Is a company's fee for helping a long-term disability insurance claimant apply for Social Security disability benefits a taxable insurance service in Texas?

Subject

Helping Insureds Apply For Social Security Disability Benefits Is Not A Taxable Insurance Service

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9308139L

Plain-English Summary

A company that contracts with long-term disability insurers wrote in asking whether its services were subject to Texas sales and use tax. When one of the company's insurance-company clients begins paying benefits on a long-term disability claim, the insurer may refer that case to the company so it can help the insured obtain Social Security disability benefits. If the company succeeds in getting the insured approved for Social Security disability benefits, the insurance company can then reduce the amount it pays the insured for long-term disability — saving the insurer money. In exchange, the insurance company pays the company a fee based on a percentage of the insured's first Social Security disability check; the company only collects this fee on the cases it wins, though it is reimbursed for expenses on all cases.

The company's services include helping the insured complete Social Security applications, obtaining medical records, providing a representative at Social Security hearings, and pursuing the case in federal court if necessary. The company does not evaluate the insured's eligibility for the long-term disability coverage itself, and it does not supervise, handle, investigate, pay, settle, or adjust claims or losses for its insurance-company clients.

The Comptroller's response is short and direct: "The activity of assisting an insured in applying for Social Security disability benefits is not taxable as an insurance service." As with other STAR letters, the ruling notes that the opinion is based on the facts presented, and that additional or different facts could change the outcome. The taxpayer's original letter also asked several follow-up questions about how the answer might change depending on whether the insurance company and/or the insured were located outside Texas — the response letter itself does not appear to separately address those scenarios.

What This Means For You

Assisting with a Social Security disability application is not treated as an insurance service. If your business is paid by an insurance company to help its insureds pursue Social Security disability benefits — even where your fee is contingent on the insured's benefit amount and even where the point of the arrangement is to let the insurer offset its own disability payout — the Comptroller treated that specific activity as not taxable as an insurance service.

The scope of the non-taxable activity matters. The letter describes the company's work in some detail: completing Social Security applications, gathering medical records, representing the insured at Social Security hearings, and pursuing federal court appeals. It also specifically notes what the company does not do — evaluate eligibility for the long-term disability coverage, or supervise, handle, investigate, pay, settle, or adjust claims for the insurer. Businesses in a similar arrangement should compare their actual scope of work to this description.

This is a facts-based opinion. The Comptroller expressly says the ruling is based on the facts presented and could change if the facts are different. The original request also raised multi-state questions (insurer and insured both out of state; insurer out of state with a Texas insured; Texas insurer with an out-of-state insured) that the response letter does not appear to resolve separately in the text provided here.

Q&A

Q: Is a fee for helping an insured apply for Social Security disability benefits subject to Texas sales tax as an insurance service?
A: No. The Comptroller states that "the activity of assisting an insured in applying for Social Security disability benefits is not taxable as an insurance service."

Q: How is the company in this letter compensated?
A: The insurance company pays the company a fee based on a percentage of the first Social Security disability check the insured receives, and the company only collects that fee on cases it wins (though it is reimbursed for expenses on all cases).

Q: What services does the company provide to the insured?
A: Helping the insured complete Social Security applications (at whatever stage the process is in), obtaining medical records, providing a representative to represent the insured at Social Security hearings, and pursuing the case in federal court if necessary.

Q: Does the company evaluate whether the insured qualifies for long-term disability coverage?
A: No. The letter states the company's service does not include evaluating the insured's eligibility or qualifications for the long-term disability coverage, and that the company does not supervise, handle, investigate, pay, settle, or adjust claims or losses for its clients.

Q: Why does the insurance company want the insured to get Social Security disability benefits?
A: Because once the insured becomes eligible for Social Security disability benefits, the insurance company can reduce the amount it pays the insured under the long-term disability policy.

Q: Does this letter address what happens if the insurance company or the insured is located outside Texas?
A: The taxpayer's original request asked about several out-of-state scenarios, but the Comptroller's response letter included in this text does not appear to separately answer those questions.

Original ruling text

August 20,1993

Dear Ms. **:

Thank you for your letter of August 6, 1993, concerning your firm's Texas sales
and use tax responsibilities.

Your firm contracts with insurance companies that insure employees against
long-term disability. The insurance companies are located in Texas as well as
in other states.

Once an insurance company begins paying disability benefits on a long-term
disability claim, the insurance company may refer the case to your firm so that
your firm may assist the insured in obtaining Social Security disability
benefits. If the insured is eligible for Social Security disability benefits,
the insurance company can reduce the amount it pays the insured. Your firm is
compensated based on a percentage of the first Social Security disability check
the insured receives.

The activity of assisting an insured in applying for Social Security disability
benefits is not taxable as an insurance service.

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

Comptroller of Public Accounts
Tax Administration Division
Austin, Texas 78774

RE: Sales Tax Ruling

Dear Madam or Sir:

We would like to request a ruling as to whether the following services we
provide to our clients are subject to the Texas Sales and Use Tax.

COMPANY A is incorporated in the State of Texas and has its principle place of
business in ****, Texas. We contract with Insurance Companies that insure
employees against long-term disability. Our clients are located in Texas, as
well as in other states.

Once one of our clients (the insurance company) begins paying benefits on a
long-term disability claim, they may refer that case to us, so that we may
assist the insured in obtaining Social Security disability benefits. If we are
successful in obtaining Social Security Disability benefits for tile insured,
then the insurance company can reduce the amount it pays its insured for the
long-term disability benefits. As a result of our saving the insurance company
money on these successful cases, the insurance company then pays US a fee based
on a percentage of the first Social Security check the insured receives. We
only recover a fee on those cases we are successful in. We are reimbursed for
expenses on all cases.

The service we provide is assisting the insured complete the Social Security
applications (depending on what stage of the process they are in); obtaining
medical records; providing a Representative to represent the insured before
Social Security hearings; and, pursuing the case in federal court if necessary.

Our service does not include evaluating the insured's eligibility or
qualifications for the long-term disability coverage provided by our client
(the insurance company); rather we assist the insured in applying for Social
Security benefits. We also do not supervise, handle, investigate, pay, settle
or adjust claims or losses for our clients.

If this service is subject to the sales tax in Texas, would we be subject to
the tax if the insurance company we contracted with and their insured were both
located outside the state of Texas? What about if the insurance company is
located outside of Texas, but their insured is a Texas resident? What about a
Texas Insurance Company with an out-of-state insured?

Please provide us with a ruling by September 5, 1993. If you are unable to do
so, please let me know. Also feel free to call me if you need any more
information.

Thank you for your prompt attention to this request.

Sincerely,

General Counsel