the definition of taxable insurance services a medical service, examination or test required or authorized under Chapter 408 of the Texas Labor Code (Workers’ Compensation Benefits) for the purpose of determining the appropriate level of benefits under that chapter. Effective 06/18/2023.

December 30, 2014

Re: Private Letter Ruling #141880761

Dear *****:

We issue this private letter ruling in accordance with Rule 3.1 in response to

your request dated June 9, 2014. Detrimental reliance is provided in

accordance with Rule 3.10, the Taxpayer Bill of Rights.

You requested guidance on the comptroller’s interpretation of taxable insurance

services set out in Tax Code Ann. Section 151.0101 [ENDNOTE 1] and Rule 3.355,

Insurance Services, as it relates to the services provided by COMPANY A.

Although the agency previously addressed this issue in STAR Document

9308L1255A09, August 20, 1993, no analysis was provided. We issue this

response to explain the agency’s position and provide a definitive answer.

RELEVANT FACTS

COMPANY A provides integrated managed care services focusing on controlling

health care costs for the workers’ compensation industry. DIVISION A, a

division of COMPANY A, provides social security disability representation

services to claimants.

DIVISION A obtains most of its clients through referrals from long-term

disability insurance carriers, self-insured employers, and third-party

administrators. DIVISION A’s fee is paid by the referring entity only when

DIVISION A successfully obtains an award of benefits for the claimant.

DIVISION A receives no fee, from the referring entity or the claimant, when an

award of benefits is not obtained.

Claims professionals employed by DIVISION A, including paralegals, complete the

initial application and any appeals, request and submit medical records to

support the case, and check the status of the claim. If the case is scheduled

for a hearing, it is transferred to an attorney who will represent the claimant

before the Administrative Law Judge. The attorney will also gather any needed

medical records, prepare the claimant for the hearing and prepare an argument

in an attempt to win the case.

RULING AND ANALYSIS

Insurance services are taxable services under Section 151.0101(a)(9).

Insurance services means “insurance loss or damage appraisal, insurance

inspection, insurance investigation, insurance actuarial analysis or research,

insurance claims adjustment or claims processing, and insurance loss prevention

service.” Section 151.0039. Rule 3.355(a)(1) – (6), effective as of March 23,

1995, states definitions for the six categories of taxable insurance services

identified in the Tax Code.

Rule 3.355(b) states a multipart test and provides that insurance services

defined in subsection (a)(1) – (6) of the rule are subject to Texas sales and

use tax when “performed on behalf of an insurance carrier, its insured, its

policyholders, or others pertaining to a policy or policies of insurance for

monetary fees, dues, or other consideration.”

In order to be taxable, the services provided must first fall within one of the

enumerated definitions of insurance services set out in Rule 3.355(a)(1) – (6).

DIVISION A provides social security disability representation services to

claimants. This service does not come within any of the definitions of

insurance services in Rule 3.355(a)(1)-(6). Since the first element of the

test is not met, there is no need to address the remaining elements. DIVISION

A provides nontaxable social security disability representation services to

claimants, not a taxable insurance service.

If you have questions about this private letter ruling, please email us at

https://www.window.state.tx.us/taxhelp/ and reference Private Letter Ruling

141880761.

Regards,

Tax Policy Division

ENDNOTES:

1.References to Section are to Texas Tax Code Annotated (Vernon 1992).

References to Rule are to sections of Title 34, Texas Administrative Code.