Does an engineer hired by an insurance company to investigate a homeowner's damage claim have to charge the insurance company sales tax on the investigation?

Subject

Forensic Engineers — Evaluations/Investigations Of Accidents, Fires, Structural Damages Connected With Insurance Claims

Plain-English summary

An insurance company hired a professional engineer to investigate a homeowner's claim -- inspecting the dwelling, checking for foundation damage or movement, and reporting on the cause and origin of that damage. The taxpayer asked whether the engineer has to charge the insurance company sales tax on the fee for this work.

The Comptroller said yes. Under 34 Tex. Admin. Code § 3.355(a)(3), what the engineer performed fits the rule's definition of an "insurance investigation." Section 3.355(b) makes sales tax apply to insurance services -- including insurance investigations -- when they are performed for an insurance carrier, its insured, its policyholders, or others in connection with a policy of insurance, in exchange for a fee. So the engineer is required to charge the insurance company sales tax on the total amount billed for the investigation.

The letter also quotes the rule's Texas-nexus test: insurance services are taxable in Texas if the person, entity, or property that is the subject of the service is in Texas, and the company paying for the service is either an insurance carrier as defined in the rule, or -- if not a carrier -- is doing business in Texas.

As with other letters of this kind, the Comptroller notes the answer is based on the facts presented and could change if the facts are different.

What this means for you

Forensic engineers and inspection firms working for insurers

If you're engaged by an insurance company (or on its behalf) to investigate a claim -- for example, evaluating foundation damage, fire damage, or the cause of structural problems -- and you're paid a fee for that work, the engagement is a taxable "insurance investigation" service. You must charge Texas sales tax on your total fee, not just absorb it as a cost of doing business.

Insurance companies and claims adjusters

Expect sales tax to be added to invoices from engineers, adjusters, or other professionals you hire to investigate a policyholder's claim, as long as the property or person being investigated is in Texas and your company is an insurance carrier (or is otherwise doing business in Texas).

Accountants and tax professionals

The taxability turns on the service being an "insurance investigation" under § 3.355(a)(3) performed for a carrier, insured, policyholder, or related party for a fee, plus the § 3.355(d) nexus test. This letter is a narrow, fact-specific example (foundation-damage inspection reports) rather than a general ruling on all forensic-engineering work, so confirm the engagement actually fits the "insurance service" definition before applying it.

Common questions

Q: Does the engineer or the insurance company owe the sales tax?
A: The engineer is required to charge the insurance company sales tax on the total amount billed for the investigation.

Q: What makes this kind of engineering work taxable?
A: It qualifies as an "insurance investigation" under 34 Tex. Admin. Code § 3.355(a)(3), and § 3.355(b) makes insurance investigations taxable when performed for an insurance carrier, its insured, its policyholders, or others connected to a policy of insurance, for a fee.

Q: Does it matter where the property or the insurance company is located?
A: Yes. Under § 3.355(d), the service is taxable in Texas if the individual, entity, or property that is the object of the service is in Texas, and the paying company is either an insurance carrier as defined in the rule or is otherwise doing business in Texas.

Q: Could the answer be different for other types of engineering investigations?
A: Possibly. The letter states its opinion is based on the facts presented -- a residential foundation-damage investigation for an insurer -- and that the opinion may change if there are additional or different facts.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code § 3.355(a)(3) (definition of insurance investigation)
• 34 Tex. Admin. Code § 3.355(b) (taxability of insurance services performed for a carrier, insured, or policyholder)
• 34 Tex. Admin. Code § 3.355(d) (Texas nexus test for insurance services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9608L1431A05

Original ruling text

August 26, 1996

Dear ***:

Thank you for your letter of August 12, 1996, asking about the taxability
of the services provided by an engineer to investigate a claim made by an
insured party.

Scenario:
A professional engineer is engaged by the insurance company to investigate
a residential claim made by an insured. The engineer provides his written
report which addresses the condition of the dwelling, any foundation damage
or movement there may be, and the cause and origin of the foundation damage
or movement.

Question: Does the engineer pay state tax on his services and subsequently
charge the insurance company for this state tax?

Answer: The engineer is required to charge the insurance company sales tax
on the total amount charged for the insurance investigation. The enclosed
Section 3.355(a)(3) defines an insurance investigation. Subsections (b)
states that sales tax applies to the services defined in subsection (a),
paragraphs (1) through (6) when performed for an insurance carrier, its
insured, its policyholders, or others pertaining to a policy or policies
of insurance for monetary fees, dues, or other consideration.

"Insurance services will be subject to taxation in Texas if the individual,
entity, or property which is the object of the service is in Texas and the
company for which the services are performed is either an insurance carrier
as that term is defined in subsection (a)(7) of this section, or if not an
insurance carrier, is doing business in Texas." 34 T.A.C. Section 3.355(d).

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 1-800-531-5441, extension 3-4683. The direct line is
512/463-4683. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division

NOTE: Previous Accession Number 9608579L