Does a private insurance carrier owe Texas sales and use tax on crop loss adjusting services it buys, even though the underlying crop insurance is federally reinsured?

Subject

Crop Loss Adjusting Services — Bought By Crop Growers Insurance Company

Plain-English summary

This letter is the Comptroller's response to a taxpayer's follow-up letter that pushed back on an earlier ruling. In that earlier letter (dated February 13, 1996), the Comptroller had concluded that crop loss adjusting services bought by "ABC Insurance, Inc." (ABC) from "DEF Services, Inc." (DEF) were taxable under Texas sales and use tax. The taxpayer argued that reliance on United States v. New Mexico was improper, pointing instead to Kansas v. Todd and a congressional amendment to 7 U.S.C. § 1511.

The Comptroller disagreed and held firm: Texas sales and use tax applies to insurance loss adjusting services, separately from the gross premium tax Texas imposes on insurance premiums under the Texas Insurance Code.

The letter walks through why federal exemptions don't help here:

• The Supremacy Clause exemption (Tex. Tax Code § 151.307(a)) only exempts property or services that federal law actually prohibits Texas from taxing. It doesn't apply to this transaction.
• The federal-government exemption (Tex. Tax Code § 151.309) exempts sales to or purchases by the United States, U.S.-owned corporations, or U.S. instrumentalities. DEF and ABC are neither — they are foreign for-profit corporations that are wholly owned subsidiaries of a private parent ("CORP X(X)"), not the federal government.
• The taxed transaction is between DEF (seller) and ABC (buyer) — not between DEF and the Federal Crop Insurance Corporation. Texas isn't taxing the federal government's activity at all.
• Texas isn't taxing insurance premiums either. The gross premium tax under Texas Insurance Code art. 4.10, Sec. 5 doesn't even count reinsurance premiums received from other licensed companies as "gross premium receipts," so the federal exemption for crop insurance/reinsurance premiums is beside the point — Texas is assessing sales/use tax on a service purchase, not premium tax on insurance.
• The federal statutory exemption the taxpayer relied on (exempting crop insurance and reinsurance contracts, and premiums, from state taxation) is about gross receipts/premium taxes on the insurance contracts themselves. The Kansas case the taxpayer cited was also a gross receipts tax case, not a sales and use tax case, so it doesn't control here.
• The claims-adjustment service itself is a separate transaction from the crop insurance premium. Private insurance carriers issuing crop insurance under the federal program are not themselves exempt, and buying claims adjustment services from an outside company is a distinct purchase subject to Texas sales/use tax.

The Comptroller also leaned on Hammerman & Gainer, Inc. v. Bullock (Tex. App. 1990), a case upholding the Comptroller's narrow reading of "insurance coverage for which a premium is paid" under Tex. Tax Code § 151.0039(b) and Comptroller's Rule 3.355 — the court held that claims adjustment services aren't automatically part of exempt "insurance coverage." The letter also distinguished United States v. New Mexico (finding it "on point" — the U.S. Supreme Court upheld a state gross receipts tax on a federal contractor even though the federal government ultimately bore the cost) and noted Holman v. Laulo-Rowe Agency (9th Cir. 1993), where the Federal Crop Insurance Act did not preempt a farmer's state-law claims against an insurance agency.

Bottom line: DEF was obligated to charge, and ABC was obligated to pay, Texas sales and use tax on the loss damage appraisals performed under crop loss insurance policies.

What this means for you

Private crop insurance carriers

If you're a private insurance carrier that buys claims adjustment or loss appraisal services related to crop insurance, this ruling says those purchases are subject to Texas sales and use tax — even though the underlying crop insurance itself may be reinsured by a federal program. The federal exemption for crop insurance/reinsurance contracts and premiums doesn't extend to your purchase of adjusting services from a separate vendor.

Businesses providing insurance claims adjusting services

If you sell claims adjustment or loss appraisal services to insurance carriers in Texas, this letter confirms the Comptroller's position (also reflected in Comptroller's Rule 3.355) that such services are generally taxable, and that being connected to a federally reinsured insurance program does not create an exemption for the service itself.

Accountants and tax professionals

This letter is a useful example of how the Comptroller distinguishes (1) taxing a private party's purchase of a taxable service from (2) taxing the federal government or an exempt federal instrumentality, and (3) taxing gross insurance premiums under the Insurance Code. Federal preemption and exemption arguments tied to premium/reinsurance taxation won't automatically carry over to a sales/use tax on a separate services transaction between two private parties.

Common questions

Q: Is Texas taxing the federal government or the Federal Crop Insurance Corporation here?
A: No. The letter is explicit that the taxed transaction is between the private seller (DEF) and the private purchaser (ABC), not between DEF and the Federal Crop Insurance Corporation.

Q: Does the federal exemption for crop insurance and reinsurance premiums cover claims adjusting services too?
A: No. That federal exemption applies to insurance/reinsurance contracts and premiums (a gross receipts/premium tax question). The claims adjustment services purchased by the private carrier are a separate transaction, and Texas is imposing its sales and use tax on that purchase, not a premium tax.

Q: Why didn't the exemption for sales to the United States (Tex. Tax Code § 151.309) apply?
A: Because neither DEF nor ABC is a corporation wholly owned by the United States or an unincorporated instrumentality of the United States. Both are foreign for-profit corporations that are wholly owned subsidiaries of a private parent company.

Q: Does this ruling apply if my facts are different?
A: No. The letter states its opinion is based on the facts presented, and the opinion may change if there are additional or different facts.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.307(a) (Supremacy Clause exemption)
• Tex. Tax Code § 151.309 (exemption for sales to/purchases by the United States)
• Tex. Tax Code § 151.0039(b) (insurance coverage for which a premium is paid)
• Comptroller's Rule 3.355
• Texas Insurance Code art. 4.10, Sec. 5 (gross premium receipts)
• 7 U.S.C. § 1511
• 7 U.S.C. § 1516(a)(2)(B)

Cases:

• United States v. New Mexico
• Kansas v. Todd
• Hammerman & Gainer, Inc. v. Bullock (Tex. App.—3d Dist. 1990)
• Holman v. Laulo-Rowe Agency, 994 F.2d 666 (9th Cir. 1993)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9608L1434A01

Original ruling text

August 23, 1996

Dear ***:

Thank you for your letter of July 31, 1996, concerning Texas' taxation of
insurance claims adjusting services.

Your letter is in response to my letter of February 13,
1996, in which I concluded that the crop loss adjusting services bought by ABC
Insurance, Inc. (ABC) from DEF Services, Inc. (DEF) were taxable. The crux of
your argument is that our reliance on United States v. New Mexico is improper,
primarily citing Kansas v. Todd and the subsequent congressional amendment to 7
U.S.C. SEC. 1511.

We disagree with your analysis and conclusion.

Texas imposes a sales and use tax on insurance loss adjusting services and a
gross premium tax on insurance premiums.

In recognizing the Supremacy Clause in the U. S.
Constitution, Texas Tax Code SEC. 151.307(a) states: "Tangible personal
property or service that this state is prohibited from taxing by the law of the
United States, the United States Constitution, or the Constitution of Texas is
exempted from the taxes imposed by this chapter."

Texas Tax Code SEC. 151.309 (Vernon 1982) exempts the
sale of a taxable item to or the purchase of a taxable item by the United
States, corporations wholly owned by the United States or unincorporated
instrumentalities of the United States. DEF and ABC are neither corporations
wholly owned by the United States nor are they unincorporated instrumentalities
of the United States. You point out that both are wholly owned subsidiaries of
CORP X(X). DEF and ABC are foreign for-profit corporations.

The transactions Texas seeks to tax are between DEF
(the seller) and ABC (the purchaser), not between DEF and the Federal Crop
Insurance Corporation. The parties to these transactions are not exempt under
the Texas Tax Code.

Texas is not attempting to assess its gross insurance
premium tax that is imposed under the Texas Insurance Code. Texas Insurance
Code, article 4.10, Sec. 5 does not include premiums received from other
licensed companies for reinsurance in the definition of "gross premium
receipts" upon which the gross premium tax is imposed. Federal law exempting
premiums for crop insurance and reinsurance from state taxation reads:

The corporation, including its franchise, its capital, reserves, and surplus,
and its income and property, shall be exempt from all taxation on or after
February 16, 1938, imposed by the United States or by any territory, dependency,
or possession thereof, or by any State, county, municipality, or local taxing
authority. A contract of insurance of the Corporation, and a contract of
insurance reinsured by the Corporation, shall be exempt from taxation
imposed by any State, municipality, or local taxing authority.

(Emphasis added.)

The congressional action you refer to exempts insurance
and reinsurance contracts from gross receipts taxes imposed by the states. The
Kansas case cited, that allegedly resulted in the congressional actions, is a
gross receipts tax case, not a sales and use tax case.

The Federal Crop Insurance Act provides for private
insurance carriers to issue insurance under the guidelines of this program.
Such private insurance carriers are not exempt and Kansas does not apply to the
transaction between DEF and ABC.

The premiums paid for crop insurance is a separate
transaction from the insurance claims processing bought by the private
insurance carrier.

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 SEC. 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
Texas Department of Insurance) were exempt from sales tax. The appellants
argued that the costs 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 court pointed to the difficulty in interpreting the
scope of SEC. 151.0039(b): "insurance coverage for which a premium is paid."
In upholding the Comptroller's narrow interpretation of the phrase and the
constitutionality of Comptroller's Rule 3.355, the court reasoned:

Insurance "coverage" is susceptible to a range of
interpretations. Generally, it can be defined as the "amount and extent of
risk covered by insurer." Blacks Law Dictionary 330 (5th ed. 1979).
Construed most broadly, the phrase "extent of risk" might include a multitude
of costs borne by an insurer, including defense costs and possibly even
the cost of adjustment services. However, "extent of risk" can also be
reasonably construed more narrowly to include only the risk of liability.

United States v. New Mexico is on point. The State of
New Mexico imposed a gross receipts tax on a contractor's receipts. Although
the federal government paid the contractor for its expenses, including the
gross receipts tax paid by the contractor, the United States Supreme Court
upheld New Mexico's tax assessment.

In Holman v. Laulo-Rowe Agency, C.A. 9 (Mont.) 1993,
994 F. 2d 666, the court held that the Federal Crop Insurance Act did not
preempt a farmer's state law claims against an insurance agency for the
agency's own errors with regard to a crop insurance policy written by the
Federal Crop Insurance Corporation which the farmers had procured through the
insurance agency.

The Comptroller does not believe the Federal Crop
Insurance Act preempts a private insurance carrier's Texas sales and use tax
liability on purchases of insurance damage or loss appraisals. This position
is based on 7 U.S.C. SEC. 1516(a)(2)(B) that includes in the authorization of
appropriations, appropriated sums as necessary to cover "...the administrative
and operating expenses of an approved insurance provider for the delivery of
policies..."

DEF is obligated to charge, and ABC is obligated to pay, Texas sales and
use tax on loss damage appraisals performed pursuant to crop loss insurance
policies.

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, P. O. Box 13528, Austin, Texas 78711.

Sincerely,

Eddie C. Washington
Tax Policy Division

NOTE: Previous Accession Number 9608623L