When a Texas insurance company is placed into receivership, what priority does the Comptroller's claim for uncollected/unremitted sales tax and premium tax get, and does the Receiver (the Commissioner of Insurance) have to keep collecting and remitting tax going forward?

Plain-English summary

This 1996 letter answers a set of questions about what happens to Texas sales tax and insurance premium tax claims when an insurance company ("Company A") is declared insolvent and placed into receivership under the Texas Insurance Code. The Commissioner of Insurance takes over as Receiver and must marshal the company's assets and distribute them according to a statutory priority scheme (Class 1 through Class 4).

The letter walks through several scenarios:

• Is the Receiver exempt from tax as a government agency? No — the Commissioner of Insurance acting as Receiver does not qualify as a governmental agency for exemption purposes, and no other exemption applies either.
• Priority of the Comptroller's sales tax claim. Under the distribution scheme, sales tax claims are Class 3 claims (ordinary general-creditor claims, ranking below administrative expenses, guaranty association expenses, employee wages, and secured creditors in Class 1, and below policyholder/guaranty-association claims in Class 2). This Class 3 ranking applies both to (a) tax that Company A collected before receivership on pre-receivership sales but never remitted, and (b) tax collected by the Receiver after receivership began, but on sales/services that occurred before receivership.
• Tax collected after receivership on post-receivership sales/services is different. For sales tax the Receiver collects on genuinely new, post-receivership sales (e.g., selling off computer software, furniture, fixtures and equipment as part of liquidating the estate), the Receiver should currently collect and remit that tax to the Comptroller — it is not simply lumped into the estate's Class 3 distribution scheme.
• Trust-fund treatment. For tax collected pre-receivership (whether remitted late or not), the Receiver should treat it as part of the estate and distribute it according to the statutory classes, even though an argument could be made that sales tax collected is trust money that isn't truly an asset of the estate.
• Premium taxes. The Receiver must pay premium taxes and file premium tax reports on the company's workers' compensation and other insurance business. The Comptroller's premium tax claim is also Class 3, even accounting for the fact that "retrospectively rated" premiums (cost-plus policies that get adjusted as claims are finalized) can keep accruing and being collected years after the underlying policy's effective dates.

The letter is explicitly limited to the facts presented: "If there are additional or different facts, the opinion may change."

What this means for you

Receivers, liquidators, or trustees of an insolvent Texas insurance company

If you are stepping into the shoes of an insolvent insurer as Receiver, you do not get a governmental-agency tax exemption just because you are appointed by the state. Sales tax the company owed before you took over — and even sales tax you collect after taking over on sales made before receivership — gets folded into the estate and paid out according to the Class 1–4 priority scheme in Tex. Ins. Code art. 21.28, § 8, not paid immediately in full.

Ongoing operations during receivership

If the receivership estate continues to make new sales (insurance services, or liquidating assets like software, furniture, fixtures and equipment) after the receivership begins, sales tax on those new transactions should be collected and remitted to the Comptroller currently — that's treated differently from tax tied to pre-receivership sales.

Insurers with retrospectively-rated ("retro") premium policies

Premium tax obligations don't stop accruing just because the underlying policies were written before receivership; the Receiver must keep filing premium tax reports and paying premium tax as retro-premium adjustments come in, and the Comptroller's claim for that tax is Class 3 regardless of how long after the original policy period the premiums are actually collected.

Creditors and claimants in an insurance receivership

Understanding that tax claims rank as Class 3 — behind administrative expenses, guaranty-association costs, employee wages, secured creditors, and policyholder claims — helps set realistic expectations about likely recovery on a tax claim against an insolvent insurer's estate.

Common questions

Q: Is the Commissioner of Insurance, acting as Receiver of an insolvent insurer, exempt from Texas sales tax as a government agency?
A: No. The letter states plainly that the Receiver does not qualify as a governmental agency for exemption, and no other exemption applies.

Q: What priority does the Comptroller's sales tax claim get in an insurance company receivership?
A: Class 3 — an ordinary general-creditor claim under Tex. Ins. Code art. 21.28, § 8(a)(3) — whether the tax was collected pre-receivership and unremitted, or collected post-receivership on pre-receivership sales.

Q: Does the Receiver have to remit sales tax collected on sales made after the receivership started?
A: Yes. The letter says the Receiver should collect tax on post-receivership sales and remit it currently to the Comptroller, rather than treating it as part of the class-based distribution.

Q: Must the Receiver keep paying premium taxes and filing premium tax reports?
A: Yes.

Q: What priority does the Comptroller's premium tax claim get, including for retrospectively-rated premiums collected years after a policy's effective date?
A: Class 3, the same as the sales tax claim.

Q: Can this letter be relied on by another insurance receivership with different facts?
A: No. The letter states it "is based on the facts presented" and that "if there are additional or different facts, the opinion may change." Under STAR policy, letters can only be relied on by the taxpayer to whom they were issued.

Citations and references

Statutes and rules:

• Tex. Ins. Code art. 21.28, § 2(a) (Receiver of an insolvent insurer must take charge of all assets of the receivership estate)
• Tex. Ins. Code art. 21.28, § 1(c) (defines estate assets, including deposits and funds of a special or trust nature)
• Tex. Ins. Code art. 21.28, § 8 (statutory priority/distribution scheme for claims against the receivership estate)
• Tex. Ins. Code art. 21.28, § 8(a)(3) (tax claims, including sales tax, rank as Class 3 general-creditor claims)
• Tex. Tax Code § 151.0039 (definition of taxable insurance services)
• Tex. Ins. Code art. 4.10 (premium tax on workers' compensation insurance premiums)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9602230L

Original ruling text

February 26, 1996

Dear **:

Thank you for your patience in awaiting this response to your letter of
December 15, 1995, concerning the tax responsibilities of the Commissioner of
Insurance as the receiver for an insurance company in receivership.

ASSUMED FACTS

Company A was an insurance company properly licensed as such in Texas. On
January 1, l99X, the state declared Company A insolvent and placed it into
receivership. The receivership of Texas insurance companies is governed by
Article 21.28, of the Texas Insurance Code. A copy of the statute is attached
for your convenience.

The Commissioner of Insurance for the Texas Department of Insurance is the
Receiver of Company A. The Receiver of an insolvent insurance company is
required to take charge of all assets of the receivership estate. Tex. Ins.
Code art. 21.28, 2(a). The assets of the estate include "all property...whether
specifically...encumbered for the security or benefit of specified persons" and
specifically include "deposits and funds of a special or trust nature." Tex.
Ins. Code art. 21.28, l(c).

The Receiver is required to distribute the assets it marshals in accordance
with the distribution scheme provided in the insurance code. Tex. Ins. Code
art. 21.28, 8. A summary of the distribution scheme is shown below.

Priority of Distribution Assets

Class 1 Expenses of administration of the receivership estate, Expenses of the
insurance guaranty association, Wages owed to the insurer's employees, and
Secured Creditors

Class 2 Claims by policyholders, and Claims by the insurance guaranty
association

Class 3 All other claims of general creditors

Class 4 Claims of equity owners in the insurance company

Under the distribution scheme, claims for taxes are Class 3 claims. Tex. Ins.
Code art. 21.28 8(a)(3).

Approval by the state district court presiding over the receivership is
generally required before any payments are made by the Receiver .

Prior to January 1, l99X, part of Company A's business was the sale of taxable
insurance services. See Tex. Tax Code 151.0039. Company A properly billed its
customers sales tax on the insurance services it provided pre-receivership.

In some cases, the customers timely paid their bills, including sales tax, for
pre-receivership services. Company A had not remitted all of these taxes to the
Comptroller as of January 1 (the date Company A was placed into receivership).
In these situations, Company A collected taxes before the receivership started
for services sold pre-receivership.

In other situations, although the bill was due prior to January 1, l99X, the
customers paid these bills late, after the onset of receivership. Company A
thus collected taxes after the receivership started for services sold
pre-receivership. The Receivership estate has not yet filed a tax returns and
has remitted none of these taxes.

Class 3 includes, "All other claims of general creditors not falling within any
other priority under this section including claims for taxes and debts due the
federal government or any state or local government which are not secured
claims.

After January 1, l99X, Company A continued to provide some insurance services.
Company A collected sales tax on these services.

After January 1, l99X, the Receiver began the process of liquidating Company
A's assets. The Receiver sold some of Company A's computer software and much of
its furniture, fixtures and equipment. The Receiver collected sales tax on
these sales.

Company A wrote workers compensation insurance policies. The premiums collected
on these policies is subject to a premium tax. See Tex. Ins.- Code art. 4.10.
Pursuant to state-set rate standards, Company A charged its insureds according
to a formula that allowed Company A to recoup its estimated premium taxes.

Many of Company A's policies called for "retrospectively rated" premiums (or
"retro-premiums"). Such policies provide for a form of cost-plus insurance.
Under a retro-premium policy, the insured pays an initial premium based on the
estimated losses which he will incur. The premium is then adjusted as the
actual losses are calculated. Premiums continue to be adjusted until all claims
made under the insurance policy are finalized.

All of Company A's policies covered time periods prior to January 1, l99X.
However, claims costs continued to be calculated after the onset of
receivership. Accordingly, after receivership, Company A collects premiums for
insurance policies which covered pre-receivership periods. Often, the Receiver
must accept discounted payoffs of premiums to facilitate collections and avoid
litigation.

ISSUES

1. Is the Commissioner of Insurance as Receiver a governmental agency that
   would qualify for exemption? Is there another type of exemption that could be
   claimed by the Receiver?

Answer: No, to both questions.

2. Under the priority scheme of the Texas Insurance Code, what priority is the
   Comptroller's claim for sales tax?

Answer: Class 3.

a. for tax collected by Company A prereceivership on pre-receivership sales but
not remitted to the Comptroller prior to receivership;

Answer: Class 3.

b. for tax collected by the Receiver post-receivership on prereceivership
sales; and

Answer: Class 3 because the receiver is required to make distributions in
accordance with the class method set up. An argument could be made that the
sales tax is not an asset of the estate and should be remitted as trust moneys.

c. for tax collected by the Receiver post-receivership on postreceivership
sales.

Answer: The receiver should collect tax on these sales and remit to the
Comptroller.

3. If the Receiver is considered a taxable entity, what are the Receiver's
   duties regarding the "trust" nature of taxes that have been collected?

a. for tax collected pre-receivership on pre-receivership sales;

Answer: The receiver should treat the tax as part of the estate and distribute
it accordingly.

b. for tax collected post-receivership on pre-receivership sales;

Answer: The receiver should treat the tax as part of the estate and distribute
it accordingly.

c. for tax collected post-receivership on post-receivership sales.

Answer: The receiver should collect tax on these sales and remit to the
Comptroller.

4. If tax claims are a priority 3 claim under the Texas Insurance Code that
   cannot legally be paid by the Receiver at this time, how would this affect the
   fiduciary responsibility of the Receiver to remit "trust" taxes.

Answer: The receiver is not bound to do anything other than remit as indicated
in 1(c) and 3(c) above.

5. Is the Receiver required to pay premium taxes or file premium tax reports?

Answer: Yes.

6. Under the priority scheme of the Texas Insurance Code, what priority is the
   Comptroller's claim for premium tax? How does the fact that retro-premiums can
   continue to accrue years after the policy effective dates affect the priority?

Answer: Class 3.

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

You may call me at 463-4683 if you have any questions or need more information.
You may also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division