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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