Does an insurance agent owe Texas sales tax on an administrative fee charged to clients to reimburse the agency for expenses like postage, printing, and phone calls, or on a pass-through charge for a third-party coverage evaluation?

Subject

Administrative Fee — Agent Collects From Clients For Cost Of Expenses Incurred In Providing Insurance Coverage (Delivery Charges, Printing/Reproduction,Telephone Calls) — Not Taxable

Plain-English summary

An insurance agency asked the Comptroller about two kinds of charges it billed to clients on top of the insurance premium and commission.

Issue 1 -- the $50 administration fee. In addition to the occupational coverage premium (which already contains the commission, taxes, and stamping fees), the agency separately billed a $50 administration fee that it viewed as a reimbursed expense or cost recovery. The Comptroller pointed to Texas Insurance Code Article 21.35A, which lets insurance agents charge clients a fee -- not to exceed actual costs incurred -- to reimburse themselves for costs like special delivery or postal charges, printing and reproduction, electronic mail, telephone transmission, and similar costs incurred on the client's behalf. As long as the $50 fee reimburses the agency for one or more of those enumerated expenses, it is not taxable. However, the agency still owes sales tax on any taxable items it purchases for use in issuing the policy -- for example, paying a photographer for a picture or paying for a motor vehicle record.

Issue 2 -- the $500 evaluation cost. For some coverage, the agency pays a third party (a service provider) for an evaluation of coverage or ratings, then passes that $500 cost through to the client on the invoice with no markup. The Comptroller held that the agency's purchase of that evaluation service from the third party is itself taxable -- the agency owes sales tax to the service provider on the total charge for the evaluation service. But the agency's pass-through charge to its own client is not taxable.

The letter also notes that the underlying August 29, 1996 letter (from Wade Anderson) had described various fee-for-service arrangements -- claims administration, risk inspection, rate fixing, and claims/loss adjustment performed for a fee instead of a commission -- and had taken the position that fees for those services (as distinct from insurance commissions) are taxable under Texas Tax Code Section 151.051 (which imposes sales tax on the sale of a taxable item, per Section 151.005) and Section 151.010 (which defines a taxable item as tangible personal property and taxable services).

The Comptroller closed by noting the opinion is based on the facts presented and could change with additional or different facts.

What this means for you

Insurance agents and agencies

If you bill clients a separate administrative fee to recover costs like postage, printing/reproduction, electronic mail, or telephone charges tied to issuing a policy, that fee is not taxable as long as it truly reimburses those enumerated costs and doesn't exceed your actual costs, per Texas Insurance Code Article 21.35A. But don't assume every cost you pass through is tax-free: if you buy a taxable item or service (like a photograph or a motor vehicle record) to issue the policy, you owe sales tax on that purchase yourself.

Agencies that pass through third-party evaluation or inspection costs

If you hire a third party to evaluate coverage or produce ratings (an actuarial-style service) and then bill your client for that cost without markup, your pass-through charge to the client is not taxable. However, your agency -- not the client -- owes sales tax to the service provider on the total charge for that evaluation service.

Accountants and tax professionals advising insurance agencies

This letter draws a clear line between (1) fee reimbursements authorized under Texas Insurance Code Article 21.35A, which are not taxable, and (2) the agency's own purchases of taxable items or services used to perform its work, which remain taxable regardless of how they're later billed to the client. Keep those two categories separate when advising clients on how to structure and document administrative fees.

Common questions

Q: Is the $50 administration fee taxable?
A: Not taxable, if it reimburses the agency for enumerated costs like special delivery or postal charges, printing and reproduction, electronic mail, or telephone transmission costs incurred on the client's behalf, and the fee doesn't exceed the agency's actual costs.

Q: What if the agency buys something taxable, like a photograph or a motor vehicle record, to issue the policy?
A: The agency must pay sales tax on that purchase, even if the $50 administrative fee itself is not taxable.

Q: Is the $500 evaluation cost passed through to the client taxable?
A: The agency's pass-through charge to its client is not taxable. But the agency owes sales tax to the third-party service provider on the total charge for the evaluation service.

Q: Could this outcome change under different facts?
A: Yes -- the letter states the opinion is based on the facts presented, and the opinion may change if there are additional or different facts.

Citations and references

Statutes:

• Texas Insurance Code Article 21.35A (fee to reimburse agents for costs incurred providing insurance coverage)
• Texas Tax Code Section 151.051 (imposes sales tax on the sale of a taxable item)
• Texas Tax Code 151.005 (sale definition, referenced with Section 151.051)
• Texas Tax Code Section 151.010 (defines taxable item as tangible personal property and 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/9610L1441D04

Original ruling text

October 1, 1996

Dear *****:

Thank you for your letter of September 16, 1996, concerning Wade Anderson's
letter of August 29, 1996.

The August 29,1996 letter stated that an insurance agency may perform "a number
of services for the client, including, but not limited to claims administration
services, inspection of risks, fixing of rates, adjustment of claims or losses
for a fee in lieu of a commission. The agency charges the fee for performing the
services directly to the client." The letter goes on to state because the fee for
performing the services is not a commission for selling insurance, the services
and fees are taxable.

Issue No. 1. An agency issues occupational coverage to a customer. In addition
to the occupational coverage premium and the taxes and stamping fees allocated to
that particular policy, the agency also bills and has set out in its billing an
administration fee of $50.00 which is in addition to the premium which contains
the commission and any other item contained on the invoice. Your question in
respect to his issue is: Is the administration fee, which you deem to be
a reimbursed expense or a cost recovery, taxable under any guideline of the
comptroller's office?

Issue No. 2. In some coverage for your customers, an evaluation cost of $500.00
is incurred. For example, third parties are paid for the evaluation of coverage
and/or ratings for coverage. When this evaluation cost is invoiced to an
insurance customer, the agency includes this pass-through cost as a reimbursable
cost without any markup. You assume that the person or agency providing the cost
would be liable for any tax associated with these professional services.

You assume that an administrative fee, which is a reimbursement of expenses of
the office for the issuance of policy coverage and the evaluation cost, and such
cost as are normally and regularly recurring for the purposes of the
administration of policies and the cost of coverage would be borne by those
individuals who perform the taxable service. You would also logically assume
that the reimbursement of an administration cost is not deemed to be income,
and would not fall as taxable under the application of Rule 3.355.

Responses

Issue No. 1: Texas Insurance Code Article 21.35A. allows insurance agents to
charge a client a fee to reimburse themselves for costs incurred in providing
insurance coverage under an insurance policy. The fee may not exceed the actual
costs incurred by the agents. Agents may charge clients or the insureds a
reasonable fee for special delivery or postal charges, printing and
reproduction costs, electronic mail costs, telephone transmission costs and
similar cost that the agent incurs on behalf of the client.

The $50.00 administrative fee charged is not taxable if the agency is
reimbursing itself for one or more of the enumerated expenses set out in the
preceding paragraph. However, the agency must pay sales tax on any taxable
items purchased for use in issuing the insurance policy, e.g., the amount paid
to a photographer for a picture, motor vehicle record, etc.

Issue No. 2: The agency purchase of an evaluation of coverage (insurance
inspection) and/or ratings for coverage (actuarial analysis) from a third party
(service provider) is taxable. The agency owes sales tax to the service provider
on the total charge made for the services. The agency's pass-through charges to
its client are not taxable.

The August 29, 1996 letter was directed to agents who perform various insurance
services for a fee that is neither an insurance premium nor a commission. Texas
Tax Code Section 151.051 imposes a sales tax on the sale of a taxable item
(Texas Tax Code 151.005). Texas Tax Code Section 151.010 defines a taxable item
to mean tangible personal property and taxable services.

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 9610794L