Were fees an insurance carrier paid to third-party administrators exempt as insurance premiums when used to buy taxable insurance services?

Plain-English summary

An insurance carrier paid third-party administrators to perform taxable insurance services under Rule 3.355. The Comptroller said those fees were taxable even when the carrier used money derived from insurance premiums to pay them.

The payments were not premiums because the carrier was not buying insurance protection or coverage from the service provider. Therefore, Rule 3.355(c)(1)'s premium exclusion did not apply to the transaction between the carrier and administrator.

What this means for you

The source of the carrier's money did not determine taxability. A payment funded by premium revenue remained a taxable service fee when it bought defined insurance services rather than insurance protection.

Common questions

Were the third-party administrator fees taxable? Yes.

Did premium-derived funding make the fees exempt? No.

Why were the payments not premiums? The carrier was not purchasing insurance protection or coverage from the administrators.

Citations and references

• 34 Tex. Admin. Code Rule 3.355(c)(1), discussed for the premium exclusion.
• Brownsville Fabrics, Inc. v. Gulf Insurance Co. (Tex. Civ. App.—Corpus Christi 1977, writ ref'd n.r.e.), quoted for the meaning of “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/8804L0888G07

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller April 8, 1988

Dear **:

Thank you for your letter of March 2, 1988, regarding the taxability of
fees
paid to third party administrators for performing insurance services as
defined under Rule 3.355.

Fees paid by an insurance carrier to a provider of taxable insurance
services are taxable even though the insurance carrier derived money for
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 payments to insurance service providers are not premiums, thus the
exclusion in section (c)(1) of Rule 3.355 does not apply to the
transaction
between the parties. The insurance carrier is not paying for insurance
protection or coverages.

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

If you have any questions or need more information, please call our
toll-free
number 1-800-531-5441. The regular number is 512/463-4600. You may
write me
at the Tax Policy Division.

Sincerely,
Eddie C. Washington
Tax Policy Division