Is a Texas insurance underwriter liable for sales and use tax on the risk-inspection services it buys from an outside vendor as part of underwriting a policy, and is the underwriting activity itself taxable?

Plain-English summary

This letter responds to an insurance underwriter that asked about its Texas sales and use tax responsibilities. The firm underwrites commercial insurance policies at the request of independent agents, acting on behalf of the agents' insureds. As part of the underwriting process, the firm engages an outside vendor to inspect the risk being insured. Once underwriting is complete, the firm provides the policy to the insured through the independent agent.

The Comptroller's answer has two parts:

• The risk-inspection service the firm buys may be taxable. Rule 3.355(d) taxes insurance investigations and other insurance services when the object of the service is located in Texas and the service is performed for an insurance carrier. Because the underwriter is an insurance carrier, it may be liable for Texas sales and use tax on the inspection services it purchases from the outside vendor.
• Underwriting itself is not a taxable service. Tax Code § 151.0039(b) and Rule 3.355(c)(1) exclude from Texas sales and use tax insurance coverage for which a premium is paid, or sales commissions paid to insurance agents — so the underwriting activity, and the premiums/commissions associated with it, are not taxed.

The letter notes the opinion is based on the facts presented and may change if the facts are different, and flags that the letter carries a previous accession number, 9506206L.

What this means for you

Insurance underwriters (carriers)

Underwriting a policy is not itself a taxable service, and the premiums or agent commissions tied to that underwriting are excluded from tax under Tax Code § 151.0039(b) and Rule 3.355(c)(1). But if you, as an insurance carrier, purchase risk-inspection or other insurance investigation services from an outside vendor for risk located in Texas, Rule 3.355(d) can make that purchase taxable to you — the tax question turns on what you're buying (an inspection/investigation service performed for a carrier), not on the underwriting activity itself.

Outside vendors performing risk inspections for underwriters

If you inspect risk in Texas on behalf of an insurance carrier as part of its underwriting process, be aware that Rule 3.355(d) treats this as an insurance service that can be taxable when the object of the inspection is in Texas and the purchaser is an insurance carrier.

Independent agents placing business with underwriters

This letter doesn't change how premiums or your commissions are taxed — those remain excluded under § 151.0039(b) and Rule 3.355(c)(1) regardless of the underwriter's own tax exposure on the inspection services it buys.

Accountants and tax professionals

When reviewing an underwriter's Texas tax position, separate the underwriting/premium/commission side (excluded from tax) from any services the underwriter purchases from third-party vendors, such as risk inspections, which can be taxable under Rule 3.355(d) if the object of the service is in Texas and the purchaser is an insurance carrier.

Common questions

Q: Is underwriting a commercial insurance policy a taxable service in Texas?
A: No. Tax Code § 151.0039(b) and 34 Tex. Admin. Code § 3.355(c)(1) exclude from Texas sales and use tax insurance coverage for which a premium is paid, or sales commissions paid to insurance agents.

Q: Does the underwriter owe tax on the risk-inspection service it buys from an outside vendor?
A: It may. Rule 3.355(d) taxes insurance investigations and other insurance services when the object of the services is in Texas and the company for which the services are performed is an insurance carrier. As an insurance carrier, the underwriter may be liable for tax on the inspection services it purchases.

Q: Who performs the risk inspection described in this letter?
A: An outside vendor engaged by the underwriter, as part of the underwriting process, before the firm provides the policy to the insured through the independent agent.

Citations and references

Statutes and regulations:

• Tex. Tax Code § 151.0039(b) (exclusion for insurance coverage premiums and agent commissions)
• 34 Tex. Admin. Code § 3.355(c)(1) (insurance coverage/premium/commission exclusion)
• 34 Tex. Admin. Code § 3.355(d) (taxable insurance investigations and services performed for an insurance carrier)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9506L1354E03

Original ruling text

June 12, 1995

Dear *****:

Thank you for your letter of June 1, 1995, concerning your firm's Texas sales
and use tax responsibilities as an insurance underwriter.

Your firm underwrites commercial insurance policies at the request of
independent agents on behalf of their insureds. Your firm engages an
outside vendor to perform an inspection of the risk as part of the underwriting
process. Your firm provides the policy for the insured to the independent
agent.

Rule 3.355(d) taxes insurance investigations and other insurance services when
the object of the services is in Texas and the company for which the services
are performed is an insurance carrier. As an insurance carrier, your company
may be liable for Texas sales and use tax on the services it buys.

Underwriting insurance risks is not a taxable service. Texas Tax Code Section
151.0039(b) and 34 T.A.C. Section 3.355(c)(1) excludes from Texas sales and
use tax insurance coverage for which a premium is paid or sales commissions
are paid to insurance agents.

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

You may call me toll free 1-800-531-5441, extension 3-4683. The direct line
is 512/463-4683. You may also write to Tax Administration Division,
Comptroller of Public Accounts.

Eddie Washington
Tax Administration Division

NOTE: Previous Accession Number 9506206L