Does the Texas Workers' Compensation Insurance Facility owe sales tax on the debt collection services it buys to recover unpaid premiums?

Plain-English summary

The Texas Workers' Compensation Insurance Facility (a non-profit, statutorily-created association of insurers that provides workers' compensation coverage for small employers and rejected risks that can't get coverage in the voluntary market) asked the Comptroller whether it could claim a sales tax exemption on the debt collection services it buys to chase down delinquent premiums.

The Facility argued that its collections work was really part of "insurance services," which are exempt for the Facility under Texas Insurance Code Article 5.76-2, Section 2.06. The Comptroller's Director of Tax Administration, Mike Doyle, disagreed. That statute only exempts the Facility from tax on insurance services under Chapter 151 of the Tax Code — and collecting delinquent premiums is not itself an insurance service. The legislature separately defined and began taxing both "debt collection services" and "insurance services" as of October 1, 1987, treating them as distinct taxable categories. Because debt collection is its own taxable service, not an insurance service, the Facility's narrow statutory exemption doesn't reach it.

Bottom line: the Facility's purchases of debt collection services (and any other taxable items it buys) remain taxable; only its purchases of true insurance services are exempt.

What this means for you

Insurance-related entities with a statutory tax exemption

If your organization has a narrow, statute-specific tax exemption (like the Facility's exemption for "insurance services"), don't assume it stretches to cover every purchase that supports your core business. Here, the Comptroller read the exemption literally — it applies to insurance services, not to related administrative or collection functions purchased from third parties.

Businesses that buy or sell debt collection services

Texas has separately and specifically taxed debt collection services since October 1, 1987. Buying collection services to recover money owed to you (like unpaid insurance premiums) is a taxable purchase unless you have an exemption that specifically covers it — a general "insurance services" exemption does not.

Accountants and tax professionals

This ruling illustrates the Comptroller's approach to exemption statutes referencing "insurance services": the term is read narrowly, tied to Chapter 151 categories, and does not sweep in related-but-distinct taxable service categories like debt collection services just because they support an exempt entity's core function.

Common questions

Q: Why did the Facility think its debt collection purchases should be exempt?
A: The Facility argued that because it is exempt from tax on insurance services under Texas Insurance Code Article 5.76-2, Section 2.06, and because collecting premiums is essential to its operations, debt collection services should count as an insurance service too.

Q: Why did the Comptroller reject that argument?
A: Because the statute exempts the Facility only from tax on insurance services under Chapter 151 of the Tax Code, and the collection of delinquent insurance premiums is not itself an insurance service. Debt collection services and insurance services were defined and taxed as separate categories effective October 1, 1987.

Q: Did the Facility get any retroactive relief?
A: The Facility's request letter asked that a favorable determination be applied retroactively, since it was currently paying tax on the collection services. The Comptroller's response ruled the purchases taxable, so no retroactive refund was granted.

Q: Does this ruling still apply today, and can other taxpayers rely on it?
A: This 1993 letter can be used as the basis of a detrimental reliance claim only by the taxpayer it was issued to (the Facility), and documents this old on STAR may no longer reflect current Comptroller policy even if not marked superseded. Anyone else should confirm the current rule before relying on it.

Citations and references

Statutes and rules:

• Texas Insurance Code Article 5.76-2, Section 2.06 (exempts the Facility from tax imposed under Chapter 151, Tax Code, for insurance services necessary to administer the article)
• Texas Tax Code, Chapter 151 (Limited Sales, Excise and Use Tax — imposes tax on debt collection services and insurance services, effective October 1, 1987)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9301L1231G11

Original ruling text

January 26, 1993

Mr. Peter Potemkin
Executive Director
Texas Workers' Compensation Insurance Facility

Dear Mr. Potemkin:

Thank you for your letter of January 19, 1993, concerning the
taxability of debt collection services purchased by the Texas
Workers' Compensation Insurance

Facility (the facility).

The facility's purchases of debt collection services for the
collection of delinquent premiums are taxable. Texas Insurance
Code Article 5.76-2, Section 2.06 exempts the facility from tax
imposed on insurance services under Chapter 151 of the Texas Tax
Code.

This provision does not exempt the facility's purchases of debt
collection services or other taxable items.

The legislature defined and taxed debt collection services and
insurance services effective October 1,1987. The collection of
delinquent insurance premiums is not an insurance service.

If you have other questions or need more information, feel free to
contact Eddie Washington in our Tax Administration Division. Eddie
can be reached at 463-4683.

Sincerely,

Mike Doyle
Director, Tax Administration

January 19, 1993

Honorable John Sharp
Comptroller of Public Accounts
Lyndon B. Johnson Building
111 E. 17th Street
Austin, Texas 78774

Re: Request for Exemption under the Limited Sales, Excise and Use
Tax Act by the Texas Workers' Compensation Insurance Facility

Dear Mr. Sharp:

I am requesting a determination that the Texas Workers'
Compensation Insurance Facility ("Facility") be exempt from payment
of tax under the Limited Sales, Excise and Use Tax, TEX. T M CODE
ANN. sec. 151.001 et seq. (Vernon 1982). More particularly, the
Facility 18 requesting exemption from payment of tax for debt
collection services which it purchases in connection with the
recovery of Insurance premiums.

The Facility is a non-profit unincorporated association of insurer
created by statute, formerly known as the Texas Worker's
Compensation Assigned Risk Pool, TEXINS. CODE ANN. art. S.76-2
(Vernon 1992). The Facility is required to provide worker'
compensation and employers' liability coverage in Texas for small
premium policy employers and for rejected risks, those Texas employers
who cannot obtain workers' compensation Insurance in the voluntary
market.

A necessary function of the Facility, as with all Insurer, is to
collect earned premiums. This is accomplished either through it
serving carriers, or, if the insured fails to timely pay the
servicing carrier, through the effort of the Facility's staff and
those entitle with which it has contracted to assist in the
collection of delinquent accounts. In this regard, the Facility
has contracted with two debt collection services which act on behalf
of the Facility to recover premiums. These services, which
specialize in the collection of premiums on behalf of insurers, are
an important part of the Facility's operations, as the collection
of earned premiums is crucial to the fiscal well-being and ultimate
success of the Facility.

In support of the Facility' petition that it be exempt from
taxation I would respectfully direct your attention to section 2.06
of TEX. INS. CODE art. 5.76, which provides as follows:

The facility hall pay the costs and expenses of operating and
maintenance the facility, including any fees for XXXXXXX (policies
issued through or reinsured by the facility. Funds of this state
shall not be appropriated or expended for payment of any costs or
expenses incurred in the operation or maintenance of the facility.
The facility is not subject to the tax imposed by Chapter 151, Tax
Code, for insurance service necessary to administer the article.
(emphasis added)

It is the Facility's position that the debt collection service used
by the Facility are indeed "insurance services" within the meaning
of the statute cited above and that such service are necessary to
carry out the purpose for which the Facility was created. And each
dollar of premium collected by the Facility affect the assessment
levied on insurer in the voluntary market, which, in turn may be
reflected in the premiums charged to Texas employer, it is most
important that the Facility be exempt from taxation for the debt
collection services it uses. Should it be your determination that
the Facility is exempt from taxation for payments made to debt
collection service, it is requested that this determination be
applied retroactively, as taxes are currently being paid for such
services.

I thank you for your consideration of this matter. Should you or
your staff have any questions regarding the Facility or its position
in this matter, please contact either my-self or William P.
Harbeson, Assistant General Counsel.

Sincerely,

Peter Potemkin
Executive Director