Is a lender's insurance-tracking vendor providing a taxable data processing or insurance service when it monitors whether borrowers maintain required hazard/flood insurance?

Plain-English summary

A company provides two services to a lender that underwrites collateralized (mostly real property) loans: (1) tracking whether borrowers maintain the hazard and flood insurance their loan terms require ("Acceptable Insurance"), and (2) placing replacement insurance, as a licensed insurance agent, when a borrower's coverage lapses. Only the tracking service is addressed by this ruling; insurance placement is separately charged and not covered here. To perform the tracking, the company processes correspondence and insurance documents, runs an automated monitoring/document-processing system, gives borrowers online/phone access to submit documents, sends the lender periodic reports, and provides a secure web portal for the lender's own customized reports — determining whether coverage is "acceptable" based on both the data it processes and its professional insurance-industry knowledge. The company asked whether this tracking service is taxable.

The Comptroller ruled the tracking service is not taxable, addressing both categories that could apply:

• Not taxable data processing. Although the company genuinely performs data-processing-type activities (managing insurance documents and information), Lender isn't buying data processing as such — that processing is ancillary and incidental to the real service being purchased: professional insurance-tracking expertise. Texas's data-processing definition specifically excludes providers of other professional services who merely use a computer to facilitate performing that service.
• Not taxable insurance services either. Texas's enumerated taxable insurance services are narrow and specific: loss/damage appraisal, inspection, investigation, actuarial analysis, claims adjustment, and loss prevention. Monitoring whether a borrower currently has required coverage — as opposed to, say, investigating an individual's eligibility FOR coverage, or evaluating a claim — doesn't fit any of those defined categories.

Because the tracking service falls outside both potentially applicable taxable-service categories, it's not taxable at all.

What this means for you

Lenders using third-party insurance-tracking vendors

A vendor's compliance-monitoring/tracking service — verifying borrowers maintain required coverage — is generally not itself taxable, even if the vendor uses sophisticated software and insurance expertise to do it. Keep tracking fees separately identified from any insurance-placement fees, since placement services weren't addressed by this ruling and may be taxed differently.

Vendors offering monitoring, compliance, or tracking services that incidentally use computers

The "ancillary and incidental" data-processing exclusion is a meaningful shield: if what your customer is really buying is your professional judgment/expertise (not the raw data manipulation itself), using automated systems to deliver that expertise doesn't automatically convert your service into taxable data processing.

Insurance-adjacent service providers

Don't assume any insurance-related activity is automatically a taxable "insurance service" — Texas's list is a specific, closed set of defined categories (appraisal, inspection, investigation, actuarial, claims adjustment, loss prevention). A monitoring/tracking function that doesn't match one of those categories falls outside the taxable scope even if it's performed by an insurance-industry professional.

Common questions

Q: Does using an automated system to track and process documents automatically make a service taxable data processing?
A: No — per this ruling, if the data processing is merely ancillary/incidental to a professional service the customer is actually buying, it's excluded from the taxable data-processing category.

Q: Is monitoring whether a borrower currently maintains required insurance the same as taxable "insurance investigation"?
A: No — per this ruling, insurance investigation specifically means evaluating eligibility/qualification FOR coverage or for benefits; ongoing monitoring of existing coverage doesn't fit that or any other enumerated taxable insurance-service category.

Q: Does this ruling also cover the fees charged for actually placing replacement insurance when a borrower's coverage lapses?
A: No — per this ruling, insurance-placement services are separately charged and expressly not addressed here.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.0101 (Taxable Services — enumerates data processing and insurance services)
• Tex. Tax Code § 151.0035 (Data Processing Service defined)
• 34 Tex. Admin. Code Rule 3.330(a)(1) (Data Processing Services — excludes professional-service providers who merely use a computer)
• Tex. Tax Code § 151.0039 (Insurance Services defined)
• 34 Tex. Admin. Code Rule 3.355 (Insurance inspection, investigation, and loss prevention defined)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201701013L

Original ruling text

January 31, 2017

Re: Private Letter Ruling #142730026

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters [ENDNOTE 1] in response to your request originally dated June 17, 2014 and resubmitted with supplemental information September 29, 2014. Detrimental reliance relief is provided in accordance with

Rule 3.10, the Taxpayer Bill of Rights.

You requested guidance regarding the taxability of tracking/notification services provided by ** (Taxpayer). In connection with the ruling request you provided an Insurance Administration Agreement and a Lender Placed Insurance Service Agreement (the Agreements), and an example of an Administrative Fee Report with an invoice/billing statement.

Relevant Facts

Taxpayer’s customer (Lender) is in the business of underwriting collateralized loans, primarily for real property. Lender’s loan terms require borrowers to maintain insurance on collateral property. All loans require hazard insurance and some loans require flood insurance. To protect itself against an uninsured loss, Lender needs to know immediately if a borrower does not maintain the required insurance coverage. Lender obtains the required insurance coverage when a borrower fails to do so.

Lender engages Taxpayer to provide two primary services – tracking insurance coverage and obtaining insurance as needed. Taxpayer is an insurance agent and is able to place hazard and flood insurance on a property when the borrower’s insurance coverage lapses for any reason. Taxpayer charges separately for the placement of insurance, and services to obtain insurance are not addressed in this private letter ruling.

Per the Agreements, Taxpayer performs the tracking service by monitoring Acceptable Insurance (as defined within the Agreements) and processing insurance documents to determine whether borrowers have obtained and are continuing to maintain Acceptable Insurance as required. To be “acceptable” the hazard and flood insurance must meet the Lender’s standards, meet the coverage and deductible limits required by Lender, and comply with federal insurance statutes and programs.

To perform the tracking service, Taxpayer determines if the insurance is “acceptable” based on its professional knowledge of the insurance industry as well as on information it obtains and retains as required by the Agreements. Per the Agreements, Taxpayer provides:

timely processing of correspondence and documents, including insurance policies and related information, received by the Taxpayer on behalf of the Lender;

an automated service for the monitoring of required insurance coverage and the processing of required documentation;

online and telephonic access to Borrowers to review and submit pertinent documents;

periodic reports to Lender; and

secure online access to Lender for customized reports via a TRADEMARKED web-based application that provides a secure interface between Taxpayer and Lender. [ENDNOTE 2]

Requested Ruling

Taxpayer’s charge for tracking services is a charge for a nontaxable service.

Ruling and Analysis:

Section 151.0101 defines “taxable services.” The term includes both data processing services and insurance services. See Section 151.0101(a)(9) and (12). Taxpayer’s tracking services, as described in the Agreements, are not taxable.

Data Processing

Section 151.0035 provides that data processing services include “word processing, data entry, data retrieval, data search, information compilation,… and other computerized data and information storage or manipulation.”

The Agreement requires Taxpayer to engage in certain data processing services to manage information that Taxpayer uses, along with its professional knowledge, to determine if the property has acceptable insurance coverage. However, Lender is not purchasing data processing services. The data processing activities are ancillary and incidental to the professional service provided by Taxpayer.

The tracking/monitoring service does not fall within the definition of data processing services because the definition specifically excludes providers of other professional services who use a computer to facilitate the performance of their services. See Rule 3.330(a)(1).

Insurance Services

Section 151.0039 defines “insurance services” as insurance loss or damage appraisal, insurance inspection, insurance investigation, insurance or annuity actuarial analysis or research, insurance claims adjustment, and insurance loss prevention. Rule 3.355 further defines relevant terms as follows:

(2) Insurance inspection--Any activity performed to evaluate risks to property, to survey or value property in connection with the furnishing of insurance coverage, or any other similar activity.

(3) Insurance investigation--Any activity performed to evaluate an individual's eligibility or qualifications for insurance coverage, or for the payment of benefits, or any other similar activity. For example, the assembly or evaluation of information for the purpose of determining whether to issue a life insurance policy to a specific individual would be considered an insurance investigation.

(6) Insurance loss prevention service--Any activities performed in an effort to identify, analyze, evaluate, control, anticipate and/or eliminate the occurrence of accidents, losses, or damage. Examples include: survey recommendations, training programs, consultations, analysis of accident causes, and industrial hygiene and health services.

While Taxpayer provides services related to insurance, its services do not meet the definitions of taxable insurance services in the statute and Rule.

Based on the above, Taxpayer’s tracking services are not taxable services.

If you have any questions about this private letter ruling, please email us through our website at https://www.comptroller.texas.gov/taxhelp/ and reference Private Letter Ruling #142730026.

Sincerely,

Indirect Tax Section Tax Policy Division

Texas Comptroller of Public Accounts

ENDNOTES

1. Unless otherwise indicated, all references herein to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.

2. TRADEMARKED web-based application is specifically required by the Agreements and enables Taxpayer to maintain the information required by the Lender while also providing a platform for real-time access to the same data by the Lender.