Does a certified fraud examiner who is licensed under Texas's Private Security Act owe sales tax on special investigations, fraud auditing, insurance claims work, and expert witness testimony?

Plain-English summary

The Comptroller's office responded to a certified fraud examiner who asked how Texas sales and use tax applies to the services listed in his engagement exhibits. The examiner is properly licensed under the Private Investigators and Private Security Agencies Act ("the act").

Because that license is required, the letter treats the "Special Investigations and Fraud Auditing" and "Insurance Claims Services" activities described in the examiner's Exhibit 2 as taxable security services. The letter notes that, absent the Legislature's rule that licensed activities under the act are automatically security services, the insurance claims work would instead have been taxed as "insurance claim adjustment or claims processing" under Rule 3.355(a)(5), (b), and (d).

The letter then looks at the exclusions from the act listed in the examiner's Exhibit 4. Exclusions (5) and (6) don't apply to him. Exclusion (4) does apply (meaning that activity doesn't require a security license), but the Comptroller says it is still taxable — just under a different category: credit reporting services (Rule 3.343(a), (b)) or insurance investigation (Rule 3.355(a)(3)).

Finally, the letter addresses the act's exclusion (18) for testifying in court as an expert witness. Fees for expert court testimony are not taxable at all — not as an insurance service, security service, or credit reporting service — but only if the testimony charge is billed as a separate line item on the invoice (Rule 3.333(g)(1)(C)).

The Comptroller notes the opinion is based on the facts presented and could change if the facts differ.

What this means for you

Licensed private investigators and security professionals

If you're licensed under the Private Investigators and Private Security Agencies Act, activities that require that license — like special investigations, fraud auditing, and insurance claims work — are taxable as security services in Texas, regardless of how you'd otherwise classify them.

Fraud examiners and insurance investigators

Activities that are excluded from needing a security license (such as those falling under exclusion paragraph (4) in the act) don't escape tax entirely — they just get taxed under a different bucket, either as credit reporting services or as insurance investigation services. Expert witness testimony in court is the one activity in this letter that comes out completely untaxed, but you must separately state that charge on your billing to preserve the exemption.

Common questions

Q: Is a licensed fraud examiner's investigation and insurance claims work taxable in Texas?
A: Yes. Because the license is required under the Private Investigators and Private Security Agencies Act, those activities are taxed as security services.

Q: What if an activity is excluded from the licensing requirement?
A: It's still taxable — just reclassified as either a credit reporting service (Rule 3.343(a), (b)) or an insurance investigation (Rule 3.355(a)(3)), unless a specific exclusion like the expert witness one applies.

Q: Is expert witness testimony fee taxable?
A: No. Fees for testifying in court as an expert witness are not taxable as an insurance, security, or credit reporting service — but the charge must be separately stated on the bill (Rule 3.333(g)(1)(C)).

Q: Can this taxpayer rely on this letter if their facts change?
A: No. The letter explicitly states the opinion is based on the facts presented, and the opinion may change if the facts are additional or different.

Citations and references

Statutes and rules:

• Private Investigators and Private Security Agencies Act (governs licensing and defines security services)
• 34 Tex. Admin. Code Rule 3.355(a)(5), (b), (d) (insurance claim adjustment/processing services)
• 34 Tex. Admin. Code Rule 3.343(a), (b) (credit reporting services)
• 34 Tex. Admin. Code Rule 3.355(a)(3) (insurance investigation)
• 34 Tex. Admin. Code Rule 3.333(g)(1)(C) (requirement to separately state exempt charges, e.g., expert witness fees)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9302L1227F01

Original ruling text

February 16, 1993

Dear ***:

Thank you for your letter of February 2, 1993, concerning your Texas
sales and use tax responsibilities as a certified fraud examiner.

You are properly licensed under the Private Investigators and Private
Security Agencies Act ("the act"). The activities described in Exhibit 2
under "Special Investigations and Fraud Auditing" are security services
as are those described under "Insurance Claims Services." Were it not
for the Legislature's edict that services that require a license under
the act are security services, the activities under "Insurance Claims
Services" would be taxable as "insurance claim adjustment or claims
processing" as defined and taxed in Rule 3.355(a)(5), (b) and (d)
concerning insurance services.

As for the exclusions under the act, the activities described in (Exhibit
4) paragraphs (5) and (6) do not apply. You have not indicated that you
are a licensed attorney or licensed under the Texas Insurance Code to
perform duties in connection with insurance coverage that you placed or
sold. Although the activities described in paragraph (4) are excluded
from the activities requiring a license under the act, these activities
are taxable as credit reporting services as defined and taxed under Rule
3.343(a) and (b) concerning credit reporting services or as an insurance
investigation under Rule 3.355(a)(3).

The exclusion in paragraph (18) of the act for testifying in court as an
expert witness is not taxable. The fee for expert court testimony is not
taxable as an insurance service, as a security service, nor as a credit
reporting service. However, the charge for such testimony must be
separately stated in the billing to the customer. See Rule
3.333(g)(1)(C).

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

You may call toll free 1-800-531-5441, extension 3-4683 if you have any
questions or need more information. You may write to Tax Administration
Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division