How could a Florida investigator recover tax mistakenly collected on nontaxable insurance investigations?

Subject

Refunds of Tax Collected on Insurance Investigations

Plain-English summary

Florida treated insurance investigation services as nontaxable and allowed the investigator to recover tax collected from its insurance-company clients through assigned refund rights. The investigator could then refund the clients after receiving the money from the state.

The service-tax statute identified taxable activities by Standard Industrial Classification codes. Private investigators appeared in taxable SIC 7381, but insurance inspection and investigation services also appeared in SIC 6411, which the statute did not list. Because that ambiguity had one taxable and one nontaxable reading, the Department adopted the taxpayer-favorable nontaxable classification.

Ordinarily, a customer that paid tax when none was due had to obtain the refund from the dealer, and the dealer could seek a state refund or take a return credit. Here, the investigator lacked enough funds to refund large amounts first and had little current taxable revenue against which to claim credits. The Department therefore accepted assignments of rights from the insurance companies as the equitable procedure.

The investigator had to submit the then-current refund application, an original assignment from each insurance company, and copies of the related invoices. The ruling's historical limitations discussion barred tax charged before October 1, 1994, and allowed five years for tax paid on or after that date.

What this means for you

The ruling did not create a blanket exemption for insurance companies. It classified insurance investigation services as outside the SIC codes taxed by the statute; other services bought by an insurer, such as security guards, could still be taxable.

Refund entitlement and refund procedure are separate. Even where tax was collected incorrectly, the claimant had to establish who paid and remitted it, secure assignments where needed, and supply transaction-level invoices.

Common questions

Q: Why were insurance investigations nontaxable? They fit both a taxable detective-services SIC code and an untaxed insurance-services SIC code, so the Department resolved the ambiguity in favor of the taxpayer.

Q: Were all services sold to insurance companies exempt? No. The ruling expressly said taxable services such as security guards remained taxable when purchased by an insurer.

Q: Why did the investigator use assignments of rights? It could not finance the customer refunds before waiting for state reimbursement and had too little current tax to use return credits effectively.

Q: What supported the refund claim? The historical procedure required the refund form, original assignments of rights, and copies of invoices covered by each assignment.

Q: Are the ruling's deadlines and form current? Not necessarily. They were the procedures and limitations periods stated in 1998 and must be checked against current law.

Citations and references

• Fla. Stat. § 212.05(1)(j)1.a — tax on specified detective and protection services
• Fla. Stat. § 213.01 — fair, efficient, and impartial administration
• Fla. Stat. § 215.26 — refunds and filing periods
• Fla. Admin. Code rr. 12A-1.0092, 12A-1.014(7) — protection services and customer refunds through dealers
• Department of Revenue v. Brookwood Associates, 324 So. 2d 184 (Fla. 1st DCA 1975), review denied, 366 So. 2d 600 (Fla. 1976) — citation reproduced as printed in the official ruling
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 98A-002

Original ruling text

SUMMARY

A private investigator needs to refund to its insurance
company clients the tax that was incorrectly collected on
insurance investigations. Due to the large dollar amount
involved in the refunds, the investigator does not have the
funds with which to make a refund to the insurance
companies and then subsequently take a credit on is next
sales tax return or apply for a refund from the Department.
Based on the facts and circumstances of the investigator's
situation, the investigator may obtain an assignment of
rights from the insurance companies, apply for a refund
from the Department, and then make a refund to the
insurance companies upon receiving the funds from the
State.

Jan 28, 1998

Re: Technical Assistance Advisement 98A-002
Sales and Use Tax
Refund of Taxes Collected on Insurance Investigations
Section 212.05(1)(j)1.a., F.S.
Rule 12A-1.0092, F.A.C.

Dear :

This is in response to your letter of September 12, 1997,
requesting a Technical Assistance Advisement (TAA). That
request concerns the proper procedures for the issuance of
refunds on taxes collected on insurance investigations performed
by your company (hereinafter "Investigator").

RELEVANT AUTHORITY

The following passages from the Florida Statutes (F.S.) and
the Florida Administrative Code (F.A.C.) are pertinent to the
issues herein under consideration.

Section 212.05, F.S., provides in part:

(1) For the exercise of such privilege, a tax is levied
on...
(j)1.a. Detective, burglar protection, and other protection
services (SIC Industry Numbers 7381 and 7382).

Section 213.01, F.S., provides in part:

It is hereby declared to be legislative intent that the
revenue laws of the state be administered in a fair,
efficient and impartial manner....

Section 215.26, F.S., provides in part:

(1) The Comptroller of the state may refund to the person
who paid same, or his or her heirs, personal
representatives, or assigns, any moneys paid into the State
Treasury which constitute:...

(b) A payment where no tax,... is due;...

(2) Application for refunds as provided by this section
must be filed with the Comptroller, except as otherwise
provided in this subsection, within 3 years after the right
to the refund has accrued or else the right is barred.
Except as provided in chapter 198 and s. 220.23, an
application for a refund of a tax enumerated in s. 72.011,
which tax was paid after September 30, 1994, must be filed
with the Comptroller within 5 years after the date the tax
is paid. The Comptroller may delegate the authority to
accept an application for refund to any state agency,...
vested by law with the responsibility for the collection of
any tax, license, or account due. The application for
refund must be on a form approved by the Comptroller and
must be supplemented with additional proof the Comptroller
deems necessary to establish the claim;....

Rule 12A-1.014(7), F.A.C., provides:

A taxpayer who has overpaid tax to a dealer, or who has

paid tax to a dealer when no tax is due, must secure a
refund of the tax from the dealer and not from the
Department of Revenue.

DETERMINATION

Background.

Section 212.05(1)(j)1.a., F.S., which imposes the tax on
detective, burglar protection, and other protection services,
expressly states that the tax will apply to SIC (Standard
Industrial Classification) industry numbers 7381 and 7382. SIC
industry number 7382 applies to security system service
companies such as burglar and fire alarm companies. The issues
affecting Investigator are not burglar or fire alarm services.
Accordingly, SIC industry number 7382 does not apply to the
issues herein under consideration and will not be addressed.

SIC industry number 7381 applies to detective, guard, and
armored car services. Within that classification, the Standard
Industrial Classification Manual ("manual") specifically
includes detective agencies and private investigators. At the
time the tax on investigative services came into existence
(September 1, 1992), the Department's understanding of the law
and of the nature of the investigative industry, was that any
type of investigation performed by a licensed investigator would
be classified under industry number 7381 and would be taxable.
However, that position has been re-evaluated, most recently in
TAA 97A-016 dated March 25, 1997.

As a part of that re-evaluation process, the Department
considered the activities appearing under SIC industry number
6411. That industry number is entitled "Insurance Agents,
Brokers, and Service." Although this classification primarily
concerns insurance agents and brokers, the SIC manual states
that "[t]his industry also includes independent organizations
concerned with insurance services." The classification goes on
to specifically enumerate insurance claim adjusters, insurance
information bureaus, and insurance inspection and investigation
services.

Again, the statutory section which imposes the tax on
investigative services, imposes the tax based on SIC industry
numbers. Although the activities performed by a private
investigator may be properly interpreted as falling under
industry number 7381, when the investigation is performed for
insurance purposes, an alternate interpretation may properly
classify the activity as falling under industry number 6411.
Accordingly, the court's findings in the matter of Department of
Revenue v. Brookwood Associates, 324 So.2d 184 (Fla. 1st DCA
1975), cert. denied 366 So.2d 600 (Fla. 1976), are pertinent.
In that case, the court stated:

Taxing statutes... are to be strictly construed. When such
statutes are... unclear then it is the duty of the taxing
authority,... to construe such statutes or ambiguities
liberally in favor of the taxpayer or citizen and strictly
against the taxing authority. If a taxing statute... is
susceptible of two meanings, the meaning most favorable to
the taxpayer should be adopted. This is particularly true
in instances wherein one meaning results in imposing the
tax and the other relieves imposition of the tax.

In consideration of Brookwood, supra, since the statute in
question is unclear and an investigator's insurance
investigations are susceptible to two meanings, one taxable and
the other not taxable, the Department must select the meaning
which finds that these investigations are not subject to tax.
However, this should not be construed to mean that insurance
companies are exempt from tax. This determination merely
recognizes that insurance investigations fall within an SIC Code
which has not been enumerated as subject to tax under the taxing
statute. If an insurance company were to hire the services of
security guards, those services would be taxable to the
insurance company.

Status of insurance investigations.

It is the position of the Department that insurance
investigations are not subject to tax, and should not have been
taxed from the onset of the tax on detective, burglar
protection, and other protection services as imposed by Section

212.05(1)(j)1.a., F.S. The Department is in the process of
preparing amendments to Rule 12A-1.0092, F.A.C., which provides
administrative guidance for the tax on these services. The
proposed amendments to that rule will formally establish the
Department's above position on insurance investigations.

Refund of taxes collected on insurance investigations.

Rule 12A-1.014(7), F.A.C., provides that a taxpayer who has
paid tax to a dealer when no tax is due, must secure a refund of
the tax from the dealer. That rule provision is consistent with
the provisions of the refund statute, Section 215.26(1), F.S.,
which requires the Department to refund taxes to the same person
who remitted the taxes to the state, meaning the dealer, not the
customer. Further, administrative requirements aside, this
process is also very efficient.

Generally, the parties most frequently encountering a tax
refund situation would be a retailer and a purchaser of tangible
personal property. The refund situation may come about because
the retailer mistakenly charged tax on an exempt item, or the
purchaser was unable to document their tax exempt status at the
time of the transaction. Here, once the taxation error has been
recognized or established by the parties to the transaction, the
purchaser can receive a prompt refund of the tax from the
dealer. Once the dealer has refunded the tax to the purchaser,
the dealer may either apply to the Department for a refund of
those same funds or the dealer may take a credit on its next
sales and use tax return.

The option of taking a credit on the tax return presumes
that the dealer will be reporting far more tax dollars than the
amount of any credit claimed. This would not be the case for
Investigator. Since the majority, if not all, of Investigator's
clients are insurance companies, little or no tax would be
currently collected with which to offset refunds of tax on
previous transactions. Accordingly, Investigator's only option
would be to directly refund tax to its insurance company clients
and subsequently apply for a refund from the Department.
However, this option is not feasible, since Investigator does
not have the funds with which to finance a refund to its clients

and wait for a reimbursement of those funds from the Department.
Accordingly, based on the facts and circumstances of
Investigator's situation, the only equitable option is for the
Department to make a refund to Investigator based on Assignment
of Rights from the client insurance companies.

Section 213.01, F.S., requires the Department to administer
the revenue laws in a fair, efficient and impartial manner. In
order to achieve those requirements, under certain limited
circumstances, the Department has allowed persons to assign
their right to a refund to another. Accordingly, based on the
facts and circumstances of Investigator's situation, the only
equitable option is for the Department to make a refund to
Investigator based on Assignment of Rights from the client
insurance companies. The following is a sample format for such
an assignment of rights.

ASSIGNMENT OF RIGHTS

INSURANCE COMPANY, incorporated in the state of STATE, its
undersigned officer who is duly authorized, hereby assigns
to INVESTIGATOR any and all rights which it had to a prior
recovery of sales tax paid to INVESTIGATOR for remittance
to the Department of Revenue, State of Florida, totaling
the sum of $ __. Said taxes were collected by
INVESTIGATOR upon the sale of insurance investigation
services as evidenced by the attached invoice(s) and are
hereby assigned to INVESTIGATOR and INSURANCE COMPANY
releases to INVESTIGATOR its rights relative to recovery of
the same.

Dated at ___COUNTY Florida, this _ day of
_, 19.

AUTHORIZED OFFICER OF FIRM
BY: _____
TITLE: ________

In order to claim a refund of taxes collected on insurance
investigations, Investigator must submit an Application for
Refund, Form DR-26, to the Department of Revenue. The claim for

refund should be accompanied by an original Assignment of Rights
form and copies of the invoices relating to that assignment for
which the refund is being claimed. It should be noted that a
refund of any tax charged prior to October 1, 1994, is barred by
the statute of limitations. However, Investigator will have
five years within which to file a claim for a refund for any
taxes paid on or after October 1, 1994.

This response constitutes a Technical Assistance Advisement
under Section 213.22, F.S., which is binding on the Department
only under the facts and circumstances described in the request
for this advise as specified in Section 213.22, F.S. Our
response is predicated on those facts and the specific situation
summarized above. You are advised that subsequent statutory or
administrative rule changes, or judicial interpretations of the
statutes or rules, upon which this advise is based, may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of Section 213.22,
F.S. Your name, address, and any other details which might lead
to identification of the taxpayer must be deleted by the
Department before disclosure. In an effort to protect the
confidentiality of such information, we request you notify the
undersigned in writing within 15 days of any deletions you wish
made to the request or response.

Sincerely,

Jeffery L. Soff
Tax Law Specialist
Technical Assistance and
Dispute Resolution

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