Can a company get a sales tax refund on insurance/actuarial services by prorating the tax based on the ratio of its Texas to out-of-state insurance premiums?

Subject

Insurance Services Sales Tax Refund Denied — Premium-Ratio Proration Is Not a Valid Sourcing Method

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9309L1273D11

Plain-English Summary

A company that had been assigned sales taxes on insurance services performed by an actuarial firm asked the Comptroller for a refund of 88.6% of the sales tax paid. The company's theory was that only its Texas share of business should be taxed, and it calculated that Texas share using the ratio of Texas to out-of-state insurance premiums shown on its 1991 Schedule T (filed with the Texas Insurance Department) — arriving at a claimed 11.4% Texas premium figure.

The Comptroller denied the refund for two independent reasons. First, the letter states the Comptroller could not find documentation supporting the taxpayer's 11.4% figure; based on the numbers available, roughly 27.39% of life insurance premiums, 19.6% of accident and health insurance premiums, and an overall 20.39% of all premiums were tied to Texas customers — all higher than the 11.4% the taxpayer used. Second, and more fundamentally, the letter states that even if the 11.4% figure had been valid, prorating insurance service tax according to the ratio of Texas to out-of-state premium receipts is not a valid method in the first place.

The letter explains why a premium-based ratio doesn't work: an actuarial/insurance consulting firm performs many different functions — benefits counseling, plan design, valuations, ERISA and FASB reports, individual benefit reports, feasibility studies for new ventures/lines/products, applicant rating systems, asset/liability strategies, and actuarial opinions. Some of these services may be performed solely for the benefit of corporate headquarters, not for the broad mix of premium payers, and few (if any) benefit the entire population of premium-payer locations. In other words, premium volume by state doesn't reflect where the actuarial services were actually used.

Instead, the Comptroller pointed to Rule 3.355 (Insurance Services), noting that Section (d) sets out the requirements for taxing services performed in Texas, and Section (j) provides that when an insurance service supports a separate, identifiable segment of a customer's business (as opposed to general administration or operation of the business), the service is presumed used at the location of that business segment. Here, the actuarial firm's invoices gave no indication of the locations or subscribers/plans benefited, so — absent documentation specifying the services performed and the benefit location — the services were presumed to be for general administration. The letter also states that corporate gross "receipts" have not been determined to be a valid basis for locating the benefit of taxable services.

What This Means For You

If you're claiming a refund based on an allocation formula: This letter shows the Comptroller will scrutinize the underlying numbers first (here, the claimed 11.4% figure could not be documented and appeared inconsistent with other data). Be prepared to support any allocation percentage with real records.

If you want to source insurance/actuarial services by a revenue or premium ratio: This letter states that approach is not valid, even if the numbers themselves are accurate. Sourcing depends on where the specific service was actually used, not on a company-wide financial ratio.

If you purchase actuarial or insurance consulting services for a multi-location or multi-state operation: To support any non-general-administration sourcing, keep documentation (in invoices or elsewhere) that identifies which locations, subscribers, or plans a given service actually benefited. Without that documentation, the letter states the service will be presumed to be for general administration.

If your invoices don't specify a benefit location: Under Rule 3.355(j), as described in this letter, the default presumption is that the service supports general administration or operation of the business — which affects how the service is sourced for tax purposes.

Q&A

Q: Did the Comptroller grant the requested refund?
A: No. The letter states plainly, "A refund cannot be granted due to the following," and proceeds to deny the request.

Q: What percentage of premiums did the taxpayer claim were attributable to Texas, and what did the Comptroller find?
A: The taxpayer claimed 11.4% Texas premiums. The Comptroller stated it could not find documentation supporting that figure, and that the data available showed roughly 27.39% of life insurance premiums, 19.6% of accident and health insurance premiums, and an overall 20.39% of all premiums were for Texas customers.

Q: Is prorating insurance service tax by the ratio of Texas to out-of-state premiums a valid method, according to this letter?
A: No. The letter states, "Even if the 11.4% is valid the assertion that all insurance services must be prorated according to the Texas and out-of-state receipts is invalid."

Q: How does Rule 3.355 determine where an insurance service is used, per this letter?
A: Section (j), as described in the letter, provides that if an insurance service supports a separate, identifiable segment of a customer's business (other than general administration or operation of the business), the service is presumed used at the location of that business segment.

Q: What happens if the invoices don't show which locations or plans a service benefited?
A: The letter states that in the absence of additional documentation specifying the services performed and the benefit location, the services will be presumed to be for general administration — as was the case here, since the actuarial firm's invoices gave no indication of locations or subscribers/plans benefited.

Original ruling text

September 17, 1993

Dear **:

Thank you for your letter of August 4, 1993, concerning a refund for
sales taxes paid on insurance services.

Your firm has received a letter of assignment for sales taxes on
insurance services. The services were performed by an actuarial firm.
You are requesting a refund of 88.6% of sales taxes paid based upon
the total out-of-state vs. Texas premiums stated on your 1991 Schedule T
(filed with Texas Insurance Department).

A refund cannot be granted due to the following;

It appears that roughly 27.39% of life insurance premiums, 19.6% of
accident and health insurance premiums, and an overall 20.39% of all
premiums are for Texas customers. I cannot find any documentation to
support the 11.4% Texas premium figure stated in your letter.

Even if the 11.4% is valid the assertion that all insurance services
must be prorated according to the Texas and out-of-state receipts is
invalid.

An actuarial/ insurance consulting firm has many functions including
but not limited to; benefits counseling, plan design, valuations,
ERISA and FASB reports, computing individual benefit reports, checking
the feasibility of new ventures, lines and products, creating
applicant rating systems, preparing asset/liability strategies, and
actuarial opinions. Some of these may be performed for the sole
benefit of the corporate headquarters and not the broad mix of current
premium payers. Few, if any, will be performed for the benefit of the
entire population of premium payer locations.

I have enclosed Rule 3.355 concerning insurance services for your
review. Section (d) outlines the requirements for taxing services
performed in Texas.

Section (j) states that to the extent an insurance service is used to
support a separate, identifiable segment of a customer's
business (other then general administration or operation of the
business) the service is presumed to be used at that location where
that part of the business is located. The invoices from the actuarial
firm give no indication as to the locations or subscribers/plans
benefited. In the absence of additional documentation that specifies
the services performed and the benefit location, the services will be
presumed to be for general administration. We have not determined
corporate gross "receipts" to be a valid basis of determining the
location of benefit concerning taxable services.

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

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct
line is 512/475-0613. You may also write to Tax Administration Division,
Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division

NOTE: Previous Accession Number 9311112L.4 and/or 9311112L