Is stress testing of metal, plastic, or concrete taxable as an insurance service in Texas, and does it matter whether the client is an insurance company, a policyholder, or an unrelated third party like a law firm?

Plain-English summary

A forensic/engineering testing firm asked whether stress testing metal, plastic, and concrete is taxable when done for insurance-related purposes. The Comptroller's answer turns entirely on whether the testing connects to an insurance policy — not on who the client is.

Taxable as an insurance service when testing is performed on behalf of an insurance carrier, its insured, its policyholders, or others in connection with a policy of insurance, including: testing before a policy is issued; testing to determine the cause of damage before or after a claim is paid; and studies limited to whether the insurer has a subrogation right to recover payments from a third party. Critically, this taxability extends even to work for non-insurance clients — the letter gives the example of a law firm suing an insurance company over a policy that hires an engineering firm to determine whether a piece of equipment caused a loss: that testing is taxable too, because an insurance policy is still involved.

Not taxable, by contrast, are engineering studies performed for individuals or law firms to determine the cause of damage where no insurance claim has been made or is anticipated to be made — pure cause-of-damage investigation work with no policy connection.

The bright-line summary the letter gives: "Anything a forensic engineering firm does for an insurance company in connection with a policy of insurance is taxable."

What this means for you

Forensic and materials-testing engineering firms

Track whether an insurance policy is anywhere in the picture for each engagement — even indirectly (a law firm suing an insurer, a subrogation study). If it is, collect tax on that testing service. If a client wants damage-cause testing with no insurance claim made or anticipated, that work is not taxable.

Law firms and litigation clients

If you hire a testing firm for litigation involving an insurance policy (including suing an insurer directly), expect the testing service to be taxed — the insurance-service classification follows the presence of a policy, not who's paying the bill. Pure damage-cause investigation unconnected to any insurance claim avoids the tax.

Accountants and tax professionals

This is a clean illustration that the "taxable insurance service" category in Texas turns on subject matter (connection to a policy of insurance) rather than the identity of the payor — a non-insurance-company client (a law firm, an individual) can still trigger taxable insurance-service treatment if a policy is genuinely involved.

Common questions

Q: Is material stress testing for an insurance claim taxable in Texas?
A: Yes. Testing performed on behalf of an insurance carrier, its insured, its policyholders, or others in connection with a policy of insurance is a taxable insurance service.

Q: What if a law firm (not an insurance company) hires the testing firm?
A: It's still taxable if the underlying matter involves a policy of insurance — for example, a law firm suing an insurance company over a policy that hires an engineering firm to test whether equipment caused the loss.

Q: Is testing to determine the cause of damage always taxable?
A: No. If it's done for an individual or law firm with no insurance claim made or anticipated, it's not taxable — the exemption from taxable-insurance-service status applies specifically when there's no policy connection.

Q: Does testing performed before a policy is even issued count as a taxable insurance service?
A: Yes — the letter specifically lists "testing prior to issuing an insurance policy" as an example of a taxable insurance service.

Q: Can I rely on this letter for my own engagements?
A: No. This opinion is rendered based on the facts presented; other facts, though similar, may yield different results.

Citations and references

No Texas Tax Code section or administrative rule is cited by number in the original letter; the analysis applies Texas's taxable insurance services category to forensic/materials testing work.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200005285L

Original ruling text

May 10, 2000

Dear **:

Thank you for your recent e-mail regarding the taxability of stress testing
metal, plastic, and concrete.

If your client is testing metal, plastic, concrete or other materials and the
following services are provided on behalf of an insurance carrier, its insured,
its policyholders or others pertaining to a policy or policies of insurance
your client is performing taxable insurance services. The following are
examples of taxable insurance services:

Testing prior to issuing an insurance policy
Testing to determine the cause of damage prior to the payment of a policy of
insurance or after the payment of a policy of insurance and
Testing to determine the cause of the damage and
Testing limited to, studies to determine whether the company has a subrogation
right to obtain reimbursement of payments made to the insured from a third
party.

If your client performs the above referenced services for non-insurance
companies and individuals and an insurance policy is involved tax should also
be collected. For example, a law firm is suing an insurance company on a policy
and contracts with the engineering firm to determine whether a piece of
equipment caused the loss, tax should be collected on the service.

Engineering studies prepared for individuals and law firms to determine the
cause of damage where no insurance claim has been made or anticipated to be
made are not taxable. Anything a forensic engineering firm does for an
insurance company in connection with a policy of insurance is taxable.

This opinion is rendered based on the facts presented. Other facts though
similar, may yield different results.

If you have any questions or require additional information, you may call
1-800-531-5441, extension 6-5809. You may write to Tax Policy Division, P. O.
Box 13825, Austin, Texas 78711-3825. You may also submit inquiries to our tax
help Internet address at .

Sincerely

Emilio S. Lerma
Tax Policy Division