A taxpayer sought a refund of sales tax it charged clients (employers) for case management/risk management consulting services, on the theory that because those clients were 'nonsubscribers' to Texas Worker's Compensation, the services couldn't be taxable insurance services. Is that refund claim valid?

Plain-English summary

This document is unusual for this corpus: it's an internal memo from the Comptroller's Tax Policy Division to its own Credit Verifications/Revenue Accounting Division staff, analyzing a taxpayer's (TP's) claim for a refund of sales tax TP had charged and collected on case management services it provided to employer clients who were "nonsubscribers" to Texas Worker's Compensation. TP's refund theory, based on Rule 3.355 and a trade-association (TARPPS) publication, was that because its clients didn't subscribe to Worker's Compensation, the services couldn't be taxable insurance services.

The memo pushes back hard on that theory. Being a Worker's Compensation nonsubscriber doesn't mean an employer has no insurance policy at all. Rule 3.355(a)(8) defines a true "self-insured plan" narrowly (an employer funding its own benefits rather than transferring risk to a carrier — not considered a policy of insurance for sales tax purposes), but many nonsubscriber arrangements are actually high-deductible insurance policies under Texas Insurance Code Art. 5.55C, which requires workers' comp insurers to offer optional deductible plans and still requires the insurer to pay and service all claims arising during the policy period, including those payable from the deductible amount. The memo draws an analogy: an auto policy with a $500 deductible is still a policy of insurance, and an adjuster's fee to appraise sub-deductible damage is still taxable — the same logic applies to high-deductible workers' comp arrangements. Separately, the memo confirms ERISA's federal preemption doesn't help TP here, because ERISA covers health, life, accident, and disability benefits, not workers' compensation or other casualty/liability insurance governed by Insurance Code Article 5.

The memo cites two pieces of precedent supporting taxability: a prior STAR letter (9603135L) holding a third-party administrator's purchase of insurance services taxable where it administered claims under a high-deductible workers' comp policy, and Comptroller Hearing No. 36,754, where an administrative law judge held that a consultant's services to non-subscriber small businesses — advising on the pros/cons of non-subscription and referring clients to insurance agents — were taxable insurance claims/loss-prevention services, even though the consultant didn't work directly for an insurance company.

Rather than flatly denying the whole refund claim, though, the memo instructs the Revenue Accounting staff to verify, relationship by relationship, whether TP's specific case management services for each named client (a self-insured airport board, a river authority and a private company using a shared third-party administrator, an exempt school district's self-insured plan, and a private nonsubscriber's plan) actually pertain to a policy of insurance before processing any part of the claim.

What this means for you

Businesses providing risk management/case management consulting to non-subscriber employers

Don't assume "non-subscriber to Worker's Compensation" automatically means your services fall outside taxable insurance services — many non-subscriber arrangements still involve an actual insurance policy (high-deductible plans, third-party-administered self-insured plans), and prior precedent (Hearing No. 36,754) has held comparable consulting taxable.

Employers using third-party administrators for self-insured or high-deductible plans

The line between a true self-insured plan (not a policy of insurance under Rule 3.355(a)(8)) and a high-deductible insurance policy (still a policy of insurance under Insurance Code Art. 5.55C) matters a great deal for whether services administering that plan are taxable — and that line often turns on the specific arrangement, not just the "nonsubscriber" label.

Accountants and tax professionals

A rare look at the Comptroller's own internal reasoning process on a refund claim, useful for seeing how ERISA preemption, Rule 3.355's self-insured-plan definition, and Insurance Code Art. 5.55C interact — and as a reminder that "nonsubscriber" status alone doesn't settle a taxability question; the underlying insurance/administrative structure does.

Common questions

Q: Does being a "nonsubscriber" to Texas Worker's Compensation mean an employer has no insurance policy, making related consulting services nontaxable?
A: Not necessarily -- many nonsubscriber arrangements are actually high-deductible insurance policies (Insurance Code Art. 5.55C) or third-party-administered self-insured plans, both of which can still involve a taxable insurance services relationship.

Q: Does ERISA exempt workers' compensation-related consulting from Texas sales tax?
A: No -- ERISA preemption covers health, life, accident, and disability benefits, not workers' compensation or other casualty/liability insurance.

Q: Has a Texas administrative hearing addressed taxability of consulting on non-subscription to Worker's Compensation?
A: Yes -- Hearing No. 36,754 held that a consultant's services advising non-subscriber employers (even without working directly for an insurance company) were taxable insurance loss-prevention services.

Q: Does this memo grant or deny the taxpayer's refund claim?
A: Neither outright -- it directs Comptroller staff to verify, client relationship by client relationship, whether the specific services actually pertain to an insurance policy before processing any part of the claim.

Q: Can I rely on this memo for my own refund claim?
A: No. It's an internal analysis based on the specific facts presented and can be relied on only in that context; other facts, even if similar, may produce a different result.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.355(a)(8), (b), (g) (Insurance Services)
• Texas Insurance Code Art. 5.55C (Optional Deductible Plans for workers' compensation insurance)
• Employee Retirement Income Security Act of 1974 (ERISA) (federal preemption of state taxation of covered employee benefits)

Administrative precedent:

• Comptroller Hearing No. 36,754 (consulting services on non-subscription to Worker's Compensation held taxable insurance loss-prevention services)
• STAR document 9603135L (third-party administrator's purchase of insurance services for a high-deductible workers' comp plan held taxable)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9907624L

Original ruling text

DATE: July 28, 1999

TO: Kevin W. Flegal, Credit Verifications, Revenue Accounting Division

FROM: Eddie C. Washington, Tax Policy Division

SUBJECT: **, Taxpayer (TP)

RE: Taxability of Case Management Services Provided to Non-subscribers to
Worker's Compensation

** submitted a claim for refund on TP's behalf for sales tax
charged and collected on case management services provided to clients
(employers) that were nonsubscribers to worker's compensation. This claims is
based on Rule 3.355(a)(8), (b), and (c) concerning insurance services and an
article that appeared in a TARPPS publication.

Rule 3.355(a)(8) defines a self-insured plan as: "[a] plan whereby an employer
maintains funds for providing employee benefits rather than transferring risk
by purchasing insurance from an insurance carrier. This plan is not considered
a policy of insurance for sales tax purposes." (Emphasis added.) Rule
3.355(b) taxing insurance services when they are performed for consideration
for others pertaining to a policy of insurance. Rule 3.355(g) requires a
third-party administrator administering funds for a self-insured to issue an
exemption certificate in lieu of paying sales tax. The Employee Retirement
Security Income Act 1974 (ERISA), a federal statute, pre-empts states from
taxing benefits covered under that act.

Employee benefits covered by ERISA apply to health, life, accident, and
disability benefits. Article 21.01, et. seq., of the Insurance Code governs
the writing and issuance of such policies and the licensing of agents.
Worker's Compensation is liability or casualty insurance and its policies and
agents are governed by and licensed under Article 5 of the Insurance Code.
This article also covers automobile, real and personal property and other
general liability insurance. ERISA does not apply to these types of insurance.

Texas Insurance Code Art. 5.55C. Optional Deductible Plans (a) "requires each
[insurance] company or association that writes workers' compensation insurance
in this state to offer optional deductible plans to allow policyholders to
self-insure for the deductible amount." (Emphasis added.) This article allows
the employer to enter into an agreement with the insurer for a negotiated
deductible in excess of the largest promulgated deductible.

Under section (d) of Art. 5.55C. an insurer writing "a deductible policy must
make all payments for benefits that are payable from the deductible amount and
that reimbursement by the policyholder be periodically rather than at the time
claim costs are incurred." (Emphasis added.) Section (e) requires an insurer
to "service all claims that arise during the policy period, including those
claims payable, in whole or in part, from the deductible amount." (Emphasis
added.)

Employers opting for worker's compensation policies having large deductibles
are still covered by a policy of insurance in the same manner as an automobile
owner whose auto insurance policy has a $500 deductible. When an adjuster
appraises the damage to the vehicle and determines that the damage is under
$500, the insurer cannot claim that the fee the adjuster charges is not taxable
because the policyholder self-insures the first $500 of any loss.

Employers opting for the higher deductible worker's compensation policies
sometimes purchase insurance coverage to transfer some of the risks assumed
under the higher deductible.

Attached is STAR document 9603135L in which a third-party administrator was
advised that its purchase of insurance services were taxable. The insurance
services were used for administering the employer's claims that were under the
deductible as provided under worker's compensation policy as provided for in
Article 5.55C of the Insurance Code. Although the claims were not paid under
the worker's compensation policy, the insurance services purchased pertained to
a policy of insurance and were taxable.

Also attached is Hearing No. 36,754 in which the administrative law judge
concluded that the consulting services performed by Petitioner for clients were
taxable insurance claims or insurance loss prevention services. Petitioner
provided information regarding responsible practices in the workplace to
non-subscribers to the Worker's Compensation Program. Petitioner did not
perform services directly for insurance companies. Rather, it performed
services to small businesses. As part of its services, Petitioner advised
clients on the advantages and disadvantages of non-subscription to Worker's
Compensation.

Petitioner's promotional literature advised potential clients that Worker's
Compensation is not mandatory in Texas and that non-subscribers could eliminate
rate increases, paying claims that are not justified, 25% down payments, a
tabular charges. However, Petitioner did encourage its clients to purchase
some type of insurance coverage and referred them to agent when requested.

These STAR documents offer evidence that the term "non-subscribers to Worker's
Compensation" does not mean that TP's case management services are not taxable.
The findings of facts in Hearing 36,754 reveal that the services performed may
very well pertain to a policy or policies of insurance that render them subject
to tax. TP's reliance on the TARPPs article is for the basis of the refund
claim is misplaced.

TP states that some of its services are performed for: (** Airport
Board a "self-insured" employer through **, a third-party
administrator; **, a third-party administrator, administering funds
for the "self-insureds" ** River Authority (an exempt political
subdivision) and ** (a nonexempt entity); ** (formerly
**) a third party administrator administering the "self insured
plan" for the ** Independent School District (an exempt entity);
and for third-party administrator, administering **'s
non-subscriber's private worker's compensation plan.

The insurance services performed for ** for **'s
self-insured plan and for ** for **'s nonsubcriber's
workers compensation could involve insurance policies as described in the STAR
documents. Verify that TP's services for these clients do not pertain to
insurance policies before processing the claim.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

Attachments: Art. 5.55C, Texas Insurance Code, STAR documents 9603L1405B10 and
9901269H.