Does a company that locates and negotiates preferred provider network contracts for health plans owe Texas administrative services tax or sales tax on the contingent commissions it earns?

Subject

Health Care/Occupational Injury Plans Network Locator — Locates And Negotiates Contract With Preferred Provider Networks For Clients

Plain-English summary

A Texas corporation (referred to here as the "Network Locator") locates and contracts with preferred provider networks on behalf of health care plans and occupational injury (workers' compensation) plans. It is not an insurance carrier. It may work directly with employers, or through group health or workers' compensation insurance carriers, and it is paid a contingent commission equal to a percentage of the savings the plan realizes.

The company asked two questions, and the Comptroller answered "no" to both:

• Administrative services tax: The Texas Insurance Code's administrative services tax (Article 4.11A) applies to fees paid for administering, managing, or servicing a health or benefit plan under an "administrative service contract." The Comptroller found that locating and negotiating preferred provider network contracts is not that kind of administration, management, or servicing — so the Network Locator's commissions are not subject to the administrative services tax.
• Sales tax on insurance services: Texas Tax Code Section 151.0039 taxes specific "insurance services" — appraisal, inspection, investigation, actuarial analysis, claims adjustment/processing, and loss prevention. Locating preferred provider networks and negotiating rates and terms with providers does not fall within any of those categories, so the commissions are not taxable as insurance services either.

The letter notes it is cross-indexed on the Comptroller's STAR system as an insurance tax document under a separate number, STAR 9608525L, reflecting that it addresses both the insurance administrative services tax and the sales tax.

What this means for you

Network locator / provider network negotiation businesses

If your business's role is limited to locating and negotiating contracts with preferred provider networks for health care or workers' compensation plans — and you are not an insurance carrier and are not administering, managing, or servicing the plan itself — this letter indicates your contingent commissions are not subject to either the Texas administrative services tax or sales tax on insurance services.

Insurance carriers and group health plans that hire network locators

If you pay a third party a contingent commission to find and negotiate preferred provider network deals, this letter suggests that payment is not automatically taxable to the recipient as an administrative service or insurance service, based on the facts described. Whether your own arrangement matches these facts (no administration or servicing of the plan, no insurance-service functions performed) is worth checking against your contract terms.

Accountants and tax professionals

The Comptroller drew a clean line between (a) locating/negotiating provider network contracts and (b) administering, managing, or servicing a benefit plan, or performing one of the enumerated "insurance services" under Section 151.0039(a). Only the latter activities trigger the administrative services tax or the insurance-services sales tax. This ruling turns on the facts as presented, so a network locator that also performs claims processing, plan administration, or other listed services could reach a different result.

Common questions

Q: Is the Network Locator an insurance carrier?
A: No. The letter states the Network Locator is not an insurance carrier; it locates and contracts with preferred provider networks on behalf of health care and occupational injury plans.

Q: How is the Network Locator paid?
A: On a contingent commission basis equal to a percentage of the savings recognized by the plan.

Q: Are the Network Locator's commissions subject to the Texas administrative services tax?
A: No. The Comptroller found the commissions are not subject to the administrative services tax under Article 4.11A of the Texas Insurance Code.

Q: Does the Network Locator have to charge Texas sales tax on its commissions as an "insurance service"?
A: No. The Comptroller found the services provided (locating preferred provider networks and negotiating terms and rates) are not taxable as insurance services under Tax Code Section 151.0039.

Q: Where else does this ruling appear on STAR?
A: The letter notes it is also indexed as an insurance tax document under STAR number 9608525L.

Citations and references

Statutes:

• Tex. Ins. Code Art. 4.11A § 2 — imposes the administrative services tax on persons receiving fees for administering, managing, or servicing certain health and benefit plans
• Tex. Ins. Code Art. 4.11A § 3 — defines an "administrative service contract"
• Tex. Tax Code § 151.0039(a) — defines "insurance service" (appraisal, inspection, investigation, actuarial analysis, claims adjustment/processing, loss prevention)
• Tex. Tax Code § 151.0101(a)(9) — includes insurance services among taxable services

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9608524L

Original ruling text

NOTE: This document is also indexed as an insurance tax document, STAR 9608525L.

August 29, 1996

RE: Request for Position Statement; Administrative Services Tax

Dear *****:

Thank you for your letter request dated August 8, 1996.
The pertinent facts contained in your letter and specific requests are restated below:

Situation

1) A Texas corporation (Network Locator)
locates and contracts with preferred provider networks for the benefit of
health care plans and occupational injury plans (Plans).

2) The Network Locator is not an insurance carrier.

3) The Network Locator may enter into
client relationships directly with employers or through group health or
workers' compensation insurance carriers.

4) The Network Locator contracts with the
Plans to locate preferred provider networks within a given geographic area.

5) The Network Locator will be paid on a
contingent commission basis that will equal a percentage of savings recognized
by the Plan.

Questions

1) Will the contingent commissions earned
by the Network Locator, as described herein, be subject to the administrative
services tax under Article 4.11A of the Texas Insurance Code (TIC)?

2) Will the Network Locator have to charge
the Texas Sales Tax applicable to insurance services defined by Section
151.0039 of the Tax Code when it charges a contingent commission for locating a
favorable preferred provider contract to an insurance carrier?

Responses:

1) The administrative services tax is assessed on:

Each person, ..., receiving any form of administrative
or service fee, consideration, payment, premium, fund, reimbursement, or
compensation for performing or providing any service, function, or duty, or
acting in any administrative, clerical, management, advisory, or technical
capacity, or providing any claims or expense review, service, administration,
management, payment, indemnification, or reimbursement, under an administrative
service contract, to be performed in this state, or on behalf of persons in
this state, or for risks located in this state, and relating to any
employer-employee, multiple employer-employee, self insurance group, member, or
other medical, accident, sickness, injury, indemnity, death, or health benefit
plan, ... (Tex. Ins. Code, Article 4.11A, ¤ 2) (Emphasis Added)

An administrative service contact is defined as "a
management contract, agency contract, or other written or oral contract or
agreement under which the management, administration, or servicing of a plan or
any portion of a plan, is provided ... ." (Tex Ins. Code, Article 4.11A, ¤ 3)
(Emphasis Added)

Based on the fact situation presented, your client's
commissions, earned as a Network Locator, are not subject to the administrative
services tax under Article 4.11A, Texas Insurance Code.

2) Sales tax on insurance services:

Texas Tax Code ¤151.0039(a) defines an "insurance
service" to mean "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."
Texas Tax Code ¤151.0101(a)(9) defines taxable services to include insurance
services. The services provided by the Network Locator to its clients
(employers, group health or worker compensation insurance carriers) under a
contract to locate preferred provider networks in a particular geographical
area and to negotiate the best terms and rates with the providers are not
taxable as insurance services.

If you have any questions, please call Tom Malone in
our Insurance Tax Section at 463-9705 or Eddie Washington in our Sales Tax
Section at 453-4683.

Sincerely,

Karey W. Barton
Manager
Tax Policy Division

cc: Tom Malone
Eddie Washington