How did Texas distinguish nontaxable insurance premiums and commissions from taxable insurance-service fees and mixed insurance packages?

Plain-English summary

The Comptroller said obtaining insurance coverage in exchange for premiums or agent commissions was not a taxable insurance service. Fees paid for separately defined taxable insurance services did not become nontaxable merely because an insurance carrier funded them from premium revenue.

Loss-prevention services and claims adjustment were taxable. Premiums and sales commissions paid to insurance agents were not. Other activities—such as contract analysis or insurance-data collection—had to be compared with Rule 3.355's definitions to determine whether they were taxable insurance services.

A package mixing coverage placement with unseparated insurance services was presumed fully taxable. The provider could overcome that presumption by separately stating taxable and nontaxable charges or documenting that each transaction consisted of at least 95% nontaxable unrelated services and no more than 5% taxable services. The same presumption applied to an arrangement that billed excess hourly fees without separating the miscellaneous services.

What this means for you

Under the 1988 rule, calling a payment a premium-based fee did not control. The actual activity and the invoice detail determined whether a charge was a nontaxable premium or commission, a taxable insurance service, or a mixed package presumed taxable.

Common questions

Were premiums and agent commissions taxable? No, when paid for obtaining insurance coverage.

Were loss-prevention and claims-adjustment fees taxable? Yes.

How could a provider rebut the taxable presumption for a mixed package? By separately stating the charges or documenting the 95%-nontaxable and 5%-or-less-taxable composition described in the letter.

Citations and references

• 34 Tex. Admin. Code Rule 3.355, including sections (a) through (i), applied to insurance services and mixed charges.
• Brownsville Fabrics, Inc. v. Gulf Insurance Co. (Tex. Civ. App.—Corpus Christi 1977, writ ref'd n.r.e.), quoted for the meaning of an insurance premium.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8804L0888G01

Original ruling text

April 12, 1988

Dear ***:

I am responding to your letter requesting clarification regarding
insurance services. You describe an entity that provides taxable insurance
services and non-taxable insurance services. For your review, I am enclosing a
copy of the March 24, 1988, revision of Rule 3.355. Insurance services and
terms are defined in section (a), section (b) explains those services that are
taxable, and section (c) discusses the non-taxable situations.

Obtaining insurance coverage for which premiums or commissions are paid
is not a taxable insurance service. However, fees paid by an insurance
carrier to a provider of taxable insurance services are taxable even though the
insurance carrier derived money from the fees from insurance "premiums."
Insurance "premium is the consideration paid by a person for insurance
protection or coverage." Brownsville Fabrics, Inc. v. Gulf Insurance Co.
(Tex. Civ. App. - Corpus Christi, 1977, writ ref. n.r.e.). The fees paid
to insurance service providers are not premiums and do not qualify for the
exclusion in section (c)(1) of the rule.

Your specific cases are restated below with responses.

CASE A

X Corporation contracts with a customer to obtain insurance coverage from
third part underwriters. Commissions are calculated based upon the
premiums for such insurance coverage. In addition, X Corporation provides
miscellaneous insurance services from time to time. Such services
include loss prevention services, claims adjustment, analysis of insurance
contracts, collection of insurance data, and loss trending analyses. The
miscellaneous insurance services are billed separately to the customer.

Response: Loss prevention services and claims adjustment are taxable
insurance services. "X Corporation" must add tax to the charges for these services.
Premiums or sales commissions paid to insurance agents are not taxable; do not add
tax to these fees. I am unsure of other terminology used, please refer to section
(a) of Rule 3.355 and compare definitions. For example, analysis of insurance
contracts may be your terminology for (a)(4) insurance or annuity actuarial analysis
or research while collection of insurance data may be either insurance
inspection or insurance investigation. Regardless of terminology any
activity which is defined as taxable insurance services must be taxed.

CASE B

X Corporation contracts with a customer on a stipulated fee basis. The primary
emphasis on such contract is X Corporation's agreement to obtain insurance coverage
for its customers from third party underwriters. Commissions are calculated based
upon the premiums for such insurance coverage and the stipulated fee is based on
such commissions. In addition, X Corporation may provide miscellaneous insurance
services from time to time. The miscellaneous insurance services are not separately
billed to the customer and are not separately allocated in the contract. Further,
there is not contractual obligation on the part of X Corporation to provide such
services. X Corporation provides such services at its own discretion as a part of
the overall insurance "package."

Response: The charge for the entire insurance "package" is presumed to be taxable,
see sections (d)(e), and (g) of Rule 3.355. "X Corporation" may overcome this
presumption by separately stating taxable charges from non-taxable charges, or
documenting each transaction to be one that is 95% or more nontaxable unrelated
services and 5% or less taxable services. They may accept valid resale or exemption
certificates in lieu of tax where applicable. See sections (h) and (i) of the rule.

CASE C

X Corporation contracts with a customer on a stipulated fee basis as described in
Case B above where the fee is based upon the premium for providing insurance coverage.
In addition, the customer agrees to pay fees based upon the amount of time spent on
the customer's matters by personnel of X Corporation. X Corporation allocates an
arbitrary hourly rate to time expended on behalf of the customer and if the fees
represented by such hourly rate exceed the commissions earned from providing insurance
coverage, the excess fees (based on the hourly rate) are billed to the customer. If the
fees for hours expended do not exceed the commissions earned from insurance coverage, no
refund is made to the customer. Similar to Case B, the primary emphasis of the contract
with the customer is to provide insurance coverage for which premiums or commissions are
paid. X Corporation is not contractually obligated to provide the miscellaneous insurance
services; however, it provides them from time to time on an "as needed" basis and in its
sole discretion. Further, similar to Case B, the fees earned for miscellaneous services in
excess of the commissions are not billed separately from the overall commission fees billed
to the customer.

Response: As in Case B, "X Corporation" must overcome the presumption that the total fee
is taxable.

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

You may write me at the Tax Policy Division.

Sincerely,

Tax Policy Division