Does it matter, for Texas sales tax purposes, whether an insurance agency's risk-management fee is paid out of commissions on premiums or billed directly to the client?

Plain-English summary

This letter responds to an insurance agency (referred to as "the Corporation") that provides a "turnkey" risk management and insurance program to clients, including both insured and self-insured customers. Because of competition, major clients were demanding a flat fee instead of (or in addition to) commissions built into insurance premiums. The Corporation's written contracts disclosed that part or all of its fee could be paid as commissions out of gross premiums, with any remaining agreed fee billed directly to the client. The Corporation asked the Comptroller to rule that, regardless of how the fee was structured (commission vs. direct billing), none of its services should be treated as taxable "insurance services."

The Comptroller declined to adopt that blanket position. Instead, the letter works through dozens of specific services across four categories — Insurance Marketing and Administration, Client Risk and Financial Analysis and Self Insurance, Client Claims Management, and Client Loss Control — and answers, question by question, whether each is taxable. The central principle applied throughout:

• How the fee is billed (commission vs. direct charge) does not change the sales tax outcome. Rule 3.355(c)(1) does not tax premiums or sales commissions themselves, but if a separate charge for insurance services is made over and above the commission, that separate charge is taxable — "regardless of whether the fee is paid from commissions on premiums or is paid directly by the client."
• What does matter is whether the activity is "insurance business" as defined in Article 1.14-1, Section 2(a) of the Texas Insurance Code (generally nontaxable — e.g., marketing, reviewing policies, preparing quotations, communicating policy changes) or a taxable "insurance service" as defined in Tax Code § 151.0039 and Rule 3.355 — insurance loss or damage appraisal, insurance inspection, insurance investigation, insurance actuarial analysis or research, insurance claims adjustment or claims processing, or insurance loss prevention service.
• Whether insurance is actually purchased as a result of the service generally doesn't make an otherwise-taxable insurance service nontaxable, except for self-insured clients. The letter gives an example: a customer with a high-deductible casualty policy has the Corporation analyze its loss prevention program and perform financial/risk analysis, and ultimately decides not to buy more insurance. Even though no policy was sold, the services are still taxable because they pertained to the customer's existing casualty policy.
• Self-insured clients are treated differently for some (not all) services. A self-insurance plan is not a "policy of insurance" under Rule 3.355(a)(8), so several services performed for self-insured clients that don't result in an insurance purchase were held nontaxable, while the same services for insured clients (or services tied to an existing policy) were taxable.
• Claims management services were held taxable across the board — claims adjustment, claims processing, and appraisal are taxable insurance services "regardless of whether paid from commissions on premiums or paid directly by the client."
• The Comptroller cited Hammerman & Gainer, Inc. v. Bullock, which upheld the constitutionality of taxing claims adjustment services under Tax Code § 151.0039 even when performed for insurance carriers whose rates were regulated.
• The letter also rejected the Corporation's broader legal position that no insurance services occur whenever a client's service doesn't result in a purchased policy, and directed the Corporation to separate its billing between nontaxable insurance business and taxable insurance services, collecting tax on the latter unless the customer provides a valid exemption certificate (Rule 3.355(g)).

What this means for you

Insurance agencies and brokers offering flat-fee or hybrid billing

Don't assume that switching from commission-based compensation to a direct flat fee (or vice versa) changes your Texas sales tax exposure. The Comptroller looks at what the service actually is, not how it's billed. If a specific activity is a taxable "insurance service" under Tax Code § 151.0039 and Rule 3.355, tax is due on the portion of your fee attributable to that service whether it's baked into commissions or billed separately — as long as it's a separately identifiable charge over and above the commission itself.

Risk management and loss-control consultants

Many common risk-management activities — financial/loss trending analysis, risk management surveys, hazard/loss-control analysis, physical plant surveys, safety and OSHA-related evaluations, and premium modification calculations under retrospective rating plans — were held taxable as insurance inspection or insurance loss prevention services, even when they didn't lead to an insurance purchase, unless the client was self-insured. Review your service menu against the categories in Rule 3.355 to determine what must be taxed.

Businesses or agencies serving self-insured clients

Several services performed for self-insured clients that do not result in the purchase of insurance were treated as nontaxable in this letter (because a self-insurance plan isn't a "policy of insurance" under Rule 3.355(a)(8)). But this exception did not apply uniformly — some services (like claims management activities) were taxable regardless of self-insured status.

Claims adjusters and claims management providers

Claims adjustment, claims processing, participation in settlement discussions, and loss/damage appraisal were all held taxable, with the letter specifically noting this holds true "regardless of whether paid from commissions on premiums or paid directly by the client."

Accountants and tax professionals

When advising an insurance agency, separate its billing (and any audit workpapers) into (1) nontaxable "insurance business" under the Texas Insurance Code, and (2) taxable "insurance services" under Tax Code § 151.0039 and Rule 3.355. Tax applies to the taxable-service portion of the fee regardless of the commission/fee label, and Rule 3.355(g) requires the agency to collect the tax unless it obtains a valid exemption certificate from the customer.

Common questions

Q: If our agency charges clients a flat fee instead of earning a commission on premiums, does that make our services nontaxable?
A: No. The letter states that the taxable portion of the fee is taxable "regardless of whether the fee is paid from commissions on premiums or is paid directly by the client." The billing method doesn't change the analysis — the nature of the activity does.

Q: Are risk-management services that don't result in an insurance sale automatically tax-free?
A: No, not generally. The Comptroller specifically disagreed with the Corporation's position that no insurance services occur when a client's service doesn't lead to an insurance purchase. Many such services remained taxable, especially for insured clients, unless the client is self-insured.

Q: Does it matter if our client is self-insured?
A: Sometimes. A self-insurance plan is not a "policy of insurance" under Rule 3.355(a)(8), so for many of the questions in this letter, services for self-insured clients that didn't result in an insurance purchase were held nontaxable. But this wasn't universal — claims management services, for example, were taxable regardless of self-insured status.

Q: Are claims adjustment and claims processing services taxable?
A: Yes. The letter holds these taxable in every instance addressed, citing Rule 3.355(c)(1) and Hammerman & Gainer, Inc. v. Bullock, which upheld taxing claims adjustment services even for insurance carriers whose rates were regulated by the state.

Q: What activities were treated as nontaxable "insurance business" rather than taxable "insurance services"?
A: Activities like developing insurance placement opportunities and consultations, reviewing policies and endorsements for accuracy, preparing confidential coverage reports, and preparing quotations/submissions and communicating policy changes were generally held not taxable, to the extent they fall within the Insurance Code's definition of "insurance business" under Article 1.14-1, Section 2(a).

Citations and references

Statutes and regulations:

• Tex. Tax Code § 151.0039 (definition of taxable insurance services)
• 34 Tex. Admin. Code § 3.355 (Insurance Services)
• Tex. Ins. Code art. 1.14-1, § 2(a) (definition of "insurance business")
• Tex. Ins. Code art. 21.14-1 (definition of "risk manager")

Case law:

• Hammerman & Gainer, Inc. v. Bullock, 791 S.W.2d 330 (Tex. App.—Austin 1990)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9508301L

Original ruling text

August 15, 1995

Dear Mr. **:

Thank you for your letter of August 3, 1995, concerning your client's (the
Corporation's) Texas sales and use tax responsibilities.

FACTS

The Corporation is an insurance agency duly licensed through the Texas
Department of Insurance ("TDI"). In addition, many of its agent employees are
duly licensed as risk managers with the TDI. In this letter, the Corporation's
risk management customers (insured and self-insured) will be referred to as
"clients."

The Corporation provides a turnkey risk management and insurance program for
its clients, and industry competition now dictates that major clients demand a
flat fee for the Corporation's services. The Corporation's written contract
with its clients discloses that insurance instances all or part of the
Corporation's fee may be paid in the form of commissions out of gross premiums
paid by the clients. The amount of commission, or lack of, is negotiable with
the insurance carriers when insurance coverage is provided and constitutes
payments by insurance carriers for the Corporation's insurance sales. Any part
of the agreed fee that is not paid by commissions, is billed to the client.
Usually, a substantial portion of the Corporation's services does not result in
the purchase of insurance from an insurance carrier. In these cases the
Corporation's services may result in new safety procedures, recommendations for
stronger loss reserves, or self-insurance programs.

It is important to understand that many of the commercial coverages the
Corporation procures can be bid with or without an agent's commission built in.
For example, the same coverage can be purchased including a commission of 0% or
5%, and the resulting premium will vary accordingly. Many sophisticated
customers will negotiate a contract with the Corporation requiring that all
insurance be purchased on a 0% commission basis, these customers preferring to
more clearly identify their pure insurance costs.

The Corporation's services will be performed primarily for the client and not
for an insurance carrier. The services may include any of the following, and
each client may, under its particular negotiated contract, purchase any
component of the services without purchasing the remainder.

1. Insurance Marketing and Administration

In performing this service, the Corporation will develop insurance placement
opportunities, provide consultations, and make recommendations about which
insurance coverages and insurance carriers will best satisfy a client's
insurance needs. If insurance is chosen, the Corporation will review all
policies and endorsements for accuracy. The Corporation will prepare a
confidential report to the client describing all of the coverages which are in
force. The Corporation may assist a client in compiling information about the
client that is necessary for the insurance carrier to underwrite insurance
coverage for the client. The Corporation may assist a client in compiling the
information that is necessary to fill out insurance applications. The
Corporation will prepare quotations and submissions. It will communicate policy
changes to the insurance carrier on behalf of the client.

2. Client Risk and Financial Analysis and Self Insurance

In performing this service, the Corporation may develop insurance and other
risk funding or loss funding programs. The Corporation will evaluate a
client's existing loss financing programs and make recommendations for changes.
The Corporation will analyze an insurance carrier's coverage options, pricing
options, and policy forms for the client. The Corporation may help a client
identify risks by performing hazard analysis, loss control analysis, and
process reviews. The Corporation will make risk management surveys to identify
operational risk exposure. The Corporation will perform financial analysis
such as trending and loss forecasting and evaluating current and prior year
losses. The Corporation may perform self-insurance studies that will not
result in the purchase of insurance from an insurance carrier. The Corporation
may perform loss reserve analysis. The Corporation may calculate premium
modifications based on past losses under retrospective rating policies.
Retrospective rating policies are policies that, at least in part, set a
current year's premium on the previous year's losses.

3. Client Claims Management:

In performing this service, the Corporation will consult with a client during
the claim adjustment process. The Corporation will negotiate with the
insurance carrier's adjusters and participate in settlement discussions. The
Corporation may perform loss reserve evaluation and analysis.

4. Client Loss control

In performing this service, the Corporation will make physical surveys of a
client's plant. The Corporation will evaluate safety procedures and loss
control procedures. The Corporation may evaluate OSHA compliance. The
Corporation may evaluate how the client conducts waste disposal. The
Corporation may evaluate the client's employee screening procedures. The
Corporation may make computer evaluations to determine if water supplies or
other loss control systems are adequate.

QUESTIONS

Insurance Marketing and Administration

1. Would developing insurance placement opportunities, providing consultations,
   and making recommendations about which insurance coverages and insurance
   carriers will best satisfy a client's insurance needs be subject to sales tax
   when a fee is not paid from commissions on premiums, but rather is charged
   directly to the client?

Answer: No, not to the extent the activities constitute "insurance business"
as that term is defined in Article 1.14-1, Section 2. (a) of the Texas
Insurance Code (Insurance Code).

2. Would reviewing all policies and endorsements for accuracy be subject to
   sales tax when a fee is not paid from commissions on premiums, but rather is
   charged directly to the client?

Answer: No, not the extent the activities constitute insurance business as
defined in Article 1.14-1, Section 2. (a) of the Texas Insurance Code.

3. Would preparing a confidential report for the client describing all of the
   coverages that the client has in force be subject to sales tax when the fee is
   not paid from commissions on premiums, but rather is charged directly to the
   client?

Answer: No.

4. Would the compilation of client information, on behalf of a client, that
   allows an insurance carrier to underwrite insurance coverage be subject to
   sales tax when a fee is not paid from commissions on premiums, but rather is
   charged directly to the client?

Answer: No, unless the activity is an insurance inspection or an insurance
investigation as defined in Rule 3.355(a)(2) or (a)(3).

5. Would assisting a client in compiling information necessary to fill out
   insurance applications be subject to sales tax when a fee is not paid from
   commissions on premiums, but rather is charged directly to the client?

Answer: No, not to the extent the extent the activity is insurance business as
defined in Article 1.14-1, Section 2. (a) of the Texas Insurance Code.

6. Would preparing quotations and submissions and communicating policy changes
   to the insurance carrier be subject to sales tax when a fee is not paid from
   commissions on premiums, but rather is charged directly to the client?

Answer: No, the activity is insurance business.

Client Risk and Financial Analysis and Self Insurance

1. (a) Would developing risk funding or loss funding programs that result in
   the purchase of insurance be subject to sales tax when a fee is not paid from
   commissions on premiums, but rather is charged directly to the client?

Answer: Article 21.14-1 of the Texas Insurance Code defines a "risk manager" as
"a person who holds himself out to the public and who for compensation
examines, assesses, or evaluates risks for and provides advice for reduction of
risks to a person who seeks to obtain or renew property and casualty insurance
coverage in this state."

Section (a)(2) of Rule 3.355 (Insurance Services) defines insurance services to
include "insurance inspection" as "any activity performed to evaluate risk to
property, to survey or value property in connection with the furnishing of
insurance coverage or any other similar activity."

Section (a)(6) defines "insurance loss prevention service" as "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... consultations..."

(b) Would developing risk funding or loss funding programs that do not result
in the purchase of insurance be subject to sales tax when a fee is charged
directly to the client?

Answer: Yes, unless the client is self insured.

2. (a) Would evaluating a client's existing loss financing programs and making
   recommendations for changes that result in the purchase of insurance be subject
   to sales tax when a fee is not paid from commissions on premiums, but rather is
   charged directly to the client?

Answer: Yes, this is taxable as insurance loss prevention service.

(b) Would evaluating a client's existing loss financing programs and making
recommendations for changes that do not result in the purchase of insurance be
subject to sales tax when a fee is directly to the client?

Answer: Yes, unless the client is self insured.

3. Would analyzing an insurance carrier's coverage options, pricing options,
   and policy forms be subject to sales tax when a fee is not paid from
   commissions on premiums, but rather is charged directly to the client?

Answer: No, not to the extent this is insurance business as defined under the
Texas Insurance Code.

4. (a) Would helping an insured client identify risks by performing hazard
   analysis, loss control analysis, and process reviews be subject to sales tax
   when a fee is not paid from commissions on premiums, but rather is charged
   directly to the client?

Answer: Yes, the activities are taxable as insurance inspections and insurance
loss prevention services.

(b) Would helping a client identify risks by performing hazard analysis, loss
control analysis, and process reviews be subject to sales tax when a fee is
charged directly to the client, but such services do not result in the purchase
of insurance?

Answer: Yes, unless the client is self insured.

5. (a) Would completing risk management surveys for insured clients to identify
   operational risk exposure be subject to sales tax when a fee is not paid from
   commissions on premiums, but rather is charged directly to the client?

Answer: Yes, unless the client is self insured.

(b) Would completing risk management surveys for clients to identify
operational risk exposure be subject to sales tax when a fee is charged
directly to the client, but such services do not result in the purchase of
insurance?

Answer: Yes, unless the client is self insured.

6. (a) Would performing financial analysis for insured clients such as
   trending, loss forecasting, and evaluating current and prior year losses be
   subject to sales tax when a fee is not paid from commissions on premiums, but
   rather is charged directly to the client?

Answer: Yes.

(b) Would performing financial analysis for clients such as trending, loss
forecasting, and evaluating current and prior year losses be subject to sales
tax when a fee is charged directly to the client, but such services do not
result in the purchase of insurance?

Answer: Yes, unless the client is self insured.

7. Would performing self-insurance studies that do not result in the purchase
   of insurance from an insurance carrier be subject to sales tax when a fee is
   charged directly to the client?

Answer: Yes, unless the client is self insured.

8. Would performing loss reserve analysis be subject to sales tax when a fee is
   not paid from commissions on premiums, but rather is charged directly to the
   client?

Answer: Yes, unless the client is self insured. See the answer to Question
1(a).

9. Would calculating premium modifications based on actual losses under
   retrospective rating policies be subject to sales tax when a fee is not paid
   from commissions on premiums, but rather is charged directly to the client?

Answer: Yes, see Rule 3.355(a)(4).

Client Claim Management

1. Would consultations with a client during the claim adjustment process be
   subject to sales tax when a fee is not paid from commissions on premiums, but
   rather is charged directly to the client?

Answer: Yes. Insurance loss or damage appraisal is a taxable insurance
service.

2. Would managing the loss adjustment process for a client be subject to sales
   tax when a fee is not paid from commissions on premiums, but rather is charged
   directly to the client?

Answer: Yes, regardless whether paid from commissions on premiums or paid
directly by the client [Rule 3.355(c)(1)].

3. Would participating in settlement discussions between a client and an
   insurance carrier be subject to sales tax when a fee is not paid from
   commissions on premiums, but rather is charged directly to the client?

Answer: Yes, as insurance claims adjustment or claims processing.

4. Would processing claim documentation be subject to sales tax when a fee is
   not paid from commissions on premiums, but rather is charged directly to the
   client?

Answer: Yes. See the answer to Question 2 of this section.

Client Loss Control

1. (a) Would making physical surveys of an insured client's plant be subject to
   sales tax when a fee is not paid from commissions on premiums, but rather is
   charged directly to the client?

Answer: Yes, as either and insurance inspection or as an insurance
investigation .

(b) Would making physical surveys of a client's plant be subject to sales tax
when a fee is charged directly to the client, but such services do not result
in the purchase of insurance?

Answer: Yes, unless the client is self insured.

2. (a) Would evaluation of safety procedures and loss control procedures be
   subject to sales tax when a fee is not paid from commissions on premiums, but
   rather is charged directly to the client?

Answer: Yes, unless the client is self insured.

(b) Would evaluation of safety procedures and loss control procedures be
subject to sales tax when a fee is charged directly to the client, but such
services do not result in the purchase of insurance?

Answer: Yes, unless the client is self insured.

3. (a) Would evaluation of OSHA compliance for an insured client be subject to
   sales tax when a fee is not paid from commissions on premiums, but rather is
   charged directly to the client?

Answer: Yes, if the activity falls within the definition of insurance loss
prevention service.

(b) Would evaluation of OSHA compliance for a client be subject to sales tax
when a fee is charged directly to the client, but such services do not result
in the purchase of insurance?

Answer: Yes, unless the client is self insured.

4. (a) Would evaluation of how an insured client conducts waste disposal be
   subject to sales tax when a fee is not paid from commissions on premiums, but
   rather is charged directly to the client?

Answer: No, unless performed as part of an insurance loss prevention service.

(b) Would evaluation of how a client conducts waste disposal be subject to
sales tax when a fee is charged directly to the client, but such services do
not result in the purchase of insurance?

Answer: No, if the client is self insured.

5. (a) Would evaluation of an insured client's employee screening procedures be
   subject to sales tax when a fee is not paid from commissions on premiums, but
   rather is charged directly to the client?

Answer: Yes, if performed as part of an insurance loss prevention service.

(b) Would evaluation of a client's employee screening procedures be subject to
sales tax when a fee charged directly to the client, but such services do not
result in the purchase of insurance?

Answer: Yes, unless the client is self insured.

6. (a) Would making computer evaluations for an insured client to determine if
   water supplies or other loss control systems are adequate be subject to sales
   tax when a fee is not paid from commissions on premiums, but rather is charged
   directly to the client?

Answer: Yes.

(b) Would making computer evaluations for a client to determine if water
supplies or other loss control systems are adequate be subject to sales tax
when a fee is charged directly to the client, but such services do not result
in the purchase of insurance?

Answer: Yes, unless the client is self insured.

The Texas Tax Code's definition of insurance service is as follows:

insurance loss or damage appraisal, insurance inspection, insurance
investigation, insurance actuarial analysis or research, insurance claims
adjustment or claims processing, or insurance loss prevention service.

We do not necessarily agree with the Corporation's position that no insurance
services are performed in situations where no insurance coverage is purchased
as a result of the client's service. We do not agree with Corporation's
conclusion that the response to the imposition of tax to the questions marked

(b) above should be in the negative.

A self-insured plan is not considered a policy of insurance for sales tax
purposes. Rule 3.355 (a)(8) . This provision does not make the fee your
client receives for performing insurance services nontaxable because the
customer decides not to buy insurance. For example, a customer has a casualty
policy that has a large deductible. The customer has your client analyze its
loss prevention program, perform financial analysis such as trending and loss
forecasting, identify risks and analyze reserves. As a result of the
Corporation's services, the customer decides not to transfer any additional
risk (by buying more insurance to reduce the deductible). Although the
Corporation's insurance loss prevention services did not result in the
Corporation selling an insurance policy, the services are taxable. The
services performed by the Corporation pertained to the customer's casualty
insurance policy.

Rule 3.355(g) requires the Corporation to collect sales tax on insurance
services unless it gets an exemption certificate from the customer claiming an
exemption.

Rule 3.355 (c)(l) does not impose tax on premiums paid for insurance coverage
or sales commissions paid to insurance agents. Sales tax is not imposed on
insurance services provided by an insurance agent when there is no charge for
them However, if the customer pays a separate amount for insurance services
over and above the amount paid as a commission for a policy, the separate
charge is taxable. Thus, the portion of the fee paid by an insurance company
to the Corporation for these insurance services over and above the sales
commissions are taxable regardless whether the fee is paid from commissions on
premiums or is paid directly by the client.

In Hammerman & Gainer, Inc. v. Bullock (App. 3 Dist. 1990) S.W.2d 330), the
court upheld the constitutionality of the Comptroller's interpretation of
151.0039. The appellants argued that the imposition of sales tax on claims
adjustment services when rendered to insurance carriers whose rates and
policies were regulated by the State Insurance Board (now the Insurance
Commission) were exempt from sales tax. The appellants argued that the cost of
the claims adjustment services were borne by the insurance carrier and were
part of the insurance coverage for which a premium is paid.

The fact that the Corporation performs its risk management and other services
on behalf its clients rather than for insurance carriers does not make the
services nontaxable. Rule 3.355(b) imposes sales tax on insurance services
when they are performed on behalf of an insurance carrier, its insured,
policyholders or others pertaining to a policy of insurance.

We cannot comply with the Corporation's request that we rule that the essence
of the transaction under a risk management and services contract with a client
is outside the scope of the Tax Code's definition of insurance services. The
Corporation performs services that are insurance business as defined in the
Texas Insurance Code and insurance services as defined under Texas Tax Code
151.0039 and Rule 3.355. The Corporation should separate the charge for
nontaxable insurance business from the charge for taxable insurance services.
Rule 3.355(e) states: "Insurance premiums and any other form of compensation
subject to gross administrative or service fees taxes under the Insurance Code
are subject to tax hereunder if paid in connection with the performance of an
insurance service."

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

You may call me at 463-4683 if you have any questions. You may also write to
Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division

[email protected]