Are the risk management, claims administration, and safety/loss control services a third-party administrator provides to Texas employers subject to sales tax?

Plain-English summary

A risk-management third-party administrator (TPA) asked the Comptroller whether the services it provides to Texas employers are subject to sales tax. The TPA's clients fall into two groups: private employers who elect not to subscribe to the Texas Workers' Compensation Act (non-subscribers), and public/governmental entities that subscribe to the Act but elect to self-insure. The TPA's services include (1) risk management consultation and program-design assistance, (2) claims administration (reviewing employee injury claims and, for governmental clients, issuing checks and determining payment appropriateness), and (3) safety and loss control services performed by Certified Safety Professionals.

The Comptroller explained that these activities are "insurance services" as defined in Rule 3.355(a) — insurance investigation, claims adjustment/processing, and loss prevention are all specifically covered. Under Rule 3.355(b), insurance services are taxable when performed on behalf of an insurance carrier, an insured, a policyholder, or others in connection with an actual policy of insurance. But the rule carves out an exception: insurance services performed pursuant to a self-insured plan, or for a third-party administrator distributing funds under a self-insured plan, are not taxable. A TPA selling insurance services to a self-insured client (or acting as a self-insured employer's TPA) should obtain an exemption certificate under Rule 3.355(g). Services sold to a qualifying exempt organization under Rule 3.322(c) are also not taxable.

The letter draws one more important line: employers who subscribe to workers' compensation insurance under an Optional Deductible Plan (Texas Insurance Code Article 5.55C) — i.e., they hold a casualty insurance policy with a high deductible — are not "self-insured" under Rule 3.355(a)(8), even though they bear more risk than a standard policyholder. Insurance services performed for those employers remain taxable.

What this means for you

Third-party administrators (TPAs) serving both insured and self-insured clients

Whether you charge sales tax on risk management, claims administration, or safety/loss-control services depends entirely on your client's insurance status, not on the nature of the service itself. The same consulting or claims-handling work is taxable for a client with a regular insurance policy but exempt for a truly self-insured client.

Self-insured employers (including governmental self-insurers)

You should give your TPA (or other insurance-services provider) an exemption certificate under Rule 3.355(g) so the provider doesn't have to charge you sales tax on services tied to administering your self-insured plan.

Employers with high-deductible workers' compensation policies (Optional Deductible Plans)

Don't assume a large deductible makes you "self-insured" for sales tax purposes — under Rule 3.355(a)(8), you're still a policyholder, and services performed for you (risk management, claims handling, safety consulting) remain taxable.

Governmental entities

Governmental entities are generally exempt from sales and use tax, but the letter notes this exemption runs through Rule 3.322(c) for qualifying exempt organizations — it's a separate basis from the self-insured carve-out in Rule 3.355(b).

Common questions

Q: Is claims administration or risk management consulting a taxable service in Texas?
A: Yes, generally — these are "insurance services" under Rule 3.355(a), taxable when performed for an insured party or policyholder.

Q: Are these same services taxable when I administer a self-insured employer's plan?
A: No. Rule 3.355(b) exempts insurance services performed under a self-insured plan or for a TPA distributing funds under such a plan.

Q: Do I need anything in writing to support treating services to a self-insured client as exempt?
A: Yes — Rule 3.355(g) requires the provider to obtain an exemption certificate when selling insurance services to a self-insured client or to a TPA administering a self-insured plan.

Q: My client has workers' comp coverage with a high deductible under an Optional Deductible Plan — are they self-insured?
A: No. Rule 3.355(a)(8) does not treat Optional Deductible Plan holders (Texas Insurance Code Article 5.55C) as self-insured; services performed for them remain taxable.

Q: Can I rely on this letter for my own TPA business?
A: No. This opinion is based on the facts presented to the Comptroller, and additional or different facts could change the outcome.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.355(a) (defines insurance investigation, claims adjustment/processing, and loss prevention as taxable insurance services)
• 34 Tex. Admin. Code Rule 3.355(b) (taxable vs. non-taxable insurance services; self-insured plan carve-out)
• 34 Tex. Admin. Code Rule 3.355(a)(8) (definition of a self-insured plan)
• 34 Tex. Admin. Code Rule 3.355(g) (exemption certificate requirement)
• 34 Tex. Admin. Code Rule 3.322(c) (exempt organizations)
• Texas Insurance Code Article 21.14-1, Section 1 (definition of a "risk manager")
• Texas Insurance Code Article 5.55C (Optional Deductible Plans)

Source

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

• Opinion: https://star.comptroller.texas.gov/view/9603L1405B10

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

• Opinion: https://star.comptroller.texas.gov/view/9603L1405B10

Original ruling text

March 5, 1996

Dear **

Thank you for your letter of February 8, 1996, regarding your firm's Texas
sales and use tax responsibilities as a risk management third-party
administrator .

As a risk manager third-party administrator, your firm
provides certain services to Texas employers who elect not to subscribe to the
Texas Workers' Compensation Act and to public or governmental entities who
subscribe to the Texas Workers' Compensation Act, but elect to self-insure.

The services provided to employers are:

1. Risk management consultation, advice and assistance
   in developing and implementing the employer's non-subscriber employee injury
   program or public entity's self-insured workers' compensation program;

2. Claims administration for non-subscriber employer/clients in which you
   receive employee injury information, review it and make recommendations to the
   employer/client as to whether and how much they may wish to pay under their
   voluntary employee injury program. The ultimate decision regarding such
   payments rests with the employer. In most cases, you do not process payment;
   you make recommendations to the employer. In most cases, the employer will
   purchase (not through your firm) insurance to indemnify the employer after the
   fact at some level; you provide assistance to a the employer in processing for
   recovery/reimbursement from such indemnity insurers, as appropriate.

For public/governmental employer/clients, claims
administration does include check issuance and determination of appropriateness
of payment in accordance with the laws and rules of the Texas Workers' Act.

All of the personnel involved in the handling of these claims are fully-licensed
adjusters in accordance with the regulations of the Texas Insurance Department.

3. Safety and loss control services for non-subscribing
   employers are provided by your Certified Safety Professionals (CPS's). The
   CSPs review the employer's safety and loss control/accident prevention program
   and assist the employer in correcting any noted deficiencies or potential
   injury-producing hazards in their workplace. Your CSPs may also make
   recommendations to the employer as to how they might improve their written
   safety programs or develop a written safety program is such is non-existent.
   Additionally, the CSPs may provide some employee training assistance for purposes
   of accident/injury avoidance. In some instance, the CSPs may provide the
   employer's indemnity insurer with a validation of the existence and enforcement
   of a safety program. The CSP's may also assist the employer/client in assuring
   compliance with OSHA standards.

For self-insured governmental clients, the CSPs may
provide the services necessary to comply with the safety and health
requirements of the Texas Workers' Compensation Act and associated rules as
promulgated by the Texas Workers' Compensation Commission.

A fee is charged for the above services; often charged
on a package basis. Some of these fees are paid for by the client's
out-of-state headquarter offices; therefore, some items may need to be
distinguished in a manner you have not considered. Also, it is your
understanding that governmental entities (school districts, cities, community
college districts, etc.) are exempt from sales and use taxes.

In checking with some competitors, it appears that
there is some confusion and difference of opinion in that some are charging
sales tax and some are not. Until recently, the vast majority of your
clientele was in the public sector. As we begin to take on more private
employers, you request guidelines so you may make a proper determination as to
how this aspect of your business ought to be structured.

Response: Section (a) of Rule 3.355 defines an
insurance investigation as "any activity performed to evaluate an individual's
eligibility or qualifications for insurance coverage, or for the payment of
benefits, or any other similar activities." Insurance claims adjustment or
claims processing is "any activities to supervise, investigate, pay, settle, or
adjust claims or losses." Insurance loss prevention is defined 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, training programs, consultations,
analysis of accident causes, and industrial hygiene and health
services.(Emphasis added.)

Article 21.14-1, Section 1 of the Texas Insurance Code
(TIC) 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. (Emphasis added.)

The activities performed under the risk management
services and safety and loss control services are subject to sales tax as
insurance services. The services are taxable whenever they are performed for a
person having a policy of insurance or seeking to obtain or renew a policy of
insurance.

Rule 3.355(b) states: "Insurance services defined in
subsection (a) of this section performed on behalf of an insurance carrier, its
insured, its policyholders, or others pertaining to a policy or policies of
insurance for monetary fees, dues, or other consideration are taxable. These
services performed pursuant to a self-insured plan or for a third-party
administrator handling distribution of funds under a self-insured plan are not
taxable." A self-insured plan is defined in Rule 3.355(a)(8).

Insurance services sold to or bought by a client qualifying for sales tax
exemption under Rule 3.322(c) concerning exempt organizations are not taxable.

Insurance services are not taxable when sold to a
self-insured client or to a third-party administrator hired by a self-insured
employer to administer the employer's self-insured plan. An insurance services
provider must get an exemption certificate when selling insurance services to a
self-insured client or to a third-party administrator administering a
self-insured plan. See Rule 3.355(g).

Insurance services performed for private employers who
subscribe to the Workers' Compensation Act under the Optional Deductible Plans
authorized in Article 5.55C. of the TIC are taxable. These employers are not
self-insured as that term is defined in Rule 3.355(a)(8). The employers have a
casualty insurance contract or insurance policy that has a high deductible.

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 Policy Division, Comptroller of
Public Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division

NOTE: Previous Accession Number 9603135L