Are claims-adjusting services an insurance agency performs for an insurance carrier taxable in Texas?

Plain-English summary

A representative asked the Comptroller about the taxability, under Rule 3.355, of claims-adjustment services performed by a licensed insurance agency for an insurance carrier. In the arrangement described, when the agency provides claims-adjustment services, the commission it receives from the carrier is higher than the commission it gets when it does not provide those services. The agency wanted to use that extra "portion" of the commission to subcontract with licensed claims adjusters to perform the work.

The Comptroller held that the claims-adjustment services are taxable when provided by the agency to the carrier. Rule 3.355 makes certain things nontaxable: insurance coverage for which a premium or sales commission is paid, and insurance services an agent provides without charge to the customer. But if the customer pays a separate amount over and above the amount paid as a commission for a policy, that separate charge is taxable.

Here, the "higher commission" paid over and above the ordinary policy commission is exactly that separate consideration — it is payment for claims-adjusting services, not for insurance coverage or a policy commission. The portion of the commission the agency uses to pay independent adjusters is not "commissions" in the sense the rule exempts. Because the agency is buying the subcontracted adjusting services to resell them to the carrier, it may issue a resale certificate to the independent adjusters instead of paying sales tax on those purchases.

What this means for you

Insurance agencies performing claims adjustment

If you adjust claims for a carrier and are paid for it — including through an enhanced commission that exceeds your normal policy commission — that payment is taxable consideration for a taxable insurance service. Collect and remit tax on the claims-adjusting charge.

The line between exempt and taxable insurance services

Insurance coverage and services you provide without charge are not taxable. What is taxable is a separate amount the customer pays over and above the policy commission for services like claims adjustment. Look at whether there is a distinct charge beyond the policy commission.

Subcontracting and resale certificates

When you subcontract the adjusting work to independent adjusters and resell it to the carrier, you can give those adjusters a resale certificate rather than paying tax on their services — the tax is due on your charge to the carrier instead.

Common questions

Q: Are claims-adjusting services taxable in Texas?
A: Yes. When an insurance agency provides claims-adjustment services to a carrier for consideration, those services are taxable insurance services under Rule 3.355.

Q: What insurance services are not taxable?
A: Insurance coverage for which a premium or sales commission is paid, and insurance services an agent provides to the customer without charge.

Q: How can adjustment services be taxable if they are paid through a commission?
A: Because the extra "higher commission" over and above the ordinary policy commission is a separate charge for the adjusting services — not a policy commission — and separate charges over the policy commission are taxable.

Q: Do I owe tax on the adjusters I subcontract?
A: No, if you are reselling their services to the carrier. You can issue the independent adjusters a resale certificate instead of paying tax on those purchases; tax applies to your charge to the carrier.

Q: Can I rely on this 1988 letter today?
A: Treat it as guidance only. It is based on the facts presented and can change with different facts; on the STAR system it binds the Comptroller only as to the taxpayer it was issued to and may no longer reflect current policy.

Citations and references

Rule cited: 34 Tex. Admin. Code § 3.355 (Insurance Services). Section (c)(1) (formerly (b)(1)) lists nontaxable insurance services (coverage for which premiums/commissions are paid; services provided without charge) and makes a separate charge above the policy commission taxable; section (b) imposes tax on the performance of taxable claims-adjusting services defined under section (a) for monetary fees, dues, or other consideration.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8809L1074D13

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TEXAS 78774

BOB BULLOCK
Comptroller September 19, 1988

Dear **:

Thank you for your letter of September 6, 1988, concerning the
taxability of the services provided by your client under Rule
3.355.

In your May 8, 1988 letter, you stated "...a licensed insurance
agency ... can perform claims adjustment services on behalf of an
insurance carrier if the insurance carrier so requests." You went
on to state "Where claims adjustment services are provided by the
insurance agency, the commission income received by the agency
from the insurance carrier is higher than commercial income re-
ceived when claims adjustment services are not being provided."
(Emphasis added.)

You asked the specific question: "Can that portion of commission
received for claims adjustment services be utilized by the corpo-
rate agency to subcontract with licensed claims adjustors to per-
form the claims adjustment services?" (Emphasis added.) I an-
swered the question in the affirmative and went on to state the
claims adjustment services are taxable when provided by the agency
to the insurance carrier.

Section (c)(1), formerly section (b)(1), of Rule 3.355 states the
following services are not taxable as insurance services:

Insurance coverage for which a premium is paid or sales
commissions are paid to insurance agents. Insurance services
provided by an insurance agent without charge to the customer
are not taxable. If the customer pays a separate amount for
these services over and above the amount paid as a commission
for a policy, this separate charge is taxable. (Emphasis
added.)

Section (b) of Rule 3.355 imposes sales tax on the performance of
claims adjusting services that are defined as taxable insurance
services under section (a) of the rule for monetary fees, dues,
or other consideration. The 'higher commission' referred to in
your May 8, 1988 letter that is paid over and above the amount
paid as a commission for a policy is the consideration paid for
claims adjusting services.

The facts are clear, the agency performs claims adjusting
services, subcontracts some claims processing services to indepen-
dent adjustors and utilizes "that portion" of the commission as
consideration received or paid to independent adjustors for claims
adjusting services. In this regard, the insurance carrier is not
paying for insurance coverage or a commission on insurance cover-
age. Furthermore, the portion of the commission the agency uses
to pay the independent adjustors for claims adjusting services
subcontracted is clearly not commissions as that term is used in
section (c)(1) of Rule 3.355.

The agency could issue a resale certificate to the independent
adjustors instead of paying sales tax on the claims adjusting
services purchased for resale to the insurance carrier.

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

If you have any questions or need additional information, you may
call our toll-free number 1-800-252-5555, ext. 3-4683. The regu-
lar number is 512/463-4683. You may write me at Tax Correspon-
dence, Comptroller of Public Accounts.

Sincerely,
Eddie C. Washington
Tax Correspondence