Is sales tax due on insurance adjusting services for claims related to a declared disaster or catastrophe?

Subject

Natural Disasters/Catastrophes — Insurance Adjusting Services Related To Declared Catastrophes Are Not Exempt

Plain-English summary

A taxpayer asked the Comptroller whether sales tax applies to insurance adjusting services, particularly when the claims being adjusted stem from a declared disaster or catastrophe.

The Comptroller answered that insurance adjusting services are taxable, full stop. Texas Tax Code Section 151.0039 defines "insurance service" to include insurance claims adjustment, and Section 151.0101(a)(9) lists insurance services among the taxable services. Comptroller Rule 3.355(a)(5) further defines insurance claims adjustment or claims processing as any activity to supervise, handle, investigate, pay, settle, or adjust claims or losses. Because of that, sales tax must be collected on the total charge for insurance adjusting services regardless of whether the adjuster is paid by the insurance carrier or by the policy holder.

The letter also addresses the catastrophe angle directly: nothing in the tax code exempts insurance adjusting services related to declared catastrophes. The only disaster-related exemption, Texas Tax Code Section 151.350, is much narrower -- it exempts labor to repair real property or tangible personal property damaged as a result of a disaster in an area declared a disaster area by the Governor of Texas or the President of the United States. That exemption covers repair labor, not claims-adjusting services.

Separately, the letter notes that exempt organizations (covered in Tax Code Sections 151.309 and 151.310, with more detail in Rule 3.322(f)) may purchase insurance services tax-free, but unless the entity is a governmental entity, the adjuster must obtain an exemption certificate from the exempt organization (such as a church) making the purchase.

What this means for you

Insurance adjusters and claims-adjusting firms

Charge sales tax on your total fee for adjusting insurance claims, whether you're paid by the carrier or the policy holder. The fact that a claim arises from a hurricane, flood, or other declared catastrophe does not change this -- there is no catastrophe exemption for adjusting services.

Exempt organizations purchasing adjusting services

If you're a church or other exempt organization purchasing insurance adjusting services, you'll need to give the adjuster a valid exemption certificate to buy the service tax-free (unless you're a governmental entity, which doesn't need one).

Contractors performing disaster-area repairs

Don't confuse this ruling with the separate labor exemption in Section 151.350: labor to repair real or tangible personal property damaged in a declared disaster area is exempt, but that exemption is specific to repair labor and does not extend to insurance claims-adjusting services.

Common questions

Q: Is sales tax due on insurance adjusting fees related to a declared catastrophe?
A: Yes. The letter states plainly that "[n]othing in the tax code exempts insurance adjusting services related to declared catastrophes."

Q: Does it matter whether the insurance carrier or the policy holder pays the adjuster?
A: No. Sales tax must be collected on the total charge for insurance adjusting services "regardless of whether you are paid by an insurance carrier or by the policy holder."

Q: What is exempt after a declared disaster, if not adjusting services?
A: Texas Tax Code Section 151.350 exempts the labor to repair real property or tangible personal property damaged as a result of a disaster in an area declared a disaster area by the Governor of Texas or the President of the United States.

Q: Can an exempt organization buy insurance adjusting services tax-free?
A: Organizations exempted (or eligible for exempt status) under Tax Code Sections 151.309 and 151.310 can, but unless the entity is a governmental entity, it must provide the seller an exemption certificate, as described in Rule 3.322(f).

Citations and references

Statutes and rules:

• Texas Tax Code Section 151.0039 (definition of "insurance service," including insurance claims adjustment)
• Texas Tax Code Section 151.0101(a)(9) (insurance services listed as taxable services)
• Rule 3.355, Insurance Services, subsection (a)(5) (defines insurance claims adjustment/claims processing) and subsection (b) (taxable insurance services)
• Texas Tax Code Section 151.309 and Section 151.310 (exempt organizations)
• Rule 3.322(f) (purchases by exempt entities)
• Texas Tax Code Section 151.350 (exemption for labor to repair property damaged in a declared disaster area)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609788L

Original ruling text

September 24, 1996

Dear ***:

Thank you for your letter concerning the taxability of insurance adjusting
services.

Texas Tax Code Section 151.0039 specifically defines an "insurance service" to
include insurance claims adjustment. Section 151.0101(a)(9) then lists
insurance services as one of the taxable services. Our Rule 3.355, Insurance
Services, in subsection (a)(5) further defines insurance claims adjustment or
claims processing as any activities to supervise, handle, investigate, pay,
settle, or adjust claims or losses. Therefore, sales tax must be collected on
the total charge for insurance adjusting services regardless of whether you are
paid by an insurance carrier or by the policy holder. See subsection (b) of the
rule explaining taxable insurance services.

Organizations that are exempted or may obtain exempt status from paying sales
or use tax on purchases of taxable items are covered in Section 151.309 and
Section 151.310 of the Tax Code. Rule 3.322(f) on exempt organizations has
additional information regarding purchases by exempt entities. Unless the
entity is a governmental entity, you must get an exemption certificate from the
exempt organization (such as a church) that is purchasing insurance services.

Nothing in the tax code exempts insurance adjusting services related to
declared catastrophes. Texas Tax Code Section 151.350 simply exempts the labor
to repair real property or tangible personal property damaged as a result of a
disaster in an area declared a disaster area by either the Governor of Texas or
by the President of the United States.

This opinion is based on the facts you submitted. Other facts, though similar,
may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct line is
512/475-0030. You may also write to Tax Policy, Comptroller of Public Accounts.

Sincerely,

David Somerville
Tax Policy Division