Does the Texas Workers' Compensation Facility's sales tax exemption on insurance services also cover its member insurance companies?

Plain-English summary

Note: STAR carries an ALERT on this letter — Senate Bill 1122 (88th Legislature, 2023) later 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 purposes of determining the appropriate level of benefits, effective June 18, 2023. That change postdates this 1994 letter and narrows what counts as a taxable insurance service in the workers'-compensation context.

The taxpayer, a company providing medical cost management services (utilization review, medical case management, and medical bill review), asked the Comptroller several questions about how sales tax applies to insurance services sold to its insurance-company clients in the workers' compensation context.

The core holding: the Texas Workers' Compensation Facility is exempt from sales tax on insurance services it buys, under V.A.T.S., Article 5.76-2, Sec. 2.06 — even though the Facility is not a state agency. But that exemption is narrow and entity-specific. The Facility assigns risks to its member insurance companies, and those members — not the Facility — are the ones who actually service claimants and buy insurance services (such as claims processing and bill review) from vendors like the taxpayer. Because the Facility and its members are separate legal entities, and because Chapter 151 sales tax is a transaction tax, the Facility's exemption does not flow through to its members. A member insurance company that buys insurance services from the taxpayer is the consumer of those services and owes sales tax on them — it cannot use a resale certificate or rely on the Facility's exemption certificate. The Comptroller also confirmed that a commission fee (a percentage of savings achieved through a PPO fee schedule) charged alongside a taxable bill-review fee is itself taxable, because the sales price of a taxable service includes the total amount charged for it. Separately, the newly created Texas Workers' Compensation Insurance Fund has no statutory exemption from Chapter 151 tax at all. Finally, third-party administrators (TPAs) that buy insurance services to administer funds under a self-insured plan may issue a valid exemption certificate under 34 Tex. Admin. Code Rule 3.355(b) and (g), but an insurer servicing an exempt entity (like a school district) is itself the taxable consumer of the insurance services it buys and cannot pass that exemption through either.

What this means for you

Insurance companies and workers' compensation facility members

If you are a member insurer of the Texas Workers' Compensation Facility (or a similar risk-pooling arrangement), don't assume the Facility's sales tax exemption on insurance services extends to you. When you buy insurance services — claims processing, bill review, utilization review, medical case management — from an outside vendor, you are the taxable consumer of those services, and you owe sales tax on the full price charged, including any commission-based fees layered on top of a base service fee.

Vendors selling insurance services (medical cost management, bill review, utilization review companies)

You should charge sales tax on services sold to member insurers, even if those insurers service claimants who are ultimately covered through an exempt facility. Don't accept a resale certificate from a member insurer claiming the Facility's exemption — the exemption belongs only to the Facility as a separate legal entity, and a resale certificate isn't valid here because the member is a consumer, not a reseller, of the services.

Third-party administrators and insurers of tax-exempt entities

If you're a TPA administering funds under a self-insured plan, you can issue a valid exemption certificate for insurance services under 34 Tex. Admin. Code Rule 3.355(b) and (g). But if you're an insurer providing coverage to a tax-exempt entity like a school district, you are the consumer of the insurance services you buy to fulfill your contract obligations — you cannot claim the school district's exemption or pass it through, and you owe tax on your own purchases.

Common questions

Q: Does the Texas Workers' Compensation Facility's sales tax exemption cover insurance services bought by its member insurance companies?
A: No. The exemption under V.A.T.S., Article 5.76-2, Sec. 2.06 applies only to insurance services the Facility itself purchases. The Facility and its members are separate legal entities, and Chapter 151 sales tax is a transaction tax, so the exemption does not extend to purchases made by members.

Q: Can a member insurance company give a resale certificate instead of paying tax on insurance services it buys?
A: No. The member is the consumer of the insurance services (it uses them to service the risks assigned to it), not a reseller of those services to the Facility, so a resale certificate is not valid and the purchase is taxable.

Q: Is the Texas Workers' Compensation Insurance Fund exempt from sales tax like the Facility?
A: No. The letter states there is no provision exempting the Fund from taxes imposed under Chapter 151 of the Texas Tax Code.

Q: If a bill-review company charges a base fee plus a commission based on savings from a PPO fee schedule, is the commission portion also taxable?
A: Yes. The sales price of a taxable service is defined as the total amount for which the taxable service is sold, so the commission fee is taxable along with the base bill-review fee.

Citations and references

• V.A.T.S., Article 5.76-2, Sec. 2.06 (Texas Workers' Compensation Facility exempt from insurance service tax)
• Tex. Tax Code Chapter 151 (state sales and use tax on taxable services, including insurance services; sales price includes total amount charged)
• 34 Tex. Admin. Code Rule 3.355(b) and (g) (exemption certificates for TPAs buying insurance services to administer self-insured plan funds)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9406L1328B02

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.

June 23, 1994

Dear *****:

Thank you for your letter of May 23, 1994, concerning **'s

Texas state and local sales and use tax responsibilities.

***** provides medical cost management services that include

utilization review, medical case management, and medical bill review.

Situation 1:

One of your clients is Insurance Company X ("X"). X provides services to

claimants through the Texas Workers' Compensation Facility (the

"Facility"). According to state statute, the Facility is exempt from

insurance service tax even though it is not a state agency. (V.A.T.S.,

Article 5.76-2, Sec. 2.06). The Facility produces an exemption

certificate to Company X when it purchases insurance services.

1. Should X provide a resale certificate to ***** when it purchases

insurance services for the Facility claimants or does the Facility's

exemption extend to X?

Answer: We understand that the Facility assigns risks to its members

(insurance companies). The members insure the risks and service the

insured by providing claims processing, claims review services, etc. The

members' employees may service the insureds or engage outside service

providers. If the members engage third-party service providers, the members

must pay sales tax on insurance services they buy.

The facility is exempt on its purchases of insurance services as provided

in Texas Insurance Code Article 5.76-2, Section 2.06. The sales tax imposed

under Chapter 151 of the Texas Tax Code is a transaction tax. This

exemption applies to the insurance services bought by the facility, not to

the insurance services bought by its members. The facility and its members

are separate legal entities.

2. Are *****'s sales to X taxable if X simply fails to produce a

valid resale certificate at the time of sale? (Can a resale certificate be

retroactive.)

Answer: X, as a member of the Facility, provides insurance coverage to the

risks assigned to it. We contend that X is the consumer of the insurance

services and is not reselling the services to the Facility. X's purchases

of insurance services from ***** are taxable.

3. Is the recently created Texas Workers' Compensation Insurance Fund

(the "Fund") exempt from insurance service tax like the Facility?

Answer: There is no provision exempting the Fund from taxes imposed under

Chapter 151 of the Texas Tax Code.

Situation 2:

A Preferred Provider Organization (PPO) is a network of contracts among

doctors who agree to price their services according to a certain fee

schedule. ***** provides taxable bill review services for Insurance

Company Y ("Y"). In reviewing bills for Y, ***** recommends

reductions to the bill based first on required state fee schedules and

secondly based on the PPO fee schedule. ***** charges Y two fees:

(a) one fee is the normal type of charge for bill review which the

Comptroller has already determined is a taxable insurance service; (2)

the other fee is a commission based on the 24% of the amount saved by

using the PPO.

Is the second fee described above taxable? We do not believe the 25%)

commission is the sale of property or service.

Answer: Yes. The sales price of the taxable service is defined as the

total amount for which the taxable service is sold.

Situation 3:

Some of *****'s clients are third-party administrators (TPAs) or

insurers for tax exempt entities such as a local school district.

If ***** should not charge tax for service on these tax exempt

claimants, what type of documentation should ***** require of its

clients?

Answer: A TPA may issue a valid and properly completed exemption

certificate when it buys insurance services for use in administering

funds under a self-insured plan. See Rule 3.355(b) and (g).

An insurer for an exempt entity, such as a school district, is the

consumer of the insurance services bought. The insurer uses the insurance

services to fulfill its obligations under the insurance contract and does

not resell the insurance services to the school district.

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

NOTE: Previous Accession Number 9406777L