My insurance brokerage sometimes charges clients a fee instead of taking a sales commission, and we serve both Texas and out-of-state clients -- when is that fee taxable as an 'insurance service,' and what happens with multi-state customers?

Plain-English summary

A firm that places and services insurance policies for clients asked the Comptroller to confirm its understanding of when its work counts as a taxable "insurance service" under Rule 3.355.

Commission vs. separate fee. If the firm is paid only through the commission it would normally earn on placing a policy -- or through a flat fee charged purely in place of that commission -- none of that compensation is a taxable insurance service. The Comptroller confirmed this is true as long as the firm isn't separately charging for performing the insurance services listed in Rule 3.355(a)(1)-(5), and the amount allocable to placement/servicing (i.e., the commission) isn't subject to any "reasonableness" test -- the Comptroller doesn't second-guess whether the commission is a fair price for the work.

Multi-state customers. A customer that benefits from the insurance services both inside and outside Texas can give the firm an exemption certificate claiming multi-state benefit. That shifts responsibility for the tax: the firm doesn't have to collect or remit Texas tax on the taxable portion, and the customer instead reports and pays the Texas-apportioned share itself.

No retroactive enforcement. The Comptroller also confirmed it would enforce these taxable-insurance-services rules only going forward from the date of an earlier (August 1996) guidance letter, not retroactively.

The bottom line the firm asked to confirm in writing: insurance services aren't taxable when provided to a customer without a separate charge (i.e., compensation comes only through the commission). But if the firm charges a customer a separate amount over and above what it's paid as commission for the policy, that separate charge is taxable under Rule 3.355(e) -- regardless of how the underlying services (administration, marketing/risk funding, claims management, risk control, quality control) are described in a sales proposal, since the same services are provided whether the client is charged a commission or an equivalent fee.

What this means for you

Insurance brokers, agents, and risk-management firms

Structure billing so your compensation flows through the commission (or a fee that simply substitutes for it) rather than a separate line-item charge for insurance services -- that keeps the compensation untaxed. The moment you bill a client a distinct fee on top of the commission for insurance-related work, that extra charge becomes taxable.

Firms serving clients with both in-state and out-of-state operations

Get a multi-state-benefit exemption certificate from the customer up front. It moves the Texas tax-reporting burden from you to the customer for the Texas-apportioned share, rather than requiring you to work out an in-state/out-of-state split yourself.

Accountants and tax professionals

This letter is a useful confirmation that Rule 3.355's line is drawn at separate charges, not at the substance or scope of the underlying services -- the same five categories of insurance-related work (general administration, marketing/risk funding, claims management, risk control/stewardship, and quality control) can be taxable or not purely depending on whether they're billed as a distinct fee or folded into the commission.

Common questions

Q: Is my commission on an insurance policy placement taxable?
A: No -- a commission (or a fee charged purely in lieu of a commission) for placing and servicing an insurance policy is not a taxable insurance service.

Q: What if I charge my client an extra fee on top of my commission for insurance-related work?
A: That separate fee is taxable under Rule 3.355(e), even if the underlying work is similar to what your commission already covers.

Q: How do I handle a customer that benefits from my services both in and out of Texas?
A: Have the customer give you an exemption certificate asserting multi-state benefit. You then aren't responsible for collecting Texas tax, and the customer reports and pays the Texas-apportioned share directly.

Q: Can I rely on this letter for my own insurance-services billing?
A: No -- this opinion is based on the specific facts presented and can change with different facts; it can be relied on only by the taxpayer to whom it was issued.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.355 (taxable insurance services; (a)(1)-(5) definitions; (e) separately charged fees)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9701214L

Original ruling text

January 27, 1997

Dear **:

Thank you for your letter of December 19, 1996, as a follow-up to our December
5, 1996 meeting.

Confirming the points discussed at our meeting, you understand the
Comptroller's position as follows:

(1) If a fee is charged instead of a commission on the sale of an insurance
product, and services are rendered in exchange for the fee, the entire fee will
be considered a taxable insurance service unless an allocation is made. Fees
allocable to placement of the insurance policy and its servicing, and fees
collected in lieu of commissions that otherwise would be received on such
placement, would not be taxable as an insurance service. Further, if all
compensation received is through the commission structure, then the
compensation is not taxable. The amount of compensation allocable to the
placement and servicing of the insurance (i.e., the commission) is not subject
to any "reasonableness" test.

Response: This is true when your client does not charge for performing
insurance services as defined in Section 3.355(a)(1) through (a)(5).

(2) A multi-state customer purchasing insurance services benefitting both Texas
and out-of-state locations is responsible for issuing to the provider an
exemption certificate asserting a multi-state benefit. The provider is then not
responsible for collecting or remitting the Texas tax on taxable insurance
services. The customer is then responsible for reporting and paying the tax on
the portion of the fees that are taxable in Texas.

Response: Correct.

The Comptroller will enforce the taxable insurance services provisions outlined
in its August 1996 letter, only as of the date of the letter, and not
retroactive to any date prior to the date of the letter.

Response: Correct.

You enclosed an excerpt from your client's sample proposal outlining general
information regarding the firm, and summarizing services provided to its
clients. The sample proposal also describes the various methods of
compensation that are offered to its clients, including commissions, negotiated
commissions, and fee arrangements.

Part 2 of the proposal is headed "Scope of Services." These services are
categorized in 5 areas: general administration, marketing and risk funding,
claims management, risk control and stewardship and quality control. Generally,
the same services would be provided to a client if the client is charged a
commission or a fee in lieu of a commission. As an example, the sample proposal
shows that the client is given the option on how to compensate the firm. All of
these services support the placement of insurance coverages. Therefore, it is
our understanding that these services can all be considered as non-taxable.

You request written confirmation that the comptroller does not disagree with
your position.

Response: Insurance services are not taxable when provided by your client
without charge to its customer. If insurance services are provided to a
customer for a separate amount over and above the amount paid as a commission
for a policy, the separate charge is taxable. See Section 3.355(e) concerning
insurance services.

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