Is Texas sales tax owed on claims processing services performed for the Texas Public Entity Excess Insurance Pool?

Subject

Texas Public Entity Excess Insurance Pool — Claims Processing Services Performed For The Pool Are Not Taxable

Plain-English summary

A taxpayer (identity redacted) performed claims processing services for the Texas Public Entity Excess Insurance Pool ("the Pool") or for an administrator the Pool hired, and asked the Comptroller's Tax Policy Division whether those services were taxable as insurance services.

The answer was no, for two independent reasons the letter lays out:

1. The Pool is not "insurance." Texas Rule 3.355(b) taxes insurance services when they are performed for consideration under a policy or policies of insurance. But Texas Insurance Code Art. 21.49-11, Section 20 specifically says the Pool "is not considered insurance under the Insurance Code and other laws of this state," and the State Board of Insurance has no jurisdiction over it. Since there's no underlying "insurance," claims processing or claims administration fees paid by the Pool aren't taxable as an insurance service.

2. The Pool is an exempt political subdivision. Separately, because services performed for the Pool (directly or through a Pool-hired administrator) are services performed for a political subdivision of the State of Texas, they fall under Rule 3.322(c)(5), which lists entities that are always exempt, and under Government Code § 791.003(4)(A), which defines political subdivisions as including local governments and combinations of local governments.

The letter walks through the statutory scaffolding behind the Pool: it's created under Texas Insurance Code Art. 21.49-11 when at least 25 public entities agree in writing to provide themselves excess liability and workers' compensation coverage, operating under the authority of the Interlocal Cooperation Act (now codified at Government Code Chapter 791), which lets local governments contract with one another and with state agencies. The letter notes the opinion is based on the facts presented and could change with different facts.

What this means for you

Third-party administrators and claims processors working with public-entity pools

If you process or administer claims for the Texas Public Entity Excess Insurance Pool, or for an administrator that the Pool has hired, this ruling says your fees are not subject to Texas sales tax as insurance services. That holds whether you contract directly with the Pool or through its administrator.

Cities, municipalities, and other public entities participating in interlocal insurance pools

The ruling confirms that a liability/workers'-compensation pool formed by 25+ public entities under the Interlocal Cooperation Act (Government Code Chapter 791) is treated as a political subdivision of the state, not as an insurance company — which is why services purchased for the pool can qualify for the "always exempt" entity treatment under Rule 3.322(c)(5).

Accountants and tax professionals advising insurance-adjacent service providers

Don't assume every claims-related service tied to a "pool" or "fund" is taxed the same as services performed under a conventional insurance policy. Here, the taxability turned on two separate legal facts — the Pool's statutory carve-out from the definition of "insurance," and its status as a political subdivision — either of which independently supported the exempt result.

Common questions

Q: Are claims processing services performed for the Texas Public Entity Excess Insurance Pool taxable?
A: No. The letter states plainly: "The fees received by TP for performing claims processing services or administering claims pursuant to the Pool are not taxable as an insurance service because the Pool is not insurance."

Q: Does it matter whether the taxpayer contracts directly with the Pool or with an administrator the Pool hired?
A: No. The letter says: "If the services are performed for the Pool, either directly or through an administrator hired by the Pool, the services and fees are not taxable."

Q: Why isn't the Pool considered "insurance"?
A: Texas Insurance Code Art. 21.49-11, Section 20(a) states that, except as provided in subsection (b), "the pool is not considered insurance under the Insurance Code and other laws of this state, and the State Board of Insurance has no jurisdiction over the pool."

Q: What is the Texas Public Entity Excess Insurance Pool?
A: Per Texas Insurance Code Art. 21.49-11, Section 2(a), it is created "[o]n written agreement of the presiding officers of not fewer than 25 public entities in this state ... to provide excess liability and workers' compensation insurance coverage to a public entity and its officers and employees."

Q: Could this outcome change under different facts?
A: Yes — the letter states "[t]his opinion is based on the facts presented. If there are additional or different facts, the opinion may change."

Citations and references

Statutes and rules (as cited in the letter):

• Section 3.355(b) concerning insurance
• Section 3.322(c)(5) concerning entities that are always exempt
• Texas Insurance Code Art. 21.49 Sec. 20
• Texas Insurance Code Art. 21.49-11 Section 1 (definitions of "pool," "fund," "public entity," "association," "insurance")
• Texas Insurance Code Art. 21.49-11 Section 2(a) (creation of the pool)
• Texas Insurance Code Art. 21.49-11 Section 20 (pool not considered insurance)
• Texas Insurance Code Art. 4.11A, Section 1 (administrative services tax)
• Government Code 791.001, 791.002, 791.025 (Interlocal Cooperation Act)
• Government Code 791.003(4)(A) and 791.003(5) (definitions of local government / political subdivision)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9610L1437G04

Original ruling text

DATE: October 22, 1996

TO: Robert Krahn, Tyler Audit Office (2I51)

FROM: Eddie C. Washington, Tax Policy Division

SUBJECT: Taxation of Claims Processing Services Performed Pursuant to the
Texas Public Entity Excess Insurance Pool (Pool)

RE: *** (TP)
Taxpayer Number *****

Question: Are claims processing services performed by TP for theTexas Public
Entity Excess Insurance Pool or an administrator hired by the Pool taxable?

Answer: No. Section 3.355(b) concerning insurance
services taxes insurance services as defined in subsection (a) when performed
for consideration pursuant to a policy or policies of insurance. The fees
received by TP for performing claims processing services or administering
claims pursuant to the Pool are not taxable as an insurance service because the
Pool is not insurance (Texas Insurance Code Art. 21.49 Sec. 20).

If the services are performed for the Pool, either
directly or through an administrator hired by the Pool, the services and fees
are not taxable because the Pool is a political subdivision of the State of
Texas under Section 3.322(c)(5) concerning entities that are always exempt and
Government Code 791.003(4)(A).

Texas Insurance Code Art. 21.49-11. Section 1. defines the following:

The "pool" as "the Texas public entity excess insurance pool."

The "fund" as "the Texas public entity excess insurance fund."

"Public entity" to mean "a city or a group of cities
who have formed an insurance pool under the provisions of The Interlocal
Cooperation Act, (Article 4413(32c), Vernon's Texas Civil Statutes.)" [Note:
Article 4413(32c) was repealed in 1991 and is now Government Code 791.001, et.
seq.]

"Association" to mean "an association whose governing board is designated by
this article to administer the pool."

"Insurance" to mean "liability insurance or workers" compensation insurance."

Texas Insurance Code Art. 21.49-11 Section 2. (a) on
the creation of a pool states: "On written agreement of the presiding officers
of not fewer than 25 public entities in this state, the Texas public entity
excess insurance pool is created to provide excess liability and workers'
compensation insurance coverage to a public entity and its officers and
employees as provided by this article."

Texas Insurance Code Art. 21.49-11 Section 20 reads:

(a) Except as provided by Subsection (b) of this
section, the pool is not considered insurance under the Insurance Code and
other laws of this state, and the State Board of Insurance has no jurisdiction
over the pool.

(b) The pool is subject to Articles 1.24A, 1.24B, and 21.21 of this code.

(Emphasis addded.)

Texas Insurance Code Art.4.11A. Section 1. imposed an
administrative services tax on any form of compensation received by an
insurance carrier for performing or providing any service, function, or duty or
acting in any capacity enumerated therein. However, this article specifically
does not apply to a person receiving consideration from a unit or units of
local government that have organized under The Interlocal Cooperation Act
(Article 4413(32c) or Article 4413(32i), Vernon's Texas Civil Statutes) to
provide group workers' compensation, health, accident, dental, disability, and
life insurance solely to local government employees.

Government Code Chapter 791 is known as Interlocal
Cooperation Act. "The purpose of the chapter is to increase the efficiency and
effectiveness of local governments by authorizing them to contract, to the
greatest possible extent, with one another and with agencies of the state."
Government Code 791.001 and 791.002. Section 791.025 allows a local government
or local governments to contract with the state or a state agency to purchase
goods and services.

Local government is defined in 791.003(4)(A) and (B) as
a "county, municipality, special district, or other political subdivision of
this state or a state that borders this state; or combination of two or more of
those entities." The term "political subdivision" includes any corporate and
political entity organized under state law." Government Code 791.003(5) with
emphasis added.

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

NOTE: Previous Accession Number 9610690L