Does a title insurance company owe Texas sales tax on the premium-split payments it makes to attorneys or other title companies for title examinations, title evidence, and real estate closing services?

Plain-English summary

A title insurance company was audited and assessed tax on its purchases of title examination and title closing services from attorneys, title companies, and title insurance agents. The company protested, and this internal Tax Policy memo (with a cover letter to the taxpayer) works through whether those purchases are taxable.

Title insurance companies buy three related services as part of underwriting a title policy: (1) "title examination" — searching and examining title to evaluate the risk of insuring it; (2) "title evidence" — the title commitment showing the legal description, parties, price, terms, exclusions, and search results; and (3) real estate "closing" services — the investigation before issuing the policy to confirm all conveyances, mortgages, and title instruments are properly executed, taxes paid and prorated, proceeds disbursed, and papers filed for record. These services are commonly performed by an attorney or another title company/agent (often because the title insurer isn't licensed in that particular county), and paid for out of "premium splits" — a portion of the insurance premium passed along to whoever performs the service, with the split percentages capped by Texas Department of Insurance rules.

The Comptroller's office reviewed both the Tax Code's definitions of taxable "information services" and "insurance services" and the Texas Insurance Code's Title Insurance Act, which defines "premium" to include the charges for title examination and closing (whether or not performed by an attorney) and provides that the premium tax is the only tax that may be levied on title insurance companies for the business of title insurance. Weighing the taxpayer's arguments against prior authority (including the Hammerman & Gainer v. Bullock case on insurance claims-adjustment services and several Attorney General opinions on the scope of the insurance-services and premium-tax exemptions), the memo concludes that title examinations, title evidence, and real estate closing services purchased from attorneys or other title companies are nontaxable title insurance transactions rather than taxable insurance investigations or information services. The cover letter issued to the taxpayer confirms this conclusion and states it is consistent with the Legislature's intent not to impose sales tax on the title insurance business as defined in the Insurance Code — meaning the premium-split payments for these services are not subject to sales tax.

The internal memo also lays out — but does not adopt — alternative approaches the agency considered, including taxing these services as insurance services (with attorneys taxed only if the Comptroller determines they are not truly providing legal services), fully exempting them regardless of who performs them, or taxing only title examination and title evidence while leaving closing services untaxed. The final decision, reflected in the cover letter to the taxpayer, was not to tax any of these premium-split payments.

What this means for you

Title insurance companies and title agents

Payments you make out of "premium splits" to attorneys or other title companies/agents for title examinations, title evidence, or real estate closing services are treated as nontaxable title insurance transactions, not taxable insurance or information services — so you should not be charged or need to remit sales tax on these premium-split payments.

Attorneys performing title-related work

The ruling reflects a broader Comptroller practice of not treating attorneys' work as a taxable service unless the Comptroller can show the attorney is not actually using legal expertise and is acting solely as a provider of a taxable service (such as debt collection) — a difficult showing the agency says it has not made in practice for title-related work.

Accountants and tax professionals advising title insurers

This letter is useful background on how the Comptroller analyzes the interplay between the Tax Code's information-service and insurance-service definitions and the Insurance Code's title-insurance premium tax framework, including the reasoning that a title insurer's purchase of these services is a separate transaction from the sale of insurance coverage to a policyholder (distinguishing it from the premium-paid-for-coverage exclusion in Tex. Tax Code Sec. 151.0039(b)), yet still concluding no sales tax applies because of the specific statutory treatment of "premium" under the Insurance Code.

Common questions

Q: Is sales tax due on the premium-split payments a title insurance company makes to an attorney for title examination or closing services?
A: No. The Comptroller determined these are nontaxable title insurance transactions, not taxable insurance investigations, so no sales tax applies.

Q: Does it matter whether the title examination, title evidence, or closing services are performed by an attorney or by another title company/agent?
A: No — the conclusion is the same either way. The cover letter states that premium splits paid for these services, whether performed by attorneys or other title companies, are not subject to sales tax.

Q: Why isn't this considered a taxable "insurance service" (insurance investigation) or "information service" under the Tax Code?
A: The memo reasons that these services are nontaxable title insurance transactions under the Texas Insurance Code, which defines "premium" to include charges for title examination and closing, and separately provides that the premium tax is the only tax that may be imposed on the business of title insurance.

Q: Were any other options considered before reaching this conclusion?
A: Yes. The internal memo discusses alternatives such as taxing these services as insurance services, taxing only title examination and title evidence but not closing services, or fully exempting all of them. The position ultimately communicated to the taxpayer was full exemption from sales tax.

Citations and references

• Tex. Tax Code Sec. 151.0038 (definition of "information service")
• Tex. Tax Code Sec. 151.0039 (definition of "insurance service" and its exclusion for insurance coverage for which a premium is paid)
• Tex. Ins. Code art. 9.02 (definitions under the Title Insurance Act, including "business of title insurance," "title examination," "closing the transaction," and "premium")
• Tex. Ins. Code art. 9.07 (regulation of title insurance premiums)
• Tex. Ins. Code art. 9.59 (title insurance premium tax and prohibition on other taxes on the business of title insurance)
• 34 Tex. Admin. Code Sec. 3.342 (taxable information services)
• 34 Tex. Admin. Code Sec. 3.355 (definition and taxation of insurance services, including "insurance investigation")

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9501L1334A01

Original ruling text

January 13, 1995

Dear **:

My office recently reviewed the issue of whether title examinations, title
evidence, or real estate closing services purchased by title insurance
companies from attorneys or other companies are taxable as insurance services
under the tax laws. I'm pleased to share the results of that review these
transactions are not subject to sales tax.

After examining both the Texas Insurance Code and the Tax Code, we determined
that these services are nontaxable title insurance transactions, not taxable
insurance investigations. Thus, the premium splits paid for these transactions
are not subject to sales tax.

I believe this policy decision is consistent with the Legislature's intent not
to impose sales tax on title insurance business as defined in the Texas
Insurance Code.

If you have any questions or need more information, please call Eddie
Washington in my Tax Administration Division. Eddie's number is
1-800-531-5441, extension 3-4683, or 512/463-4683.

Sincerely,

JOHN SHARP
Comptroller of Public Accounts

cc: Glen Hunt, Director, Tax Administration

DATE: October 18, 1994

TO: Tax Policy Committee

FROM: Tax Administration Division
VIA: Joe Galvan, Manager

SUBJECT: Taxability of title evidence, title examination, and real estate
closing services

Issues: Are purchases of title evidence and title examination services
taxable? Are services performed during the closing of real estate transactions
taxable? Are these services taxable when performed by attorneys?

Background: The taxpayer (TP) writes title insurance. As part of the
underwriting of title insurance policies, TP buys title examination services
and title evidence and closing services from attorneys or from other title
companies.

According to the Texas Department of Insurance (TDI) Title Insurance Section,
title agents are licensed on a county-by-county basis and must be licensed in
each county in which they do business. If a title company is not licensed in a
county, it may contract with an attorney or a title agent licensed in that
county to handle the closing and provide title evidence or perform the title
examination.

"Title examination" means the search and examination of a title to determine
the conditions of the title to be insured and to evaluate the risk to be
undertaken in the issuance of a title insurance policy. TIC art. 9.02 (m).

"Title evidence" is the commitment for title insurance. It contains a legal
description of the property; the name of the owner, purchaser, and lender, the
purchase price, the terms and conditions under which the policy will be issued
and any exclusions from the policy; and the results of the title search. A
title search determines the status of the title as of the day the search is
performed; it does not result in a history of all transactions involving the
property as an abstract does.

"Closing the transaction" means the investigation made for a title insurance
company or title insurance agent before the actual issuance of the title policy
to determine proper execution of all conveyances, mortgages and title
instruments and includes the determination that all delinquent taxes are paid,
all current taxes have been properly prorated, the consideration has been
passed, all proceeds have been properly disbursed, a final title search has
been made, and all papers have been filed for record. TIC art. 9.02(n).

The payments for closing the transaction, the title examination, and furnishing
title evidence are made from "premium splits" (i.e. a portion of the premium
received by the title insurance company is paid to the person providing these
services). TDI regulates the premiums charged for title insurance policies MC
art. 9.07) and the portion of the premium that is paid to another title
insurance company or title agent for performing these services (Rule P-24,
Texas Insurance Commission Basic Manual of Rules, Rates, and Forms for the
Writing of Title Insurance).

TP has been audited and tax assessed on TP's purchases of title examination and
title closing services from attorneys, title companies and title insurance
agents. TP timely filed a petition for a redetermination. The hearings
attorney, in preparing a position letter, sought assistance from the Tax
Division concerning this issue.

Statutory provisions: Effective October 2, 1987, the Texas Legislature imposed
tax on information services and insurance services. Tex. Tax Code Sec.
151.0038 defines information service to mean:

(1) furnishing general or specialized news or other current information,
including financial information, unless furnished to a newspaper or to a radio
or television station licensed by the Federal Communications Commission; or

(2) electronic data retrieval or research.

Section 151.0039 defines insurance service:

(a) "Insurance service" means insurance loss or damage appraisal, insurance
inspection, insurance investigation, insurance actuarial analysis or research,
insurance claims adjustment or claims processing, or insurance loss prevention
service.

(b) "Insurance service" does not include insurance coverage for which a premium
is paid or commissions paid to insurance agents for the sale of insurance or
annuities.

The Title Insurance Act, Chapter 9, Texas Insurance Code, regulates and taxes
title insurance. Article 9.02 defines the "business of title insurance":

(b) the "business of title insurance" shall be deemed to be (1) the making as
an insurer, guarantor or surety, or proposing to make as insurer, guarantor or
surety, of any contract or policy of title insurance; (2) the transacting or
proposing to transact, any phase of title insurance, including solicitation,
title examination, except when conducted by an attorney, closing the
transaction, except when conducted by an attorney, execution of a contract of
title insurance, insuring and transacting matters subsequent to the execution
of the contract and arising out of it, including reinsurance, or (3) the doing,
or proposing to do, any business in substance equivalent to any of the
foregoing in a manner designed to evade the provisions of this Act.

TIC art. 9.59 Sec. l imposes a tax on "each title insurance company receiving
premiums from the business of title insurance. . ."

Article 9.59 Sec. 2 defines premium:

In this article premium means the total amount of premiums received for the
taxable year on title insurance written on property located in this state
except premiums received from other licensed title insurance companies for
reinsurance, less return premiums paid policyholder with no deduction for
premiums paid for reinsurance.

Article 9.02, which sets out the general definitions for the Title Insurance
Act, defines premium:

(o) "Premium" means the premium rates promulgated by the Board pursuant to
Article 9.07 of this Code and includes the charges for title examination and
for closing the transaction, whether or not performed by an attorney, and for
issuance of a policy. " (Emphasis added.)

TIC art. 9.59 Sec. 8 provides:

(a) An occupational tax may not be levied on title insurance companies or
title insurance agents who are subject to this premium tax by any county, city,
or town. The taxes in this article constitute all taxes collectible under the
laws of this state against any title insurance company or title insurance
agent, except maintenance taxes specifically levied under the law of this state
and assessed by the State Board of Insurance to support the various activities
of the divisions of the State Board of Insurance.

(b) No other tax may be levied or collected from any title insurance company
or title insurance agent by the state or any county or city, but this law may
not be construed to prohibit the levy and collection of state, county, and
municipal taxes on the real and personal property of the title insurance
company or title insurance agent. The premium tax is levied on all amounts
defined to be premium in this Chapter, whether paid to the title insurance
company or retained by the title insurance agent, such tax being in lieu of the
tax on the premium retained by the agent by setting the division of the premium
between insurer and agent so that the insurer receives the premium tax due on
the agent's portion of the premium and remits it to the State.

Administrative rules, court cases, attorney generals opinions: Rule 3.342 on
information services provides

(b) Taxable information services. Information which is gathered, maintained,
or compiled and made available by the provider of the information service to
the public or to a specific segment of industry for a consideration is subject
to sales tax. Except as provided in subsection (d)(3) of this rule, the total
charge for information services whether by subscription or on an as-needed
basis is taxable. Examples of such information include, but are not limited
to, the following:

(7) abstracts of title and other information provided by title plants.

Rule 3.355(a)(3) defines "insurance investigation:"

Any activity performed to evaluate an individual's eligibility or
qualifications for insurance coverage, or for the payment of benefits, or any
other similar activity. For example, the assembly or evaluation of information
for the purpose of determining whether to issue a life insurance policy to a
specific individual would be considered to be an insurance investigation.

Rule 3.355(b) provides that the defined insurance services are taxable when
performed "on behalf of an insurance carrier, its insured, its policyholders,
or others pertaining to a policy or policies of insurance for monetary fees,
dues, or other consideration."

In TDI’s Basic Manual of Rules, Rates, and Forms for the Writing of Title
Insurance, Rule P-24 on payment for services rendered by a title insurance
company, title insurance agent, or direct operation to another title insurance
company, title insurance agent, or direct operation, provides:

In negotiating the portion of the premium to be paid by a Title Insurance
Company, Title Insurance Agent, or Direct Operation (collectively "Company") to
another Title Insurance Company, Title Insurance Agent, or Direct Operation
for: (i) furnishing title evidence, (ii) furnishing title evidence and
examining title, (iii) closing a transaction, or (iv) closing a transaction and
examining title, the payments shall not exceed the following percentages as
applied to the portion of the title insurance premium remaining after payment
of the underwriter's portion of the premium:

(a) If the insured policy amount is in excess of $100,000.

Furnishing title evidence, or furnishing title evidence and title examination
by the Company furnishing the evidence 60%

Closing the transaction, or closing the transaction and title examination 40%

(b) If the insured policy amount is $100,000 or less.

Furnishing title evidence, or furnishing title evidence and title examination
by the Company furnishing the evidence 90%

Closing the transaction, or closing the transaction and title examination 10%

Any payment in excess of sums calculated by use of the percentages specified in
this Rule shall be deemed to be an unreasonable and excessive amount, unless
the Company providing such services and the Company paying for such services
enter into a prior written agreement specifying and agreeing to percentages
different from those provided in this Rule.

In Hammerman & Gainer, Inc. v. Bullock (App.3 Dist. 1990) S.W.2d 330
[microfiche 1038F091, the appellants argued that the claims adjustment services
they performed were exempt from sales tax when performed for insurance carriers
whose rates and policies were regulated by the Insurance Commission. The
appellants argued that the cost of the claims adjustment services were borne by
the insurance carrier and were part of the insurance coverage for which a
premium is paid.

The court upheld the Comptroller's position that Section 151.0039(b) does not
exclude from tax the purchase of claims adjustment services by insurance
carriers. The provision merely clarifies that transactions in which a consumer
pays a premium to an insurance carrier, or in which a carrier pays a commission
to an agent, are exempt from taxation. The court pointed to the difficulty in
interpreting the phrase "insurance coverage for which a premium is paid." In
upholding the Comptroller's narrow interpretation of the phrase and the
constitutionality of Rule 3.355, the court reasoned:

Insurance "coverage" is susceptible to a range of interpretations. Generally,
it can be defined as the "amount and extent of risk covered by an insurer."
Blacks Law Dictionary 330 (5th ed. 1979). Construed most broadly, the phrase
"extent of risk" might include a multitude of costs borne by an insurer,
including defense costs and possibly even the cost of adjustment services.
However, "extent of risk" can also be reasonably construed more narrowly to
include only the risk of liability.

Before Hammerman & Gainer filed suit, the Comptroller asked the Attorney
General whether the activities of independent claims investigators or
adjusters constituted a taxable service under Section 151.0039. Attorney
General Opinion JM-1016 (0923A03) issued February 13, 1989, stated that the
definition of insurance service expressly included those services. The AG
opined that:

The exclusion of 'insurance coverage for which a premium is paid' from the
definition of 'insurance coverage' simply means that a transaction that
consists of the payment of a premium for insurance coverage is not a taxable
event. It does not mean that any expenditure for which the premium is
ultimately used by the insurer is not a taxable event.

Attorney General Opinion JM-823 (0844A08) issued November 20, 1987, answered
the Comptroller's query concerning whether attorney’s fees are taxable as debt
collection services in certain circumstances. In looking at the legislative
intent, the Attorney General noted that the Legislature twice rejected attempts
to amend House Bill 61 to make legal services subject to sales tax. Also noted
was the House's refusal to concur with the Senate's provision excluding from
the sales tax those services labeled as "professional." The only referenced
debate on the bill that produced the statutory definition of "debt collection
service" reveals that if a lawyer is doing what debt collectors do and that is
all, then he would be treated as a debt collector. If the attorney were
involved in some other aspect of the case relative to establishing a claim or
Lawyers receiving the judgment, that individual would be providing legal
services rather than debt collection services. The Attorney General concluded
that the services of a lawyer are not taxable services under Chapter 151 unless
the Comptroller determines that the lawyer is not providing legal services and
is acting solely as a debt collector.

In 1968, the Comptroller asked the Attorney General whether language similar to
that found in TIC art. 9.59 Sec. 8 exempted insurance companies from sales tax.
was that "The exempt language simply means that the companies which pay the
gross premiums receipts taxes are not subject to any other types of occupation,
privilege, or franchise taxes." Attorney General Opinion M-188 (0095E07) issued
January 10, 1968. The opinion states:

We do not believe that the Legislature intended that insurance companies
operating under either Article 7064 or Article 4769 should be exempt from
general tax laws which are not related primarily to operating as an insurance
company. For example, an insurance company would not be exempt from paying
gasoline taxes on gasoline used by company automobiles, or state sales tax on
items of furniture, equipment and supplies purchased for use in the business.

Administrative history: In late 1987, the Comptroller's Office met with
representatives of the Texas Land Title Association to discuss the taxability
of their services. In January 1988, Dan Pearson, deputy comptroller, wrote to
the association and identified these services as taxable information services:
abstracts, abstracters certificates, abstracters letters, title runs, take off
services, tax searches, and tax service fees (0848EI2). He went on to say
that:

Title companies may sell title insurance policies to their clients. This
insurance policy replaces abstracts. The title company performs a title run
prior to issuing the title policy. The title company may have to go to another
title company for information on property in another county. The second title
company provides title evidence to the first company in return for a share of
the insurance premiums. This charge is not taxable.

A title company which handles a closing may receive escrow fees, reimbursements
for long distance phone calls, and attorney fees for legal services. These
amounts are not taxable.

Mr. Pearson does not explain why the charges for title evidence provided by one
title company to another title company in return for a share of the premiums
are not taxable. Title evidence contains the results of a title run or search,
which Pearson's letter identifies as a taxable information service.

The agency has not otherwise specifically addressed the taxability of the
transaction between the title insurer and the parties providing the title
examinations and title evidence and closing services. However, similar issues
have been addressed.

For example, in a December 1993 letter (1276A01), we addressed the taxability
of a fee paid to an engineer for an inspection performed for an applicant
seeking to obtain insurance on a surplus lines basis. The inspection fee and
the sales tax paid on the inspection reported to the Surplus Lines Stamping
Office are also subject to surplus lines (gross premium) tax. The insured
contended it was being taxed twice on the amount that represents the inspection
fee. [The language in TIC Article 1.14-2 Sec. 12(a) is similar to the language
in Article 9.59 Sec. 8(b).]

We took the position that the purchase of an insurance service by the insured,
the insurance carrier, or the managing general agency is a separate and
distinct transaction from the purchase or sale of insurance coverage. The
sales tax is paid once on the insurance service. The fact that the insurance
service and the applicable sales tax on the service are included in the
"premium" does not exempt the purchase of the insurance services from sales
tax.

Concerning the issue of services performed by attorneys, the Comptroller has
followed AGO JM823 very strictly. After AGO JM-1016 was issued, Hammerman &
Gainer asked the Comptroller to request further clarification from the AG as to
how its response applied to attorneys. Writing on behalf of the Tax Policy
Committee, Mr. Anderson responded:

The Attorney General has made it clear that the Legislature didn't intend to
tax attorneys unless they were not using any legal expertise and put the burden
clearly on our shoulders to prove beyond a shadow of a doubt that they were not
should we assess tax on their activities. This will be very difficult, if not
impossible, in the vase majority of cases. [847B04]

In researching this issue, we did not find a situation where this office
determined that an attorney was performing a taxable service rather than a
legal service.

Discussion: Title evidence and title examination services and services
performed during real estate closings appear to fall within the definition of
either information or insurance services.

The TP contends that the "premium splits" paid for these services are not
subject to sales tax because, as premiums, they are specifically excluded from
the definition of "insurance services" by Section 151.0039(b). TIC art. 9.02(o)
defines premium to include ". . . the charges for title examination and for
closing the transaction, whether or not performed by an attorney, and for
issuance of a policy."

The TP further argues that TIC art. 9.59 Sec. 8(b) provides that no tax other
than the premium tax may be levied or collected from title insurance companies
by the state. The article specifies that "the premium tax is levied on all
amounts defined to be premium in this Chapter, whether paid to the title
insurance company or retained by the title insurance agent. . ." And, as stated
previously, Article 9.02(b) defines premium to include charges for title
examination and for closing the transaction, whether or not performed by an
attorney.

While Article 9.59 Sec. 8(b) is similar to language addressed by the Attorney
General in AGO M-188, the TP argues that the additional language in Article
9.59 Sec. 8(b) specifically providing that "the premium tax is levied on all
amounts defined to be a premium in this Chapter" distinguishes this article
from those previously construed. The AG did not discuss a case such as this
where the services are paid as part of the premium, rather than paid for with
money received by the insurance company as a premium. On that basis, the
opinion and the court cases cited in the opinion are distinguishable.

The problem with the TP's first argument is that the exclusion in the
definition of insurance service (Section 151.0039(b)) is for "insurance
coverage for which a premium is paid." That coverage is what is provided to the
insurance purchaser by the insurer. The title evidence and title examination
services and services performed during real estate closings are services
purchased by the insurer to determine whether to issue the insurance coverage.
Like the claims adjustment services at issue in

Hammerman & Gainer, these services are separate transactions from the provision
of insurance coverage by the insurer for which the premium is paid.

Additionally, language similar to that in Article 9.59 Sec. 8(b) was reviewed
by the Attorney General in AGO M-188 and found to exempt insurance companies
only from other types of occupation, privilege, or franchise taxes. It was the
Attorney General's opinion that the Legislature did not intend that insurance
companies should be exempt from general tax laws which are not related
primarily to operating as an insurance company. The AG specifically stated
that the sales tax is one such general tax law that does not relate primarily
to operating an insurance company. If the sales tax is not covered by the
exemption provided in Article 9.59 Sec. 8, a question arises as to how the
additional language concerning the definition of premium changes that.

It appears that premium is defined in Article 9.02(o) to include title
examination and closing services to ensure that those charges cannot be
separately itemized and excluded from the premium tax base by the title
insurance company. However, the fact that the reference in Article 9.59 Sec.
8(b) to the definition of "premium" was added in 1987, may support the argument
that it was specifically added to exclude these services from the sales tax.

Although the taxpayer has not argued that it is purchasing another non-taxable
professional service, rather than an insurance investigation or information
service, it is possible to make that argument in the case of the title evidence
and real estate closing services. It is, however, more difficult to make that
argument about title examination services.

Alternative approaches: (1) Tax as insurance services title examinations, title
evidence, and real estate closing services performed by title insurance
companies and title insurance agents. Tax these services when provided by
lawyers if the Comptroller determines the lawyers are not providing legal
services and are acting solely as providers of taxable services.

Because the industry has previously been told that these services are not
taxable, this change should be made prospectively from the date of a
notification to industry and/or rule amendment addressing this change. (Note:
The Texas Land Title Association is aware that this issue is pending in
hearings and has already written offering to meet to discuss it with us.)

Pro: This position follows those previously upheld in Hammerman & Gainer and in
AGO M-188. It also avoids the problem of attempting to tax legal services
provided by attorneys.

Con: Title insurance companies and title insurance agents may argue that they
are performing the same services performed by attorneys and raise the issue of
unequal treatment.

(2) Exempt title examinations, title evidence, and real estate closing services
performed by title insurance companies, title insurance agents, and attorneys.

Pro: Avoids the problems incurred by reversing the position taken on this
issue in Dan Pearson's 1988 letter and any possible perception of a problem
distinguishing the types of services performed by title insurance agents from
those performed by attorneys.

Con: By specifically accepting either of the taxpayer's arguments, we may
weaken the positions upheld in Hammerman & Gainer and in AGO M-188, unless
taxpayer's case is clearly distinguished from these earlier cases. 13

(3) Tax as insurance services title examinations and title evidence services
performed by title insurance companies and title insurance agents. Tax these
services when provided by lawyers if the Comptroller determines the lawyers are
not providing legal services and are acting solely as providers of taxable
services. Do not tax real estate closing services. Con: Problems may arise
over identifying the taxable sales price of these services.