Is a forensic engineering firm's technical consulting for plaintiff attorneys — in lawsuits where the defendant's insurance coverage isn't the point of the litigation — automatically exempt from Texas sales tax as a non-insurance service, just because the client is a plaintiff's lawyer rather than an insurance company?

Plain-English summary

A forensic engineering firm made a detailed argument that its technical consulting for plaintiff attorneys shouldn't count as a taxable "insurance service." The scenario: a plaintiff's attorney sues a defendant (not the defendant's insurance carrier) over an industrial or non-industrial accident, often without even knowing yet whether the defendant has insurance, whether a claim has been filed, or whether coverage will apply. The firm's engineering study exists to establish the defendant's legal liability and help the plaintiff get paid — not to determine insurance coverage. The firm argued this makes the work categorically non-insurance, and cited a 1989 Attorney General opinion (JM-1016) about claims investigators, contending it doesn't reach this fact pattern.

The Comptroller didn't accept the firm's broad legal theory. Tax Code § 151.0039 defines "insurance service" (including insurance investigation), § 151.0101(a)(9) makes insurance services taxable, and § 151.0101(b) gives the Comptroller — not the Attorney General or the taxpayer — exclusive authority to interpret what counts as a taxable service. The Comptroller found no provision anywhere in the relevant statutes that exempts professional engineers from sales tax on insurance services, and specifically rejected the idea that the sales tax law distinguishes between a plaintiff's attorney and a defense attorney as the purchaser — AG Opinion JM-1016 itself said "the statute provides no basis for distinguishing among purchasers of insurance services," and Rule 3.355(b) makes no such distinction either. The Comptroller also noted that the legislature deliberately left "insurance services" broadly within the Comptroller's own interpretive authority (unlike "personal services," which the legislature specifically narrowed by statute), reinforcing that there's no special carve-out for plaintiff-side engineering work.

So instead of a bright-line rule, the actual taxability turns on the facts of each individual engagement — specifically, whether that particular engineering study pertains to an existing insurance policy, an insurance policy to be furnished, or an insurance claim/expected claim. Because the purchaser (the attorney or client) is usually the one who knows this, the Comptroller endorsed a practical solution: a letter of engagement form, devised by a group of engineers, in which the client expressly represents in writing that the engagement does NOT involve any of those three insurance-related elements. If the client signs that representation, the engineering firm is protected from sales tax liability even if the Comptroller later concludes the work actually did pertain to insurance. If the client won't sign it, the firm must collect tax on the engagement to be safe.

What this means for you

Forensic engineers, consultants, and similar professionals serving both plaintiff and defense attorneys

Don't assume your services are automatically exempt just because your client is a plaintiff's attorney rather than an insurer or defense side — Texas draws no such distinction. What matters is whether the specific engagement involves an insurance policy, coverage question, or claim. Use a signed client representation (like the letter of engagement form described here) to document the answer and protect yourself from later tax liability if the Comptroller reaches a different conclusion.

Plaintiff's attorneys hiring technical experts

Be prepared to sign a representation about whether your expert's work touches an insurance policy or claim — if you decline, your expert may need to collect sales tax on the engagement as a precaution.

Accountants and tax professionals

This letter is a good illustration of how far the Comptroller's exclusive interpretive authority over "taxable services" (§ 151.0101(b)) extends, and how a case-by-case, engagement-level facts test (rather than a client-type-based bright line) can still be operationalized practically through a signed engagement letter functioning much like an exemption/resale certificate's good-faith reliance protection.

Common questions

Q: Are engineering services for plaintiff attorneys automatically exempt from Texas sales tax on insurance services?
A: No. The sales tax law and Rule 3.355 make no distinction based on whether the purchaser is a plaintiff's attorney, a defense attorney, an insurer, or an insured — taxability depends on the actual facts of the engagement.

Q: What determines whether a specific engineering engagement is a taxable insurance service?
A: Whether it pertains to an existing insurance policy, an insurance policy to be furnished, or an insurance claim (existing or expected) — not who the client is or which side of a lawsuit they represent.

Q: What is the "letter of engagement" form, and how does it help?
A: It's a form where the client expressly represents in writing that the engagement doesn't involve any of the three insurance-related elements above. If signed, the engineering firm is protected from sales tax liability even if the Comptroller later disagrees; if the client won't sign, the firm should collect tax to be safe.

Q: Can I rely on this letter for my own forensic engineering or consulting practice?
A: No. This opinion is based on the facts presented, and additional or different facts may change the result; it binds the Comptroller only as to the taxpayer it was issued to.

Citations and references

• Tex. Tax Code § 151.0039 (definition of insurance service)
• Tex. Tax Code § 151.0101(a)(9) (insurance services as taxable services)
• Tex. Tax Code § 151.0101(b) (Comptroller's exclusive jurisdiction to interpret taxable services)
• 34 Tex. Admin. Code Rule 3.355 (insurance services)
• Attorney General Opinion JM-1016 (1989) (insurance investigation services; no distinction among purchasers)
• Attorney General Opinion JM-823 (attorney's fees as debt collection services; legislative-intent analysis)
• Attorney General Opinion JM-211 (Attorney General defers to Comptroller's exclusive interpretive jurisdiction)

Subject

Forensic Engineers — Letter Of Engagement — Form Devised By Engineers To Help Determine Whether Services Performed For Clients Are Taxable Or Not

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9801215L

Original ruling text

January 30, 1998

Dear *****:

Thank you for your letter of January 7, 1998, concerning your firm's sales tax
responsibilities when performing services for plaintiff attorneys.

Facts: Many of ABC's clients are plaintiff attorneys who will be asking for
guidance and clarification as to whether or not the engineering services which
ABC provides to them are taxable insurance services.

The purpose of this letter, therefore, is to request a ruling from the Tax
Policy Section regarding the Texas sales tax obligation of engineers that
supply technical consulting services to plaintiff attorneys under the following
circumstances: the attorney is representing a plaintiff(s) that have been
injured in other industrial or non industrial accidents and the target of the
litigation is not the plaintiff's own insurance company.

Under the above circumstances, the plaintiffs attorney brings suit against a
defendant that is either a company or an individual. The suit is not brought
against the defendant's insurance carrier and at the time engineering services
are engaged, the plaintiff attorney often will not know if:

1. the defendant in the suit possesses third party insurance coverage;

2.the defendant in the suit (assuming they do have insurance) has filed a claim
with their insurance carrier;

3.the insurance carrier of the defendant will conclude that, assuming a claim
was filed, that the incident that occurred is a peril covered by the terms of
the policy and/or whether the claim may be denied for any number of other
reasons;

4.the plaintiff they are representing will prevail and either receive a
judgment or reach a settlement on the case;

5.any judgment or a settlement achieved will be less than the deductible
provision in the defendant's insurance policy (in which case the defendant is
essentially self insured).

The purpose of an engineering study of an accident, commissioned by a plaintiff
attorney, is to determine the legal liability of the defendant. It is for the
benefit of the injured party and seeks payment from the defendant. Its purpose
is not to determine whether a defendant's insurance policy provides coverage
relative to a given claim. Therefore, such an engineering study is totally
unrelated to insurance. Indeed, the plaintiff is indifferent as to whether a
judgment is paid by the defendant themselves or the defendant's insurer.

As a result, such a study does not meet any of the definitions of subsection
(a) of Section 3.355. Specifically, it is not an insurance investigation
(definition 3.) as it is not "performed to evaluate an individual's eligibility
or qualifications for insurance coverage, or for payment of benefits, or any
similar activity." This definition clearly refers to the investigations aimed
at addressing coverage issues between an insured and their insurance company.

Furthermore, "insurance benefits" refer to payments made by a carrier to its
insured, not payments made to a third party who has received a monetary
settlement. As discussed in footnote (1) on page one, forensic engineers are
frequently employed by the carrier or the insured to address coverage issues.
You readily agree that such engineering investigations meet the definition of
insurance services. This is not the case, however, with a plaintiff who has no
contacts or relationship with the defendant's insurance company.

In addition, the type of engineering study commissioned by a plaintiff attorney
which you are asking for a ruling on does not meet the definition of a taxable
service as defined in subsection (b) of 3.355. It is not "performed on behalf
of an insurance carrier, its insured, its policyholders, or others pertaining
to a policy or policies of insurance. " Such a study simply does not pertain to
or consider in any way the insurance implications when assessing the technical
facts surrounding an accident. In fact, the engineer performing the study
generally does not know (or care) if the defendant in the case has insurance
coverage.

In phone conversations with the Comptrollers Office you have been referred to a
1989 written opinion of the Attorney General of Texas (Opinion No. JM 1016 Re:
Whether certain activities of an independent claims investigator or adjuster
constituted a taxable insurance service under section 151.0039 of the insurance
code and related questions R2-l 564).

(2) Insurance policies almost always have a deductible or self retained limit.
As a result, even assuming that the defendant has insurance coverage, some
percent of the settlement represents self insurance paid by the defendant.

This opinion from the Attorney General considered four questions all of which
involved insurance investigation services engaged by either an insurance
carrier or an insured relative to insurance policy coverage issues. These
questions do not address the issue of a plaintiff or his attorney engaging
engineering investigations where the purpose of the investigation is to receive
a monetary settlement from the defendant and is not related to the issue of the
defendant's insurance coverage.

For the reasons stated herein, therefore, ABC respectfully submits that
engineering services commissioned by attorneys representing plaintiffs, when
the target of the litigation is not the plaintiff's own insurance carrier, are:

a. not performed for the purpose of ascertaining the eligibility or
qualifications for the payment of insurance benefits;

b. do not pertain to a policy or policies of insurance;

c. are not insurance related; and

d. therefore, are not subject to Texas sales tax.

Response: Texas Tax Code Section 151.0039 defines insurance service to mean
"insurance loss or damage appraisal, insurance inspection, insurance
investigation, insurance actuarial analysis or research, insurance claims
adjustment or claims processing, or insurance loss prevention service." Texas
Tax Code Section 151.0101(a)(9) defines taxable services to include insurance
services. Texas Tax Code Section 151.0101(b) gives the comptroller the
exclusive jurisdiction to interpret what constitutes taxable services as
defined under Texas Tax Code Section 151.0101(a).

While not exactly analogous to your query, Attorney General Opinion JM-823
gives some insight as to whether services provided by "professionals" should be
taxed. The Comptroller asked the Attorney General if an attorney's fees in
certain circumstances would be taxable as debt collection services. In looking
at the legislative intent, the Attorney General noted the rejection of two
floor amendments in the House attempting to amend House Bill 61 to extend sales
tax to legal services. Also noted was the refusal by the House to concur with
the Senate's proposal to exclude from the sales tax those services labeled as
"professional."

The only referenced debate the Attorney General found on the bill that produced
the statutory definition of "debt collection service" reveals that if a lawyer
is doing what debt collectors do, and that is all, then he would be treated as
a debt collector. If the lawyer was involved in some other aspect of the case
relative to establishing a claim or receiving the judgment, that individual
would not be providing debt collection services.

In Attorney General Opinion JM-1016, the Comptroller asked if sales tax applied
to insurance services bought by the insured or an attorney rather than the
insurer to deter-mine whether a settlement offer should be accepted. The
Attorney General replied: "The statute provides no basis for distinguishing
among purchasers of insurance services." Rule 3.355(b) makes no such
distinction.

In narrowing the Comptroller's authority to interpret what constitute "personal
services" as taxed under 151.0101(a)(3), the Legislature added 151.0045
defining "personal services" to mean "those listed as personal services under
Group 721, Major Group 72 of the Standard Industrial Classification Manual,
1972, and includes massage parlors, escort services, and Turkish baths under
Group 729...but does not include any other services under Group 729..." The
Legislature did not narrow the Comptroller's jurisdiction in interpreting
insurance services defined and taxed under 151.0039 and 151.0101(9).

The Legislature defined a "security service" as a service for which a license
is required under Section 13, Private investigators and Private Security
Agencies Act (Article 4413(29bb) Vernon's Civil Statutes). In the area of
insurance services, the Legislature did not require persons performing
insurance services to be licensed under the Insurance Code.

The Legislature added subsection (b) to Texas Tax Code 151.0101, that gives the
Comptroller the exclusive jurisdiction to interpret subsection (a). In
answering the Comptroller's inquiry about the taxability of country club
membership dues as an amusement service, the Attorney General wrote in Opinion
JM-211: "The attorney general will not as a matter of policy answer a question
whose initial determination the legislature has clearly indicated shall be left
to the Comptroller."

We can find no provision in Article 3271a, 13, 13B, 20 or in Chapter 151 of the
Texas Tax Code that exempts or prohibits professional engineers from charging
or collecting sales tax on insurance services as defined and taxed under Rule
3.355. Neither the sales tax law nor Rule 3.355 requires a "direct test" for
the services provided by a service provider to be an insurance investigation or
any other insurance service.

The sales tax law does not provide any provision for making a distinction
between a plaintiff attorney or a defense attorney.

The letter of engagement is a form devised by a group of engineers for use in
helping determine whether or not certain work performed for clients other than
insurance companies should be taxable. The purchaser of the service likely
knows if the service an engineer will be performing pertains to a policy of
insurance. In accepting the letter with all three questions answered in the
negative, the engineering firm will not be liable for sales tax should the
comptroller later determines that the services were performed pertaining to a
policy of insurance. The engineers at the CITY A meeting devised this
engagement letter for this specific use. A copy is enclosed for your
convenience.

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

cc: Wade Anderson , Director of Tax Policy

LETTER OF ENGAGEMENT FORM

[LETTERHEAD]

[CLIENT NAME AND ADDRESS]

Re: [DESCRIPTION OF ENGAGEMENT]

Dear [CLIENT[:

We have agreed to undertake the above-referenced engagement on your behalf. As
we have discussed, the Comptroller of Public Accounts regards certain
engineering services to be taxable insurance services. You have represented to
us that our services on this engagement are not taxable insurance services
because the services do not involve:

(1) an existing insurance policy;

(2) an insurance policy to be furnished; or

(3) an insurance claim, or an expected claim on a loss incurred.

By signing this letter, you expressly make the above representations.
Unfortunately, if we do not receive this letter from you, we must collect tax
on our services to you. Please call the Comptroller at 1-800-252-5555 if you
have any questions.

Very truly yours,

[FIRM]

[CLIENT]

By:

Date: