Texas Letter Ruling 9209193L: Are subrogation services taxable as security services, debt collection, or insurance claims adjustment?

Subject

Subrogation Services

Plain-English summary

A firm that performs subrogation services wrote to the Texas Comptroller disagreeing with an earlier response (called "TR 1303") that classified its activities as taxable security services under Rule 3.333. The firm argued its subrogation work should instead fall outside the tax net, or at most be treated differently, because: (1) the payments it collects under "installment agreements" aren't "past due," so they should qualify for the debt-collection exclusion in Rule 3.354(b)(2), and (2) the work it does to figure out whether a valid claim even exists shouldn't count as taxable debt collection under Rule 3.354(d).

The Comptroller disagreed and upheld TR 1303. The key reason: the Legislature intended that any activity requiring a license under Article 4413(29bb), Texas Civil Statutes (the Private Investigators and Private Security Agencies Act) be taxed as a security service — and that overrides how the activity would otherwise be classified.

On the specific arguments: the Rule 3.354(b)(2) exclusion doesn't apply to subrogation because that exclusion is meant for current credit accounts or current real estate accounts, where a written debt instrument sets a due date and late penalties. Subrogation claims aren't that — they're more like the claim a payee has against someone who wrote a dishonored check: a liability that arises once something goes wrong, not an amount due under an existing credit relationship.

The Comptroller also noted that, apart from the security-services classification, subrogation services would otherwise be taxable as debt collection services. And separately, because the firm's work often consists of reviewing an insured's statement and a police report to evaluate a third-party liability claim (the firm said this describes over 95% of its claims), that work looks like insurance claims adjustment or claims processing under Rule 3.355 — taxable when performed for an insurance carrier, its insured, policyholders, or others tied to an insurance policy. But again, the security-services classification takes priority when a license is required.

The letter closes with a practical formula: if only about 5% of the firm's claims require activities for which a private investigator/security license is needed, the remaining ~95% of the firm's activities would still be taxable — just under a different category, either as debt collection services or as insurance claims adjustment/processing services.

What this means for you

Subrogation and claims-recovery firms

If your firm's work requires a license under the Private Investigators and Private Security Agencies Act (Article 4413(29bb)), the Comptroller treats that work as a taxable security service, regardless of whether you'd otherwise describe it as debt collection or insurance claims handling. Arguments that your collections aren't "past due" or that investigative work to validate a claim isn't "debt collection" do not change this outcome, because the security-services classification controls once a license is required.

Firms whose work is only partly licensed activity

Not every claim a firm handles necessarily requires the security/investigator license. Per this ruling, activities that don't require that license are still taxable — but under a different rule, either as debt collection services (Rule 3.354) or as insurance claims adjustment/claims processing services (Rule 3.355), depending on the facts.

Insurance carriers and self-insureds using third-party claims firms

If you hire a firm to investigate and pursue third-party liability claims (as described in this letter), be aware the Comptroller may view those services as taxable insurance claims adjustment/processing when performed on your behalf, on behalf of your insureds or policyholders, or as taxable security services if a license is required for the activity.

Accountants and tax professionals

This letter illustrates how the Comptroller resolves overlap between three taxable service categories — security services (Rule 3.333), debt collection services (Rule 3.354), and insurance services/claims adjustment (Rule 3.355). The licensing requirement under Article 4413(29bb) is the tiebreaker: if a license is required for the activity, it's taxed as a security service even if it would otherwise fit one of the other categories.

Common questions

Q: Why did the Comptroller tax subrogation services as "security services" instead of debt collection or insurance claims adjustment?
A: Because the Legislature intended activities that require a license under Article 4413(29bb), Texas Civil Statutes (the Private Investigators and Private Security Agencies Act), to be taxed as security services. That classification takes priority over how the activity might otherwise be described.

Q: The firm argued the payments collected weren't "past due" — why didn't that matter?
A: The Rule 3.354(b)(2) exclusion for non-past-due payments applies to current credit accounts or current real estate accounts governed by a written debt instrument with a due date. The Comptroller found subrogation claims don't fit that description — they're more comparable to a claim arising from a dishonored check, not an amount owed under an existing credit relationship.

Q: If security-services classification didn't apply, would subrogation services be tax-free?
A: No. The letter states subrogation services would otherwise be taxable as debt collection services.

Q: What happens to the portion of a firm's work that doesn't require a security/investigator license?
A: The letter states that if only about 5% of claims require licensed activity, the remaining claims would still be taxable, either as debt collection services or as insurance claims adjustment/claims processing services.

Q: Does this letter bind other taxpayers?
A: No. Per the disclaimer below, STAR letters can only be relied on for detrimental-reliance purposes by the taxpayer to whom they were directly issued, and this letter may no longer reflect current Comptroller policy.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.333 (Security Services)
• 34 Tex. Admin. Code Rule 3.354 (Debt Collection Services), including subsections (a), (b)(2), and (d)
• 34 Tex. Admin. Code Rule 3.355 (Insurance Services), including subsections (a)(5) and (b)
• Article 4413(29bb), Texas Civil Statutes (Private Investigators and Private Security Agencies Act)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9209193L

Original ruling text

September 16, 1992

Dear *:

Thank you for your letters of July 1, 1992, and August 19, 1992, concerning the
taxability of subrogation services which were forwarded to me for response.

You indicate that you disagree with the Tax Administration Division's response
in TR 1303. TR 1303 states that the activities performed by your firm are
security services as defined in Rule 3.333 - Security Services.

You contend that subrogation services as described in your January 2, 1992
letter are not taxable as debt collection services because the payments that
are collected under the "installment agreements" are not past due under Rule
3.354(b)(2). You also argue that the activities that you perform to determine
whether or not a valid claim exists is not taxable under Rule 3.354(d).

TR 1303 fully complies with the Legislature's intent to tax any activity that
requires a license under Article 4413(29bb), Texas Civil Statutes to be taxed
as a security service.

Rule 3.354(a) defines a "claim" as "...any alleged right, entitlement, or
demand, whether for money or property...whether in law or equity, in contract
or in tort..." A "debt" is defined as "any activity performed for
consideration, to collect or adjust a debt or claim...including any activity
performed...in...satisfaction of a debt or claim."

The exclusion in Rule 3.354(b)(2) does not apply to subrogation services. This
exclusion applies to current credit and real estate accounts; the claims
handled in subrogation are neither a current credit account nor a current real
estate account. The contractual obligations set out in a written debt
instrument executed between a creditor and borrower specifies the payment due
date or a date when penalty or sanctions apply if payments are made late.

The claim that your firm pursues against the liable third party is similar to a
claim that a payee has that results from a dishonored check. The check writer
becomes liable to the payee for the claim once the check is dishonored. This
claim does not result from the extension of a line of credit by a creditor. The
check collection agency receives the claim solely for collection purposes.

Subrogation services, were it not for the statutory provision making the
activities security services, would be taxable as debt collection services.

As an aside, Rule 3.355(a)(5) concerning insurance services defines "insurance
claims adjustment or claims processing" as "any activities to supervise,
handle, investigate, pay, settle, or adjust claims or losses." (Emphasis
added.) Rule 3.355(b) taxes such activities when they are "performed on behalf
of an insurance carrier, its insured, its policyholders, or others pertaining
to a policy or policies of insurance." (Emphasis added.)

You state in your January 2, 1992 letter that "our firm handles various
third-party liability situations for insurance carriers as well as
self-insureds." In your July 1, 1992 letter, you point out that in over 95
percent of the claims that your firm receives, the investigations consist of no
more than a review of the insured's statement and the police report provided.
The activities would be insurance claims adjustment or claims processing
services were it not for the fact that they are security services.

If only 5 percent of the claims received by your firm require activities for
which a license is required under the Private Investigators and Private
Security Agencies Act, the remaining activities would be taxable as either a
debt collection service or as an insurance claims adjustment or claims
processing service.

I trust that this letter sufficiently answers your questions.

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

You may call toll free 1-800-252-5555, extension 3-4683 if you have any
questions or need more information. You may write to Tax Administration
Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division

cc: John T. Taylor, ** Audit Office