Were flood-claim adjustment services sold to private insurers taxable, and who owed the tax if the insurer refused to pay it?

Plain-English summary

The 1989 letter treated claims-adjustment services sold to private insurance companies participating in the National Flood Insurance Program as taxable. Reimbursement by the federal program did not convert the private insurer's purchase into a purchase by the federal government itself.

The claims adjuster was responsible for adding, collecting, and remitting the tax. If a customer refused to pay, the tax became part of the sales price and could be recovered in the same manner as the underlying charge; partial customer payments were allocated proportionately to tax.

An editor's note in the preserved STAR text says that a 2004 FEMA contract later described participating carriers as federal fiscal agents and points readers to STAR document 201501046L. That note means the letter's original 1989 treatment should not be assumed to govern later arrangements.

Common questions

Did federal reimbursement alone make the private insurer exempt? No, under the original letter.

Who remained responsible if the insurer refused to pay the invoiced tax? The claims adjuster that sold the taxable service.

Does the preserved text flag a later development? Yes. Its editor's note identifies a changed 2004 contract description and a newer STAR document.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8907L0947E12

Original ruling text

July 25, 1989

Dear **:

Thank you for your letter concerning the taxability of claims adjustment

services.

Facts:

"...these services are rendered in the handling of flood claims for the

National Flood Insurance Program (NFIP) and those floor claims underwritten by

NFIP but written by an insurance carrier (i.e., State Farm, Aetna, Omaha

Property & Casualty).

NFIP is a federally funded program enacted by Congress during 1968. In

handling floor claims for NFIP, it is our understanding that they are exempt

from the paying of sales tax. We understand that this in turn exempts the

adjusting firm from paying and/or collecting of said sales tax.

NFIP developed a program where individual insurance companies would write and

handle flood policies and claims. This program is commonly referred to as

WRITE YOUR OWN (WYO). The WYO companies handle and conclude the flood claim

and are under written and reimbursed by NFIP."

Question: Are the WYO carriers obligated to pay sales tax on adjusters'

services even though they are handling claims for and being reimbursed by NFIP?

Answer: Yes. Claims adjustment services provided to private insurance

companies are taxable even if the NFIP reimburses the company for the cost of

the services you provide.

The Texas Tax Code exempts sales to and purchases of taxable items and services

by the federal government itself. The exemption extends to corporations wholly

owned by the federal government and also unincorporated instrumentalities of

the federal government. Editor's Note: On October 1, 2004, FEMA's contract with WYO carriers expressly stated that

the companies are fiscal agents of the federal government, although not general agents. See 44 CFR Pt. 62 App. A. See STAR 201501046L.

The Texas Tax Code exempts sales to and purchases of taxable items and services

by the federal government itself. The exemption extends to corporations wholly

owned by the federal government and also unincorporated instrumentalities of

the federal government.

Question: Assuming the WYO carriers are required to pay sales tax and we include the sales tax on each and every invoice, and the WYO carrier refuses to pay said tax -- who is responsible to the state?

Answer: The claim adjuster is responsible for collecting the tax and remitting it to the state. When an individual sells taxable goods or services, they are required to add tax to the sales price. The tax then becomes part of the sales price and, if the purchaser refuses to pay, it is recoverable at law in the same manner as the original sales price. To the extent that a customer does pay his bill, a pro-rata portion of the payment is considered to be payment of the tax.

Feel free to call or write me if you have questions. You can reach me by calling toll free 800-531-5441 or FAX (512) 475-0900.

Sincerely, Al Van Allen

Taxability Section Legal Services Division