Are fees paid to a third-party adjusting company that inspects plumbing damage claims and coordinates repairs under a national class action settlement taxable 'insurance services' in Texas?

Plain-English summary

The Consumer Plumbing Recovery Center (CPRC) was created under a Tennessee court's supervision to administer a national class action settlement compensating people harmed by faulty polybutylene plumbing systems. CPRC verifies claim eligibility, initiates repairs or reimbursement, and processes payment — using a national third-party adjusting company to examine claimants' plumbing, determine eligibility, assign repair work to local contractors, and submit bills. The adjusting company charges CPRC a standard fee per claim, and CPRC asked whether that fee is a taxable service.

The Comptroller said no, but for a specific reason: these adjusting services are performed under a court-supervised Settlement Agreement, not under an insurance policy. Rule 3.355(b) taxes "insurance services," but that category only reaches services tied to an actual policy of insurance — a legal settlement isn't one. So the adjusting fees fall outside the taxable insurance-services category.

That said, the letter flags a compliance step: Rule 3.355(g) requires a provider of what would normally be taxable insurance-type services to obtain an exemption certificate when the services actually fall outside that category. So CPRC needs to issue the adjusting company an exemption certificate specifically stating that its services don't pertain to insurance, to document why no tax is being charged.

What this means for you

Class action settlement administrators using third-party adjusters

If your adjusters' work looks like insurance claims adjusting but is actually performed under a court settlement rather than an insurance policy, the fees aren't taxable insurance services — but you still need to issue the adjuster a Rule 3.355(g) exemption certificate documenting that the services aren't insurance-related, rather than just assuming no certificate is needed.

Third-party adjusting or claims-processing companies

Don't assume all claims-adjusting-style work is automatically taxed (or automatically exempt) — the taxable "insurance services" category in Rule 3.355(b) turns on whether the work is performed under an actual insurance policy, not just on whether the work resembles what an insurance adjuster does.

Accountants and tax professionals

This letter is a useful reminder that "insurance services" is a defined, policy-tied category — claims-adjuster-style work performed under a settlement, court order, or other non-insurance arrangement can look identical in substance yet fall outside the taxable category, provided the paperwork (the Rule 3.355(g) exemption certificate) is in place.

Common questions

Q: Are fees paid to a claims adjuster always taxable as "insurance services" in Texas?
A: No. The taxable insurance-services category applies to services performed under an actual insurance policy. Services performed under a court-supervised settlement agreement, as here, fall outside that category.

Q: If the services aren't taxable, do we still need any paperwork?
A: Yes — Rule 3.355(g) requires an exemption certificate from the entity paying for the services, stating that the services don't pertain to insurance, even though no tax is due.

Q: Can I rely on this letter for my own settlement-administration arrangement?
A: No. This opinion is based on the facts presented, and additional or different facts may change the result; it binds the Comptroller only as to the taxpayer it was issued to.

Citations and references

• 34 Tex. Admin. Code Rule 3.355(b) (taxable insurance services — tied to an actual insurance policy)
• 34 Tex. Admin. Code Rule 3.355(g) (exemption certificate required when services would normally be taxable insurance services but are not)

Subject

Adjusting Services/Re — Inspecting Work Performed As Result Of Class — Action Settlement For Faulty Plumbing System — Not Taxable 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/9712575L

Original ruling text

December 16, 1997

Dear **:

Thank you for your letter of December 11, 1997, concerning the taxability of
adjusting services provided pursuant to a national class action settlement for
faulty repairing and/or specific plumbing system failures.

Facts: The Consumer Plumbing Recovery Center (CPRC) was established under
supervision of the Court to administer relief for a national class action
settlement approved in the Chancery Court for Obion County, Tennessee (Civil
Action No. 18,844). This class action settlement provides relief to eligible
class plaintiffs for damages caused by polybutylene plumbing systems. CPRC
distributes and receives claim eligibility forms from class action plaintiffs,
verifies the eligibility of claims under the class action Settlement Agreement,
initiates the repair or reimbursement process (if eligible), and processes
payment for all associated expenses.

The repair and/or reimbursement process is coordinated by one of your vendors,
a national third party adjusting company. This process includes the
examination of claimants' plumbing system/loss property, determination of
claimants' eligibility under the Settlement Agreement, assignment of repair
work to area contractors (if eligible), and submission of all bills to CPRC for
payment. For these services, this third party adjusting company bills CPRC a
standard fee for each claim.

Question: Is this fee for the adjusting services, paid to your national third
party adjusting company a taxable service for Texas Sales and Use Tax purposes?

Answer: The fees paid to the national adjusting services are not taxable
because services are performed under a Settlement Agreement, not pursuant to a
policy or policies of insurance [see the Rule 3.355 (b) concerning insurance
services]. Rule 3.355(g) requires a provider of insurance services to get an
exemption certificate when rendering services that would normally be taxable.
Thus, you should issue an exemption certificate the adjusting company stating
the services do not pertain to insurance.

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