Can a Texas insurance company claim a multistate benefit exemption on sales tax paid for actuarial services, when the resulting policies are later sold in other states?

Subject

Multistate Customer — Method For Determining Tax

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9402L1286F03

Plain-English Summary

A taxpayer (TP) filed a refund claim to recover sales tax it had paid on actuarial studies purchased from a consulting actuary (ABC, Inc.). The studies were used to prepare packages supporting proposed insurance policy forms. Those studies were received and used only at TP's general office in Texas — the actuarial study itself never left Texas, though data derived from it was included in packages sent to other states for regulatory approval. Once approved, the resulting policies were sold in multiple states, and TP argued that its Texas sales tax liability should be based on the percentage of those policies ultimately sold in Texas.

The Comptroller rejected that approach. Rule 3.355(j) governs the "multistate benefit exemption" for services like actuarial services: a multistate customer that wants to allocate tax based on out-of-state use must (1) actually have an identifiable business location in another state, (2) issue an exemption certificate to the service provider naming that out-of-state location, and (3) keep books supporting the allocation. If the extent of out-of-state use can't be tied to an identifiable business segment, the service is instead treated as used at the purchaser's principal place of business.

TP's base of operations was in Texas, and TP did not have a location in any other state. The Comptroller reasoned that simply selling insurance policies (developed using the Texas-based actuarial studies) to customers in other states does not, by itself, create a "multistate benefit" for TP — citing a prior administrative hearing holding that a Texas taxpayer benefits from sales to out-of-state customers to exactly the same extent as from sales to Texas customers. The fact that TP's parent or an affiliated subsidiary might have out-of-state locations did not help TP, because those are separate legal entities. TP also had not issued the required exemption certificate. As a result, the Comptroller denied TP's refund claim.

What This Means For You

If you purchase services (like actuarial studies) in Texas and later use the output of that work to sell products in other states: Merely selling the end product outside Texas does not automatically entitle you to a multistate benefit exemption on the underlying service purchase. You must show the service itself was used to benefit an actual out-of-state business location.

To claim a multistate benefit exemption under Rule 3.355(j): You need (1) an identifiable business location in another state, (2) a properly issued exemption certificate to your service provider naming that out-of-state location, and (3) books and records supporting the allocation between Texas and out-of-state use.

A parent company's or affiliate's out-of-state presence does not count for you: The Comptroller treated TP and its parent/subsidiary as separate entities — an affiliate's location in another state does not give TP a multistate location for exemption purposes.

Q&A

Q: TP had no office outside Texas, but its policies were later sold in other states. Was TP entitled to the multistate benefit exemption on the actuarial studies it purchased?
A: No. The Comptroller held that TP's base of operations was in Texas and TP had no location in any other state, so the later sale of policies in other states did not create a multistate benefit. The refund claim was denied.

Q: What does a purchaser need to do to claim the multistate benefit exemption on services like actuarial studies under Rule 3.355(j)?
A: The purchaser must have an identifiable business location in another state, issue an exemption certificate to the service provider identifying that out-of-state location, and maintain books supporting the allocation of the service's use between Texas and out-of-state locations.

Q: Does having a parent company or affiliated subsidiary with locations in other states satisfy the multistate benefit exemption requirements?
A: No. The Comptroller found that another entity's (the parent's or a subsidiary's) location in another state does not establish a location in another state for the taxpayer itself — the taxpayer must have its own out-of-state business location.

Original ruling text

DATE: February 11, 1994

TO: Ervin McRae, Waco Audit (2182)

FROM: Eddie C. Washington, Tax Administration Division

SUBJECT: Taxability of Insurance Services - Multi-state Benefit Exemption

RE: **

FACTS: TP has filed a refund claim to recover $***** in sales tax
paid on actuarial studies used to prepare insurance policies to be sold in
different states. The tax was paid to ABC, Inc. (ABC), consulting actuaries.

ABC was audited for the period ** through ** and was assessed a
$* state, city, and transit tax liability. Subsequently, ABC received
a $** refund (presumably based on customers' claiming multi-state
benefit exemption) leaving a net audit liability of $**. TP's
claim would practically zero out ABC's audit.

The actual studies are received and used at TP's general office in *,
Texas. The studies are used to prepare a package for the proposed policy form.
The package is sent to different states for approval (the actuarial study
originally purchased by the entity is not a part of the package and does not
leave *, Texas; however, the data contained in the package is derived
from the actuarial studies).

Once policies are approved by states, they are sold in different states. TP
believes tax should be reported to Texas based on a percentage of policies sold
in Texas.

Copies of TP's correspondence is attached for your review and consideration.

Question: What is TP's tax responsibility in this case?

Answer: Rule 3.355 addresses this issue directly. Subsection (j)(1) provides
that services are presumed to be used at the location where that part of the
business is conducted. Subsection (j)(2) states:

A multi-state customer purchasing insurance services, such as actuarial
services, for the benefit of both in-state and out-of-state locations is
responsible for issuing to the insurance services provider an exemption
certificate asserting a multi-state benefit, and for reporting and paying the
tax on that portion of the insurance services which will benefit the Texas
location. (Emphasis added.)

Subsection (j)(3) provides that services such as actuarial services for the
benefit of both in-state and out of state locations is responsible for issuing
the exemption certificate. The exemption certificate should list the out-of-
state location that benefits from the service. A provider of insurance services
that accepts such a certificate in good faith is relieved of the responsibility
for collecting and remitting tax on transactions to which the certificates relates.

Subsection (j)(2) states that the purchaser's books must support the claim
assigning the service to an identifiable segment as provided by subsection
(j)(1) and the determination of the location of use of the service.

Finally, subsection (j)(5) states that the service is used at the principal
place of business from which the business is directed or managed when the
extent of use of the service cannot be assigned to an identifiable segment of a
customer's business (in an out-of-state location).

TP's base of operations is in ***, Texas. TP does not appear to have a
location in any other state. ABC has assigned its refund rights to TP. The
exemption certificate that TP is required to issue to claim the multistate
exemption is not part of the documentation.

The sales tax law (Texas Tax Code Chapter 151) does not define a multi-state
customer. However, Texas Tax Code Chapter 141, Article I states that the
purposes of the Multistate Tax Compact are to: "Facilitate proper determination
of state and local tax liability of multistate taxpayers..." The term
taxpayer is defined in Article II as "any corporation, partnership, firm,
association, governmental unit or agency or person acting as a business entity
in more than one state." (Emphasis added.)

In order for TP to be eligible to claim a multi-state benefit exemption, TP
must have a location in another state. The subsequent sale of insurance
policies in New Jersey by TP, its parent, **, or
*** does not create a multi-state benefit for TP.
In Hearing 27,621 (microfiche document 9306H1243D07), the administrative
law judge (ALJ) reasoned that a Texas taxpayer benefit from sales to customers
in another state to exactly the same extent as sales to Texas customers.

TP holds itself out to the public as being a subsidiary of **.
The placement of insurance coverage in another state from which TP
receives premiums benefits TP's only location. **'s location in
another state does not establish a location in another state for TP.
** or another subsidiary (***), not TP, may be
operating as a business entity in another state.

TR 1283, approved and issued January 12, 1992, addressed ABC's tax
responsibilities as an actuary. TR 1283 states that actuarial services
performed pertaining to an insurance policy are taxable when performed
for an insurer regardless of whether the services pertain to policies in force
or to a new product (policy) the insurer is contemplating offering. The TR did
not address the multi-state benefit exemption. Exemption certificates
accepted by a seller after the fact are subject to verification.

TP is not entitled to a refund based on the multi-state benefit exemption.

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

NOTE: Previous Accession Number 9402059L