Is a forensic engineer's accident-investigation work for insurance companies and attorneys taxable as an 'insurance service' under Texas sales tax law, even though attorney legal fees themselves are not taxable?

Plain-English summary

This January 21, 1993 Comptroller letter answers a series of follow-up questions from a representative of a licensed professional engineer who does forensic consulting for insurance companies and attorneys, investigating the cause of accidents (product failures, negligence claims, etc.). The engineer reviews evidence, sometimes tests products, writes or gives reports, sits for depositions, and testifies in court about the cause of an accident or defect.

The Comptroller had already told the taxpayer (in a November 24, 1992 letter, also reproduced here) that this work counts as a taxable "insurance service" under Rule 3.355 whenever it's done to help determine whether a claim against an insurance policy should be paid — even though the engineer never personally decides whether the claim gets paid. This January letter reconsiders that conclusion after the taxpayer pushed back, but reaffirms it and answers six specific follow-up questions about how the rule applies to different hiring scenarios (in-state vs. out-of-state attorneys, plaintiff vs. defense attorneys, self-insured companies, and so on).

A key thread running through the letter: Texas sales tax law does not tax legal services provided by attorneys (except attorney fees for debt collection, per Attorney General Opinion JM-823). But the tax on insurance services applies to whoever performs the service, regardless of profession or license — so an engineer hired by an attorney to investigate an insurance claim is taxable even though the attorney's own fee is not.

What this means for you

Forensic engineers, investigators, and other insurance-claim consultants

If your work involves evaluating, investigating, or otherwise helping determine whether an insurance claim should be paid, Rule 3.355 treats it as a taxable insurance service — no matter what your profession or license is, and no matter whether you're hired directly by an insurance company or indirectly through an attorney. Only your separately stated court-testimony charges and services unrelated to a claim (like plain product testing not tied to a claim) fall outside the tax.

Attorneys who hire outside investigators or experts

Your own legal fees stay nontaxable (aside from debt-collection fees). But if you hire a professional (engineer, investigator, appraiser, etc.) to investigate an insurance claim on behalf of your client, that professional's fee to you is taxable, and you as the "purchaser" of that insurance service may owe use tax on it if the provider didn't collect it — the ruling notes the attorney is required to pay sales tax on insurance services purchased for use in providing legal services.

Businesses hiring out-of-state or defense-side professionals

The ruling addresses jurisdictional wrinkles: services are taxable when hired by an out-of-state attorney only if the object of the service is in Texas and the attorney is "doing business in Texas" (absent a valid exemption certificate under Rule 3.355(d) and (g)); they're not taxable when hired for a case where jurisdiction and the object of the service are both outside Texas. Legal services from a defense attorney are not taxable, and insurance services performed for a self-insured company are also not taxable.

Common questions

Q: Does the sales tax apply to everything an attorney's client pays for?
A: No. Not all services performed for an attorney are taxable — Texas sales tax is a limited tax that only reaches specifically enumerated taxable services, and legal services from attorneys themselves are not among them (except attorney debt-collection fees).

Q: My professional (engineer, investigator) is hired by an out-of-state attorney — is that taxable?
A: It's taxable if the object of the insurance service is located in Texas and the out-of-state attorney is "doing business in Texas." If the attorney is not doing business in Texas, the provider should assume the service is taxable unless the attorney furnishes a valid exemption certificate explaining why it isn't.

Q: What if the case's jurisdiction and the object of the investigation are both outside Texas?
A: Then the service is not taxable, per Rule 3.355(d) and (g).

Q: Are services for a plaintiff's attorney trying to get an insurance company to pay taxable?
A: Yes, taxable, unless a specific exclusion in Rule 3.355(d) applies.

Q: What about services for a defense attorney, or for a self-insured company?
A: Legal services provided by a defense attorney are not taxable, and insurance services performed for a self-insured company are not taxable either.

Q: Is testifying in court taxable?
A: No — a separately stated charge for testifying in court, even about a claim against an insurance policy, is not taxable.

Citations and references

Rules and opinions cited in the letter:

• Rule 3.355 (Insurance Services), including subsections (a), (a)(3) (defining "insurance investigation"), (b) (taxability), and (d) and (g) (out-of-state/exemption certificate provisions)
• Attorney General Opinion JM-823 (attorney debt-collection fees are taxable)
• Attorney General Opinion JM-1016 (attorney's own legal fees are not taxable; attorney must pay tax on insurance services purchased for use in providing legal services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9301372L

Original ruling text

January 21, 1993

****:

Thank you for your letter of December 23, 1992, concerning the tax
responsibilities of one of your clients, a professional engineer.

On November 24, 1992, I responded to your letter of November 6, 1992, informing
you that your client is performing insurance services when he or she performs
activities to determine if a claim against an insurance policy should be paid.

Rule 3.355 (b) states that an insurance service as defined in section (a) of
Rule 3.355 are taxable when performed on behalf of an insurance carrier, its
insured, its policyholders, or others pertaining to a policy of insurance.
"Insurance claims adjustment or claims processing" is defined in Rule 3.355 as
"any activities to supervise, handle, investigate, pay, settle, or adjust
claims or losses."

An "insurance investigation" is defined in Rule 3.355(a)(3) as any activity
performed to evaluate an individual's eligibility for payment of benefits or
other similar activity. An engineer who assembles or evaluates information to
determine the cause of an accident pursuant to a policy of insurance is
performing an insurance service.

The sales tax law does not tax legal services provided by attorneys. However,
attorneys who provide debt collection services are required to collect sales
tax on their fees. See Attorney General Opinion JM-823 (enclosed). The
Comptroller has determined that an attorney is not providing debt collection
services if he or she takes action to collect a judgment for a client the
attorney represented in court.

The legal services performed by an attorney representing an insurance carrier
or the insured is not taxable. If an attorney is representing a client who is
seeking damages from an insured party, the attorney's fee for legal services
are not taxable. The attorney is required to pay sales tax on insurance
services that he or she purchases for use in providing the legal services. See
Attorney General Opinion JM-1016 (enclosed).

The sales tax law makes no distinction between providers of insurance services
and applies to any insurance service provider regardless of the provider's
profession. The sales tax law does not require an insurance service provider to
hold any particular license, nor does it exclude any particular professions
from being insurance services providers.

The questions that you asked are answered below:

1. Not all services that are performed for an attorney are subject to sales
   tax. The Texas Sales and Use Tax Law is a limited sales and use tax meaning not
   all tangible personal property or services are taxable.

2. Your client's services would be taxable when hired by an attorney located
   outside Texas if the object of the insurance service is in Texas and the
   attorney is "doing business in Texas". If the attorney is not doing business in
   Texas, you client should assume that the services are taxable unless the
   attorney issues a properly completed and valid exemption certificate stating
   why the services are not taxable. See Rule 3.355(d) and (g).

3. Your client's services would not be taxable if hired by an attorney in a
   case where jurisdiction is outside Texas if the object of the services is
   located outside Texas. See Rule 3.355(d) and (g).

4. Your client's services are taxable when he/she is hired by an attorney who
   is attempting to have an insurance company pay his/her client are taxable
   unless excluded by provisions in Rule 3.355(d).

5. Legal services provided by a defense attorney are not taxable.

6. Insurance services performed for a self-insured company are not taxable.

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

You may call toll free 1-800-531-5441, 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

December 23, 1992

Mr. Eddie G. Washington
c/o Comptroller of Public Accounts
Tax Administration Division
111 East 17th St.
Austin, Texas 78774

Dear Eddie:

I had previously written to you concerning one of my clients, a licensed
professional engineer, for a determination as to whether the services he
renders are taxable services for the state of Texas sales tax. I have included
a copy of my original letter and your reply.

I find that after reviewing your reply I have other questions concerning the
subject.

According to rule 3.355(b), the services rendered are taxable if performed for
purposes of determining whether or not a claim against an insurance company
should be paid.

Please note that my client never determines whether a claim should be paid.
That is made by the attorney, jury or other responsible official, although we
do acknowledge that his analysis may be used to aid someone who does make that
determination.

Would you please reconsider my additional information and rule as to whether
his services are taxable.

Also if he does render taxable services the statute is inconsistent in that an
attorney is not subject to sales tax yet it is he who ultimately advises as to
how claims are paid.

Lastly, should a final determination be made that his services are subject to
sales tax could we have answers to the following.

1. Are all services that are done for an attorney subject to sales tax, even if
   the attorney is not hired by an insurance company?

2. When hired by an attorney who is located out-of-state, are these services
   taxable?

3. When hired by an attorney in a case whose jurisdiction is out-of-state, are
   these services taxable?

4. When hired by a plaintiff attorney who is attempting to have the insurance
   company pay monies to his client, are these services taxable?

5. Exactly what services does a defense attorney provide that are not subject
   to Rule 3.355? Attorneys certainly have more influence and say in when an
   individual is paid from an insurance company.

6. The way I interpret the rule, any services that might be taxable are not
   taxable provided they are performed for a company which is self insured. Please
   confirm.

I look forward to hearing from you as it is our intention to comply with the
law.

Very truly yours,

November 24, 1992

*****:

Thank you for your letter of November 6, 1992, concerning the taxability of
services provided by your client, a professional engineer, for the legal
profession and insurance industry.

Insurance services as defined in Rule 3.355(a)(1) - (6) are taxable when
performed on behalf of an insurance carrier, its insured, its policyholders, or
others pertaining to a policy or policies of insurance. Rule 3.355(b). Your
client's investigation services are taxable if performed for purposes of
determining whether or not a claim against an insurance policy should be paid.
The service is taxable even if performed for an insurance company or an
attorney representing the insurance company.

Your client is required to apply for a sales tax permit and to collect tax on
investigation services performed pursuant to insurance policies.

I am mailing a sales tax application packet under separate cover in order for
your client to apply for a sales tax permit if needed.

Services to test a product (not related to claims against an insurance policy)
is not taxable. A separately stated charge for testifying in court under any
circumstance (including testimony concerning a claim against an insurance
policy) is not taxable.

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

You may call toll free 1-800-531-5441, 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

November 6, 1992

Comptroller of Public Accounts
Tax Administration Division
111 E. 17th Street
Austin, Texas 78774

Gentlemen:

On behalf of my client I would like to request a ruling as to whether the
activities enumerated below are taxable transactions for the collection of
sales tax.

My client is a licensed professional engineer who provides forensic consulting
services to the legal profession and the insurance industry.

The majority of his work centers on the investigation of accidents which result
from product failure or from the negligence of various parties. His clients
consist of insurance companies and attorneys.

During his investigation the following activities will be conducted:

1) Review factual information concerning the accident. This information can
come from testimony of witnesses, reports of experts, reports of governmental
agencies, and materials which would have been generated in the normal course of
business by the parties involved.

2) In a few instances, testing would be conducted to aid in determining the
cause of the accident. This testing might result in the generation of data,
which could be presented to a client.

3) In some instances, write reports concerning his findings. In other
instances, these reports might be verbal. In either instance, data generated
from testing would be included in at least a summary form.

4) Submit to a deposition in which findings and opinion as to cause or defect
would be expressed.

5) Appear in court to testify concerning the accident at which time an opinion
would be expressed as to cause or defect.

Upon the review of Rule 3.355 Insurance Services, in particular Part A
Definition Section it is unclear whether my client is performing a taxable
service.

We do not value or appraise damages, inspect property subject to risk, perform
insurance investigation to evaluate eligibility for coverage, provide actuarial
analysis or research, process claims, or perform loss prevention services.

The total focus of my client's efforts are focused towards determining the
cause of an accident or product failure.

If you need any additional information to make your ruling, feel free to call.

Very truly yours,