A joint venture bills an insurance company a single charge covering many different accounting/administrative functions -- some classified as taxable insurance services, others as taxable data processing, and some seemingly nontaxable -- does the 5% threshold for taxing an entire bundled charge apply function-by-function, or to the whole contract?

Plain-English summary

A joint venture provides a wide range of administrative and accounting functions to an insurance company under a single contract for one combined charge, described in detail in an exhibit to the request. The taxpayer pushed back on the Comptroller's earlier recommendation (from a March 1997 letter) that actuarial-service charges be separately stated, prompting this follow-up covering the venture's broader service list.

The Comptroller classified the functions into two taxable categories, citing Hearing 30,261: taxable insurance services under Rule 3.355 include Premium Accounting (reviewing/analyzing premiums, producing statutory reports and premium filings, reconciling unearned premium accounts), Claims Accounting (reconciling claims to the general ledger, producing annual statement schedules), DPAC Accounting, Intercompany Accounting (recording intercompany payables/receivables, preparing settlement billings and Schedule Y), Earned-but-Unbilled Accounting (accruing Worker's Compensation unbilled audit premium), the RA Department's cash flow management and external/internal reporting work, and Financial Reporting (statutory annual/quarterly statements). Separately, taxable data processing services include 1099 Reporting, Escheat Filings, Treasury Operations, Accounts Payable, Premium Receivables, and Third-Party Deductibles Billings -- largely highly-automated, systems-personnel-driven functions.

The key procedural point: because the joint venture performs all of these (and possibly other, unrelated nontaxable) functions under ONE contract for a SINGLE charge, the 5% threshold that triggers taxing an entire bundled charge (from Rule 3.355) applies to the AGGREGATE of ALL taxable services combined -- insurance services plus data processing services together -- not function-by-function. If that combined taxable total exceeds 5% of the contract's total cost, the joint venture must separately state the charges for taxable services from the charges for unrelated nontaxable services.

What this means for you

Insurance company service providers and joint ventures billing insurers

Track the combined value of ALL taxable functions you perform under a single contract -- insurance services (Rule 3.355) and data processing services together -- against the 5% threshold, rather than evaluating each individual function in isolation. Exceeding 5% in the aggregate requires you to separately state taxable and nontaxable charges.

Accountants structuring multi-function outsourcing contracts

When a single contract bundles many different service types for one price, don't assume each small function escapes taxation just because it individually falls under 5% -- the aggregation rule looks at the whole taxable pool together.

Insurance companies purchasing bundled administrative services

Ask your service provider whether their invoice separates taxable insurance/data-processing services from any unrelated nontaxable work, especially if the taxable functions collectively exceed 5% of your total contract cost.

Common questions

Q: Does the 5% threshold for taxing a bundled charge apply separately to each type of taxable service?
A: No, per this letter -- it applies to the aggregate of ALL taxable services performed under the contract combined.

Q: What functions were classified as taxable insurance services here?
A: Per this letter and Hearing 30,261: Premium Accounting, Claims Accounting, DPAC Accounting, Intercompany Accounting, Earned-but-Unbilled Accounting, RA Department cash flow/reporting, and Financial Reporting.

Q: What functions were classified as taxable data processing services?
A: Per this letter: 1099 Reporting, Escheat Filings, Treasury Operations, Accounts Payable, Premium Receivables, and Third-Party Deductibles Billings.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.355 (insurance services; separately stated charges for unrelated taxable/nontaxable services, 5% aggregation threshold)

Prior decision cited in this letter:

• Comptroller's Hearing 30,261 (classifying similar insurance-company administrative functions as taxable 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/9706232L

Original ruling text

June 25, 1997

Dear **:

Thank you for your letter of May 19, 1997, in which you provide additional
information about the sales tax responsibilities of a joint venture providing
services to an insurance company.

You appear to take exception to my March 31, 1997 response in which I
recommended that any charges for actuarial services be separately stated. Rule
3.355 specifically addresses the performance of taxable and nontaxable
unrelated services for a single charge. Because of this provision in this rule
and in the other rules on services that became taxable after September 1, 1987,
I would have been remiss not to caution you.

Although I only expressed concern about actuarial services, there are other
taxable services the joint venture will perform for the insurance company as
described in Exhibit A.

Under the Administrative Law Judge's decision in Hearing 30,261, the following
services could be taxable insurance services:

Premium Accounting - reviewing and analyzing premiums recorded to the ledger by
the business units for reasonableness. This function also analyzes and adjusts,
as necessary, premiums recorded to miscellaneous accounts. Premium Accounting
produces statutory reports and premium filings. Premium Accounting is
responsible for reconciling unearned premiums accounts from the general ledger
to the system and monitoring accuracy of earnings routines and changes.

Claims Accounting - reconciliation of G/L accounts to the claims systems and
producing Schedules P and X for annual statement filings.

DPAC Accounting - maintaining, recording and analyzing DPAC, rates, unearned
premium balances.

Intercompany Accounting - responsible for recording the intercompany
payables/receivables, preparation of intercompany monthly settlement billings,
prepares Schedule Y for annual statement.

Earned but Unbilled Accounting - monthly analysis and accrual of Worker's
Compensation unbilled audit premium.

RA Department - cash flow management, external/internal reporting, and
financial analysis. This involves premium and commission adjustments, schedule
F preparation and other statutory reporting, record maintenance.

Financial Reporting - preparation and filing of internal and external reporting
requirements (includes Statutory Annual and Quarterly Statements for all
insurance subsidiaries and Statutory Financial Statements (audited) for all
insurance subsidiaries.

The following services are data processing services:

1099 Reporting - generating, distributing, and making edits to agents' (and
other recipients') 1099 statements. This function is highly automated and is
performed by systems personnel. System extracts files from CDS, Agency and
Commission Systems are uploaded to the ledger, IRS withholdings are applied,
and 1099 statements are generated.

Escheat Filings - highly automated function is performed by systems personnel.
Escheat filings are sent to regulatory bodies. The escheat files are uploaded
to APECS.

Treasury Operations - receipts processing; journal edits (automated journal
entries)

Accounts Payable - enter approved invoice in to CDS, travel and expense reports
function, file automated Journal Edits, request vendor file set up and
automated check generation and distribution.

Premium Receivables - accounts for and reconciles cash receipts for most lines
of business (Direct Bill and Agency business). Direct Bill is automated and
constitutes 25% of receipts; agency business is highly manual and constitutes
75% of receipts. Third party is agency business but receipts are automatically
uploaded to the Agency system.

Third Party deductibles billings is very complex because each contract has
deductibles that vary based on the type of loss (e.g., medical and lost time
for the same accident).

Your client performs these and other services under a contract for a single
charge. The 5% guideline does not apply to each type of taxable service
performed under a contract; it pertains to the aggregate of taxable services
performed under the contract. This means that if the taxable services
(partially listed above) exceeds 5%, your client should separate the charges
for the taxable services from the charges for unrelated nontaxable charges.

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 3-4004. The direct line is
512/463-4004.

Sincerely,

Wade Anderson, Director
Tax Policy