Were fees to design and administer a Section 125 cafeteria benefit plan taxable as insurance or data-processing services?

Plain-English summary

The provider designed and presented an Internal Revenue Code Section 125 cafeteria benefit plan, explained it to employees, enrolled participants, facilitated employer premium payments, prepared payroll-withholding and benefit-account documents, and prepared employee reimbursement checks for employer signature.

Those design and administration services were not taxable as insurance services.

Preparing documents showing employee-account status was not taxable data processing. Using a computer did not change the result because the provider applied its knowledge of tax law to the benefit plan rather than merely processing data.

The provider paid sales tax on outside services when the contracted work itself was taxable, such as data processing. Providing the work through a joint venture with another firm did not change the answer for outsourced taxable service.

Common questions

Was cafeteria-plan design taxable? No.

Was computer-generated account reporting taxable data processing? No, under the facts stated.

Were outsourced taxable services tax-free? No.

Did a joint venture change the outsourced-service result? No.

Citations and references

• Internal Revenue Code § 125

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8909L0958A01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

September 12, 1989

Dear **:

Thank you for your letter of August 22, 1989, concerning your
sales tax responsibilities as a designer and administrator of
a cafeteria (benefit/health) plan under Section 125 of the Inter-
nal Revenue Code.

A summary of the services is that you will design and present the
plan to the client (employer and employees). If the client ap-
proves, you will hold meetings to explain the program and en-
roll employees wishing to participate. You would then facilitate
the payment of appropriate insurance premiums by the employer on
each participating employee. You would provide documents showing
the amount of withholding from each employee's pay for the payroll
period, the cumulative withholding and the payment of benefits
from the employee's account. Finally, you will prepare reimburse-
ment checks to the employees for benefits the employer's signa-
ture.

The services you will be performing to design and administer the
cafeteria plan are not taxable as insurance services. The prepa-
ration of documents showing the status of an employee's account
(payroll withholding, cumulative withholding, benefit payments,
etc.) is not taxable as data processing services. The use of a
computer to provide these services are not considered data pro-
cessing services because you will be applying your knowledge of
tax law, as it applies to benefit plans.

You will be required to pay sales tax on the services contracted
outside your firm if the services being performed are taxable ser-
vices, e.g., data processing services. These services provided
by a joint venture consisting of your firm and another firm would
not change the answer regarding contracting out data processing
services.

This opinion is based on the facts presented. If there are addi-
tional or different facts, the opinion may change.

If you have any questions or need more information, you may call
toll-free 1-800-252-5555, ext. 3-4683. The regular number is
512/463-4600. You may write me at Tax Correspondence, Comptroller
of Public Accounts.

Sincerely,
Eddie C. Washington
Tax Correspondence