Is a flood zone determination service -- checking FEMA flood hazard maps and certifying whether property is in a flood zone for mortgage lenders -- taxable in Texas as an information or insurance service?

Plain-English summary

A service company (referred to as "ABC Services Corp" in the letter) provides mortgage lenders with a specialized service: consulting FEMA's flood hazard boundary maps (FHBMs) and certifying on a federal form whether a property is in a flood zone. That determination helps lenders meet a federal notice requirement -- federally insured lenders must notify borrowers if a property is in a special flood hazard area, and federal law bars those lenders from making a loan secured by property in a flood zone unless the borrower carries adequate flood insurance.

This letter reversed the Comptroller's own prior positions on the same service. An earlier 1996 letter had classified it as a taxable "information service"; a later 1996 letter reclassified it as a taxable "insurance service." After reconsidering, the Comptroller concluded both were wrong: the flood zone determination is a non-taxable service that simply helps lenders comply with federal regulations, and it doesn't qualify as an insurance service under Rule 3.355(f). The Comptroller confirmed an even earlier 1991 letter reaching the same non-taxable conclusion was the correct one all along.

What this means for you

Flood zone determination companies and mortgage lenders

If your business (or a vendor you use) provides FEMA flood hazard map lookups and zone certifications to support mortgage lending compliance, that service is non-taxable in Texas -- it's neither a taxable information service nor an insurance service.

Accountants and tax professionals

This letter is a good illustration of the Comptroller changing its own classification after reconsideration, and shows the specific test applied to distinguish a compliance/due-diligence service from a taxable "information service" or "insurance service" under Rule 3.355(f).

Common questions

Q: Is a flood zone determination service taxable in Texas?
A: No, per this letter -- it's a non-taxable service that helps lenders satisfy federal flood-notice regulations.

Q: Did the Comptroller always treat this service as non-taxable?
A: No. The letter describes two intervening classifications (information service in 1996, insurance service later in 1996) that were both reversed by this letter, which restored the non-taxable conclusion from an earlier 1991 letter.

Q: Why isn't this an "insurance service"?
A: The letter states the determination does not qualify as an insurance service, applying Rule 3.355(f)'s treatment of insurance services.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.355(f) (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/9703135L

Original ruling text

March 4, 1997

Dear ****:

Thank you for your letter regarding the service in connection with the National
Flood Insurance Program. Your earlier letter and my response on this issue did
not identify your client.

The issue involved a service rendered by ABC SERVICES CORP (ABC) for mortgage
lending institutions. The service company provides the specialized service of
consulting flood hazard boundary maps (FHBM) and certifying on a Federal
Emergency Management Agency (FEMA) form if property is in a flood zone.

The service provided by ABC is one of two notice requirements that federal law
requires federally insured lenders to give. A notice is required if property
is located in an area that has been identified as a special flood hazard area.
Notice must also be given as to whether federal disaster relief assistance will
be available to the property in the event of a disaster caused by a flood.
Federal law prohibits any federally insured lender from extending a loan
secured by improved real property located in a special flood hazard area unless
the borrower has purchased flood insurance in an amount equal to the value of
the improvements. FEMA publishes the FHBMs to provide a preliminary indication
of where in a community there is at least a one percent chance of being flooded
in any given year.

After reviewing all of the information you provided and reconsidering your
argument, we agree that the determinations are non-taxable services to enable
lenders to satisfy federal regulations in order to provide financing. John
Christian's letter of August 29, 1991, was correct and the service does not
qualify as an insurance service. Please disregard our correspondence of July
18, 1996, classifying the service as an information service and the October 18,
1996 letter classifying the service as an insurance service. As you point out,
SEC. 3.355 (f) dealing with insurance services discuses the taxability of the
service. This opinion is based on the facts presented. If there are any
additional or different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 3-4675. The direct line is
(512) 463-4675. You also may write to Tax Administration Division, Comptroller
of Public Accounts.

Sincerely,
Tom Soto
Tax Administration Division