Do casualty insurance agencies owe Texas sales tax on fees they charge clients for services like claims administration, risk inspections, and rate-setting when those fees are paid instead of a sales commission?

Subject

Casualty Insurance Agents — Performing Taxable Insurance Services For Clients

Plain-English summary

This is a "special mailing" letter the Comptroller's Tax Policy Division sent to roughly 900 casualty insurance agencies in 1996, explaining a shift in how some of their fees are taxed.

The letter explains that competition in the insurance marketplace, and clients wanting to know the exact cost of coverage, changed how casualty insurance is sold. Many agencies now have licensed risk managers who provide "turnkey" risk management and insurance programs, and some clients require that insurance be bought or sold without a commission. In those cases, the agency instead performs services for the client for a fee -- things like claims administration, inspecting risks, fixing rates, and adjusting claims or losses.

The Comptroller's position: those services are taxable insurance services, even though the Texas Insurance Code also classifies them as "insurance business" (Art. 1.14-1, Sec. 2.(a)(6)). Because the fee is charged for performing the services rather than as a commission for selling a policy, the agency must collect sales tax on it. The letter draws a clear line:

• Not taxable: insurance services provided without charge, and a fee paid in lieu of a commission when the agency does not provide any taxable insurance service as defined in Rule 3.355.
• Taxable: a separate charge for insurance services on top of (or apart from) any commission, and fees charged directly to the client for services like claims administration, risk inspection, rate-setting, or claims/loss adjustment.

The letter tells agencies to separate the (nontaxable) charge for the insurance business itself from the (taxable) charge for insurance services, and to collect sales tax on the latter.

What this means for you

Casualty insurance agencies and risk managers

If your clients pay you a flat fee -- instead of, or on top of, a sales commission -- for services like claims administration, risk inspections, rate-setting, or adjusting claims and losses, that fee is for a taxable insurance service. You need to collect sales tax on it, and you should separately state that charge from any nontaxable commission or insurance-business charge on your invoices.

Agencies still working on commission

If you receive a fee directly from a client for selling insurance (in lieu of a commission) but don't provide any taxable insurance service as defined in Rule 3.355, that fee is not taxable. Providing insurance services for free, with no separate charge, also does not create a tax liability.

Accountants and tax professionals

Watch for clients whose insurance agency contracts blend a commission-like fee with services such as claims handling or loss-reserve recommendations. The letter's test is whether the fee is compensation for a taxable insurance service (taxable) versus purely a substitute for a sales commission with no taxable service attached (not taxable). Encourage clients to itemize invoices so taxable service charges are separated from nontaxable commission/insurance-business charges.

Common questions

Q: Is a casualty insurance agency's commission for selling a policy subject to sales tax?
A: No. The letter addresses fees charged for insurance services (like claims administration or risk inspection), not ordinary sales commissions negotiated with insurance carriers.

Q: My agency charges clients a fee instead of taking a commission -- is that automatically taxable?
A: Not automatically. If the fee is paid in lieu of a commission and the agency does not provide any taxable insurance service as defined in Rule 3.355, the fee is not taxable.

Q: What kinds of services does the letter identify as taxable?
A: Claims administration services, inspections of risks, fixing of rates, and adjustment of claims or losses, among others -- when the agency charges the client a fee for performing them.

Q: Does it matter that these services are also called "insurance business" under the Texas Insurance Code?
A: No. The letter states these services are taxable insurance services even though they are also defined as "insurance business" in Art. 1.14-1, Sec. 2.(a)(6) of the Texas Insurance Code.

Q: What if the agency provides insurance services for free?
A: The letter states insurance services are not taxable when provided by an agency without charge to the client.

Citations and references

Statutes and rules:

• Texas Insurance Code Art. 1.14-1, Sec. 2.(a)(6) (definition of "insurance business")
• 34 Tex. Admin. Code Rule 3.355 (insurance 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/9609L1428G03

Original ruling text

DATE: September 4, 1996
TO: Distribution List
FROM: Karey W. Barton
SUBJECT: Special Mailing-Casualty Insurers

Attached is a copy of the letter that was mailed to approximately 900 casualty
insurers. The letter explains that some services provided by the casualty
insurer may be subject to sales tax.

If you need any additional information, you may call Dorothy Van Dokkumburg
at 3-3725.

Thank you.

August 29, 1996

Name
Address
City, State, Zip

Dear :

Recent discussions with insurance agency representatives (agency) reveal
major changes in the way casualty insurance is sold and bought. The changes
are a result of industry competitiveness and clients' desire to know the
exact cost of insurance coverage. These changes may subject agencies to
sales tax liabilities.

In today's marketplace, many agencies have agents who are licensed risk
managers and who provide turnkey risk management and insurance programs
for their clients. An agency's contract with its clients may state all or
part of the fee is for insurance, and the fee may be paid out of gross
premiums paid by the clients.

If there is a commission for selling insurance, the agency negotiates the
commission with its insurance carriers. On the other hand, some clients
elect to require that all insurance they buy be sold or bought without a
commission. In such instances, the agency performs a number of services
for the client. These services include, but are not limited to, claims
administration services, inspections of risks, fixing of rates, and
adjustment of claims or losses. The services are provided for a fee in
lieu of a commission. These services are taxable insurance services, even
though they are also defined as "insurance business" in Art. 1.14-1, Sec.
2.(a)(6) of the Texas Insurance Code.

A substantial portion of the agency's services may result, not in the
client buying insurance from an insurance carrier, but in new safety
procedures, recommendations for stronger loss reserves, or self-insurance
programs. The agency charges the client directly for performing the
services. Because the fee received by the agency for performing these
services is not a commission for selling insurance, the services and fees
are subject to sales tax.

Insurance services are not taxable when provided by an agency without
charge to the client. If insurance services are provided to a client
for a separate amount over and above the amount paid as a commission for
a policy, the separate charge is taxable.

An agency must collect sales tax on fees received in connection with the
performance of an insurance service. An agency should separate the
charge for nontaxable insurance business from the charge for taxable
insurance services.

If an agency receives a fee directly from a client for selling insurance,
but does not provide any taxable insurance services as defined in Rule
3.355, this fee paid in lieu of a commission is not taxable.

You may call Eddie Washington in our Tax Policy Division if you have
any questions or need more information. He may be reached toll-free
at 1-800-531-5441, extension 3-4683. His direct number is 512/463-4683.

Sincerely,

Wade Anderson
Director, Tax Policy

NOTE: Previous Accession Number 9609514L