Must a forensic engineering firm charge sales tax on fees for investigating the cause of a fire or explosion for a law firm or insurance company pursuing subrogation, as a taxable insurance service?

Plain-English summary

A Texas corporation ("Newco") provides forensic engineering services: it's retained by law firms and/or insurance companies to determine the cause of a major fire or explosion, views the scene, gathers and analyzes evidence, and provides expert testimony in the resulting litigation. Newco bills hourly plus expenses and delivers a report on the cause of the damage -- but doesn't value damages, only investigate cause. Critically, Newco's work here isn't used to decide whether the insured is entitled to policy benefits; it's used so the insurance company can determine whether it has subrogation rights (the right to recover from a third party who actually caused the damage, once the insurer has already paid the insured). Newco asked whether it must collect sales tax on these services, and whether the answer differs when it's hired by a law firm instead of directly by an insurance company. It also asked the Comptroller to distinguish an earlier 1996 letter opinion (9608L1431A05) involving a professional engineer whose investigation WAS used to determine whether a homeowner qualified for policy benefits.

The Comptroller held Newco's services are taxable insurance services. Rule 3.355(b)'s definitions of "insurance inspections" and "insurance investigations" are broad, and per Attorney General Opinion JM-1016, they extend to professional engineers (not just appraisers and adjusters). That same AG opinion held the statute provides no basis for distinguishing among purchasers of insurance services -- so it doesn't matter whether an insurance company or a law firm buys the service -- and that the timing of when the service provider is engaged is immaterial as long as the services pertain to a policy of insurance. That means Newco's distinction (subrogation determination vs. benefits-eligibility determination) doesn't take it outside the tax, since both still "pertain to a policy of insurance." The Comptroller also rejected two possible narrowing arguments: the Legislature's 1995 narrowing of "personal services" (Tax Code § 151.0045, referencing SIC Group 721/729) didn't touch the separate insurance-services tax under §§ 151.0039 and 151.0101(9); and while the Legislature separately required licensing for "security services" under the Private Investigators and Private Security Agencies Act, it imposed no similar licensing requirement for insurance services -- so a provider's lack of an insurance adjuster's license (or any other specific license) doesn't exempt its services from the insurance-services tax.

What this means for you

Forensic engineers, expert witnesses, and similar professionals serving insurers or law firms

If your engineering, investigative, or expert-testimony services relate to a policy of insurance -- even if you only determine cause (not damages or benefits eligibility) and even if you're hired by subrogation counsel rather than the insurer directly -- your services are likely taxable insurance services under Rule 3.355(b). Not holding an insurance-specific license doesn't change that.

Law firms and insurance companies retaining engineering experts

Expect sales tax to apply to fees for cause-of-loss investigations connected to an insurance policy, regardless of whether your firm or the insurance company is the direct purchaser, and regardless of when in the litigation the expert is retained.

Accountants and tax professionals

This letter is a useful illustration of how broadly Rule 3.355(b)'s "insurance services" definition reaches professional services adjacent to claims and litigation, and confirms that neither purchaser identity, engagement timing, nor professional licensing status narrows that reach -- only whether the service "pertains to a policy of insurance."

Common questions

Q: Do forensic engineers have to charge sales tax on fire/explosion cause investigations for insurance-related litigation?
A: Yes, per this letter -- these are taxable insurance services under Rule 3.355(b), as confirmed by Attorney General Opinion JM-1016's broad reading of the insurance-services definitions.

Q: Does it matter whether a law firm or the insurance company directly hires the engineer?
A: No. Per this letter and AG Opinion JM-1016, the statute provides no basis for distinguishing among purchasers of insurance services.

Q: Does it matter that the investigation supports a subrogation claim rather than a benefits-eligibility determination?
A: The letter doesn't treat that distinction as taking the service outside the tax -- per AG Opinion JM-1016, timing and purpose don't matter as long as the services pertain to a policy of insurance.

Q: Does the engineer need an insurance adjuster's license for the tax to apply?
A: No, per this letter -- the sales tax law doesn't require any particular license (like an insurance adjuster's license) for a service to be taxed as an insurance service.

Citations and references

Statutes, rules, and opinions:

• 34 Tex. Admin. Code Rule 3.355(b) (insurance services)
• Tax Code § 151.0039 and § 151.0101(9) (insurance services taxed)
• Tax Code § 151.0045 (definition of "personal services," referencing SIC Group 721/729)
• Tax Code § 151.0101(a)(3) (personal services as taxable services)
• Attorney General Opinion JM-1016 (broad reading of insurance services; no distinction among purchasers or engagement timing)
• Texas Private Investigators and Private Security Agencies Act § 13, Article 4413(29bb), Vernon's Civil Statutes (security services licensing, contrasted with insurance services)
• Letter Opinion No. 9608L1431A05 (Aug. 26, 1996) (distinguished: engineer's investigation there determined benefits eligibility)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9701253L

Original ruling text

January 29, 1997

Dear **:

Thank you for your letter of January 6, 1997, concerning the taxation of
services provided by your client, a Texas corporation ("Newco"), a provider of
specialized professional engineering services.

Facts:

Newco is a professional engineering company specializing in forensic
engineering. It is retained by law firms and/or insurance companies in order
to determine the cause of a major fire or explosion. In such regard, it
provides expert testimony in connection with ensuing litigation. Newco in
connection with its services views the scene of the fire and/or the explosion.
Further, Newco in connection with its services gathers, retains and analyzes
any evidence of the cause of such fire and/or explosion. The law firm or
insurance company which retains Newco uses the information obtained by Newco in
connection with such litigation. In the case where a law firm retains Newco,
the law firm's client is generally an insurance company.

Newco typically invoices its clients on an hourly fee basis plus out of pocket
expenses. Newco then provides a report detailing the cause for the fire and/or
explosion along with a summary of its scene examination and other related documentation.

Newco's services are limited to professional engineering related services and
do not include the valuation of damages, only the cause of damage. Since the
fire and/or explosion has already occurred, such services are not utilized in
connection with the furnishing with insurance coverage or other similar
activity. Further, the services performed by Newco are not utilized to
evaluate whether the insured was entitled to the payment of benefits under the
subject commercial liability insurance policy. Newco's evaluation and expert
testimony is utilized by the law firm and/or insurance company in order to
determine whether or not such insurance company has any rights of subrogation
under its policy. This right of subrogation provides to the insurance company
a right to reimbursement from the third party (other than the insured) which
caused a fire or explosion damages in an amount equal to the amount that the
insurance company paid to the insured.

In connection with Newco's services, it does not provide any information
regarding insurance coverage, valuation or damage appraisal. In such regard,
employees or contractors of Newco have no training in any of the following
areas: (i) insurance policies and procedures, (ii) coverage interpretation,
(iii) appraisals, (iv) settlements, negotiations of payments of claims, (v)
investigation to determine eligibility for insurance coverage or (vi) the
calculation of premiums, reserves, rates, refunds, dividends or benefits.

Issue:

Section 3.355 entitled Insurance Services under Title 34 of the Texas
Administrative Code defines insurance inspections and insurance investigations.
These definitions are extremely broad in scope and appear to encompass the
services of not only appraisers and adjusters, but professional engineers,
certified public accountants and attorneys as well. In light of the foregoing,
advice is requested as to whether Newco is obligated to collect sales taxes
from its clients for services that it renders in connection with the evaluation
of the cause of a fire and/or explosion as well as the expert testimony that it
provides in connection therewith. Further, advice is requested as to whether
such services are taxable if provided to a law firm rather than to an insurance
company.

You also wish to distinguish Letter Opinion Number 9608L1431A05 which is dated
August 26, 1996 under which a professional engineer was held to be required to
charge an insurance company sales tax on the amount charged for its insurance
investigation. Under such letter opinion, the professional engineer's services
were utilized in order to make a determination as to whether the homeowner (the
insured under the policy) was entitled to benefits under such insurance policy.
In that case, the cause or origin of the foundation damage or movement was
relevant as to whether the homeowner was entitled to benefits. In the subject
case, Newco is retained in order to determine the cause of a fire and/or
explosion so that the insurance company may determine if it is entitled to
reimbursement from a third party for amounts that the insurance company may
have already paid to the insured. Thus, benefits payable are not relevant in
the case of Newco.

Response: In Attorney General Opinion JM-1016, the Comptroller asked if sales
tax applied to insurance services bought by the insured or an attorney rather
than the insurer to determine whether a settlement offer should be accepted.
The Attorney General replied: "The statute provides no basis for distinguishing
among purchasers of insurance services." Section 3.355(b) makes no such
distinction.

Your conclusion that the definitions are extremely broad and emcompass the
services of engineers is confirmed by the attorney general opinion.

The attorney general also opined that the timing of the engagement of an
insurance services provider is immaterial as long as the services pertain to a
policy of insurance.

In narrowing the Comptroller's authority to interpret what constitute "personal
services" as taxed under Sec. 151.0101(a)(3), the Legislature added Sec.
151.0045 defining "personal services" to mean "those listed as personal
services under Group 721, Major Group 72 of the Standard Industrial
Classification Manual, 1972, and includes massage parlors, escort services, and
Turkish baths under Group 729...but does not include any other services under
Group 729..." The Legislature did not narrow the Comptroller's jurisdiction in
interpreting insurances services defined and taxed under Secs.151.0039 and
151.0101(9).

The Legislature defined a "security service" as a service for which a license
is required under Section 13, Private investigators and Private Security
Agencies Act (Article 4413(29bb) Vernon's Civil Statutes). In the area of
insurance services, the Legislature did not require persons performing
insurance services to be licensed under the Insurance Code.

The sales tax law does not require the provider of an insurance service to hold
any particular license that may be required under any other statute, for
example an insurance adjuster's license required under the Texas Insurance
Code.

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