A metal-failure-analysis forensic engineering firm that rarely works directly for insurance companies (mostly working for chemical plants/refineries, plaintiff attorneys, and defense attorneys) asks a detailed set of questions about exactly when its investigative work is taxable as an 'insurance service' — including cross-state cases where the incident, the client, or both are outside Texas.

Plain-English summary

A metal-failure-analysis forensic engineering firm — in business since 1957, historically never collecting sales tax — had heard through industry channels that firms doing this kind of work must now collect Texas sales tax whenever a project "involves insurance." Since most of its own work is for chemical plants and refineries (purely technical, no insurance angle) or for attorneys (plaintiff or defense), with hardly any direct insurance-company work, the firm asked the Comptroller a detailed series of questions to pin down exactly when its work is taxable. This letter (issued about a week after a companion ruling on the same subject, 9801215L) answers with a specific, practical framework built around Attorney General Opinion JM-1016 (1989), which held that forensic engineering services can be taxable insurance services under Tax Code § 151.0039, with no distinction among purchasers — insurance company, policyholder, plaintiff's attorney, or defense attorney all get the same analysis.

Direct insurance-company clients: always taxable — collect sales tax automatically, no engagement letter needed, whether the insurer is Texas-based or an out-of-state adjuster, as long as the object of the service is in Texas (or the insurer otherwise does business in Texas).

Everyone else (plaintiff attorneys, defense attorneys, direct corporate clients): use a signed engagement letter where the client represents in writing that the engagement doesn't pertain to a policy of insurance. If the client signs it, don't charge tax. If the client refuses or fails to return it, charge tax to be safe. Because sales tax is a transaction tax assessed case-by-case, a new engagement letter is needed for each new case, even from a repeat client — but once a client has an engagement letter on file for a particular case, no additional letters are needed for that same case.

Plaintiff vs. defense attorneys make no difference. Whether the firm is investigating liability for a plaintiff (who's typically indifferent to whether the ultimate payer is the defendant or the defendant's insurer) or working for a defense attorney (who may never have direct contact with the insurance company at all), the same engagement-letter logic applies — sign the letter, no tax; don't sign, charge tax.

Cross-border cases turn on where the "object of the service" is located, not where the client is. The letter works through several scenarios: if the incident/property under investigation is in Texas and the purchaser is an insurance carrier or otherwise doing business in Texas, the work is taxable. If a Texas lawyer represents an out-of-state defendant but the incident occurred in Texas and pertains to insurance, it's taxable; if the incident occurred outside Texas, it's not — regardless of where the lawyer or client is based. And if both the client and the underlying incident are entirely outside Texas, no Texas sales tax applies at all, even though the investigation is physically performed in the firm's Texas laboratory.

What this means for you

Forensic engineers, consultants, and technical experts serving both plaintiff and defense sides

Collect tax automatically on direct insurance-company work. For every other client, use a signed engagement letter (one per case) declaring no insurance-policy involvement — that protects you from tax liability if you later turn out to be wrong, while a client's refusal to sign should prompt you to charge tax as a precaution.

Firms with multi-state clients or investigations

Taxability tracks the location of the "object of the service" — the incident, property, or site being investigated — combined with whether the purchaser does business in Texas. A Texas-based lab investigating an out-of-state incident for an out-of-state client owes no Texas tax even though the physical work happens in Texas.

Accountants and tax professionals

This letter is a detailed operational companion to the earlier, more conceptual forensic-engineers ruling (9801215L) from the same period — it works through the mandatory-collection case (direct insurance clients), the engagement-letter mechanism for everyone else, and a full cross-border sourcing framework based on Rule 3.355(d).

Common questions

Q: Do I have to collect sales tax on all my forensic engineering work?
A: Only automatically for direct insurance-company clients. For other clients, use a signed engagement letter to document that the work doesn't pertain to an insurance policy — if signed, don't charge tax; if the client won't sign, charge tax.

Q: Do I need a new engagement letter for every project, even from a repeat client?
A: Yes, for each new case — sales tax is a transaction tax assessed case-by-case. But you don't need multiple letters for the same case.

Q: Does it matter whether my client is a plaintiff's attorney or a defense attorney?
A: No. The sales tax statute makes no distinction among purchasers of insurance services — the same engagement-letter analysis applies either way.

Q: What if the incident I'm investigating happened outside Texas, but my client is a Texas company?
A: If the object of the service (the incident/property) is outside Texas, the service is not taxable, even if the purchaser does business in Texas.

Q: What if both my client and the incident are outside Texas, even though I do the analysis in my Texas lab?
A: No Texas sales tax is due — the location of your lab doesn't matter if the object of the service is outside Texas.

Q: Can I rely on this letter for my own forensic engineering practice?
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

• Tex. Tax Code § 151.0039 (definition of insurance service)
• 34 Tex. Admin. Code Rule 3.355(a)(3) (insurance investigation, including liability assessment pertaining to a policy of insurance)
• 34 Tex. Admin. Code Rule 3.355(a)(7) (definition of insurance carrier)
• 34 Tex. Admin. Code Rule 3.355(b) (insurance services taxable regardless of purchaser)
• 34 Tex. Admin. Code Rule 3.355(d) (sourcing based on location of the object of the service and purchaser's Texas business presence)
• 34 Tex. Admin. Code Rule 3.355(g) (transaction-by-transaction taxation)
• Attorney General Opinion JM-1016 (1989) (forensic engineering services as taxable insurance services; no distinction among purchasers)

Subject

Forensic Engineers — Evaluations/Investigations Of Accidents, Fires, Structural Damages Connected With Insurance Claims

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9801459L

Original ruling text

January 23, 1998

Dear Mr. **:

Thank you for your letter of January 9, 1998, asking about your company's Texas
sales tax responsibilities as a consulting engineering firm primarily
conducting metal failure analysis.

Facts: Your company has been in business in ** since 1957. Your
primary business is metal failure analysis which is considered as an
engineering service. As such, you have never collected sales tax on you
services. Recently, as a result of litigation between a much larger
competitor, you have been told that you must now collect state sales tax on any
project which involves insurance or an insurance claim.

As you understand it, the companies involved in the litigation do most of their
work for insurance companies. You, on the other hand, do hardly any. The term
"involving insurance" is nebulous at best and you have some questions.

Response: There has been no litigation. However, there was a meeting held in
** November 7, 1997. Wade Anderson, Director of Tax Policy for the
Comptroller's Office, I met with representatives from several engineering firms
to discuss this matter.

Enclosed is Attorney General Opinion JM-1016 (1989) in which the attorney
general concluded that the services provided by a forensic engineer for others
constitute insurance services under Texas Tax Code Section 151.0039. Please
note that the attorney general specifically ruled that the sales tax statute
makes no distinction between purchasers of insurance services. We interpret
that to mean that insurance services are taxable when performed pursuant to a
policy of insurance regardless whether the purchaser of the services is an
insurance company, policy holders or others. See Rule 3.355(b) concerning
insurance services.

First, do you have to send a letter and keep it on file for all engineering
clients, even if you already know who they are and know that there is no
insurance involvement? That would be extremely tedious, especially for repeat
customers. On the other hand, if you are audited, what will you need to have
to show what should be taxable an what should not?

Response: No. You should add sales tax to charges for services performed for
insurance companies. The engagement letter (copy enclosed) should be to
clients other than insurance companies as an aid in helping you determine
whether the charges relate to insurance.

When a client is working for a non-insurance customer and the client has filed
the engagement letter declaring that insurance is not involved, you need not
get additional letters from the client for services related to this particular
case. However, if this client request services for a different client, you
should get a separate engagement letter. The sales tax is a transaction tax and
each transaction is taxed or not on its own merit under the sales tax law. See
Rule 3.355(g).

While it may seem tedious, the engagement letter will provide sufficient
documentation that the services provided does not relate to a policy of
insurance.

Second, you rarely work for an insurance company or an insurance adjuster. If
you do, you assume that the work is clearly taxable. Is this true if the
client is an insurance adjuster from out of state?

Response: You should presume the work is taxable when the object of the service
is in Texas and the purchaser of the service is an insurance carrier as that
term is defined in Rule 3.355(a)(7), if not an insurance carrier, is doing
(engaged in) business in Texas. See Rule 3.355(d).

Third, most of your investigative work is for chemical plants and refineries
and their work is purely technical, with no insurance involvement. The next
biggest customer base, however, is attorneys. These may be either plaintiff or
defense. If you work for a plaintiff attorney and he is representing a person
or company (but not an insurance company), is this service taxable? To your
way of thinking, there is no insurance involvement except if a defendant has
insurance and the insurance company ultimately pays the bill. You are not
working to investigate coverage. You are working to assess liability.

Response: Again, the sales tax statute makes no distinction among purchasers of
insurance services. You will not have to collect sales tax if the attorney
responds in the negative to the questions on the engagement letter. You are
performing an insurance investigation when working to assess liability when the
services pertain to a policy of insurance. See Rule 3.355(a)(3).

Fourth, in the same scenario, when you work for defense attorneys, you never
deal with the insurance companies. You have no contact with them at all and
don't necessarily know if the bills are ultimately being paid by an insurance
company or directly by a client. Your bill and your reports go to the lawyer.
Again, your charge is to determine cause of failure. You do not make any
recommendations as to coverage, although clearly, you work cold impact someone
else's determination of policy coverage. Under which scenarios is this work
taxable?

Response: You will not charge tax if the attorney returns the engagement letter
with the questions answered in the negative. You should charge sales tax if
the client fails or refuses to complete and return the engagement letter.

Neither the sales tax law nor Rule 3.355 requires a "direct test" for the
services provided by a service provider to be insurance claims processing or
insurance claims adjusting.

Fifth, carrying the question #4 a bit further, you have a number of cases where
a Texas lawyer represents a Louisiana defendant in such a case (the defendant
may or may not be insured). If the incident which you are investigating in
your laboratory in **, Texas occurred out of Texas, is the service
taxable?

Response: The services would be taxable if the entity or the property that is
the object of the service is in Texas and the entity is engaged (doing
business) in Texas. If the object of the service is outside Texas but the
purchaser is engaged in business in Texas, the services will not be taxable.

Sixth, likewise, if a Louisiana attorney represents a Texas company in a
similar situation, regardless of where the incident occurred, is your work
taxable?

Response: If the incident occurred in Texas and pertain to policy of insurance
(the attorney answered one of the questions on the engagement letter
affirmatively), the services would be taxable. If the incident occurred
outside Texas, the services would not be taxable.

Finally, if you are working for a client out of Texas on a case from outside
Texas, is your work subject to Texas sales tax?

Response: No. If the object of the insurance service is outside Texas, no
Texas sales tax is due. See Rule 3.355(d).

I am enclosing the guidelines passed out to the representatives of forensic
engineering firms that attended the ** meeting and a copy of the
engagement letter. Again, the attorney general opinion does not limit the
taxation of insurance services to those purchased only by insurance carriers or
insurance claims adjusters.

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