Two companies provide liability-investigation services to attorneys representing plaintiffs and defendants in injury cases -- not directly to insurance companies -- and argue that because they don't work on 'first-party' claims (an insured's own claim under their policy) and any insurance involved is only incidental to determining liability between litigants, their services shouldn't count as taxable insurance services. Is that right?

Plain-English summary

Two companies (Company A and Company B) provide liability-investigation services to attorneys — representing either plaintiffs claiming injury or defendants accused of causing it — not directly to insurance companies. They argued their services aren't taxable insurance services because: (1) they don't handle first-party claims (a claim the insured files under their own policy, as opposed to a third-party claim, made by an injured person against someone else's policy), and (2) whether either litigant has liability insurance is incidental to their real job, which is determining liability between the litigants, not processing insurance claims.

The Comptroller disagreed. Tax Code Sec. 151.0039 defines "insurance service" broadly to include insurance loss/damage appraisal, inspection, investigation, actuarial analysis, claims adjustment/processing, and loss prevention service — and Sec. 151.0101 makes insurance services a taxable service. If a company is paid to investigate a loss pertaining to insurance, its services are taxable insurance services, regardless of who hires it — the statute's own language notes services performed pursuant to a policy of insurance may be for an insurance carrier, its insured, its policyholders, or others (insurers, litigants, attorneys, etc.). And per Attorney General Opinion JM-1016, the Tax Code makes no distinction between purchasers of insurance services — so it doesn't matter whether the buyer is an insurer or a litigant's attorney, and it doesn't matter whether the underlying claim is first-party or third-party. Under Sec. 151.0101(b), the Comptroller has exclusive jurisdiction to interpret what activities count as taxable services, and based on the described activities and past similar rulings, the Comptroller concluded both companies are providing insurance services.

What this means for you

Litigation-support and liability-investigation firms working for attorneys

Don't assume you're outside the insurance-services tax net just because you're hired by an attorney rather than an insurance company, or because you're investigating liability generally rather than processing a specific insurance claim — if the work pertains to a policy of insurance and involves investigation/appraisal-type activities, it's likely taxable regardless of who's paying you.

Attorneys hiring investigation/appraisal services in injury cases

Expect sales tax on liability-investigation, loss-appraisal, or similar services tied to an insurance policy, whether you represent the plaintiff or the defendant, and whether the claim is first-party or third-party.

Accountants and tax professionals

A clean example of Sec. 151.0039's broad "insurance service" definition combined with the purchaser-neutral principle from AG Opinion JM-1016 — the taxability analysis turns on the nature of the service and its connection to an insurance policy, not on who buys it or which side of a first-party/third-party line the claim falls on.

Common questions

Q: Are liability-investigation services taxable only when purchased directly by an insurance company?
A: No — per AG Opinion JM-1016, the Tax Code makes no distinction between purchasers of insurance services (insurers, insureds, litigants, attorneys, etc.).

Q: Does it matter whether a claim is a first-party claim or a third-party claim?
A: No — the statute makes no distinction between first-party and third-party claims.

Q: What makes an investigation service a taxable "insurance service"?
A: Being paid to investigate a loss pertaining to a policy or policies of insurance, under Tax Code Sec. 151.0039's definition.

Q: Can I rely on this letter for my own investigation/appraisal business?
A: No. It's based on the specific facts presented and can be relied on only by the taxpayer to whom it was issued; other facts, even if similar, may produce a different result.

Citations and references

Statutes and rules:

• Texas Tax Code Section 151.0039 (definition of "insurance service")
• Texas Tax Code Section 151.0101 (definition of "taxable services," including insurance services)
• Texas Tax Code Section 151.0101(b) (Comptroller's exclusive jurisdiction to interpret taxable service activities)

Administrative precedent:

• Attorney General Opinion JM-1016 (Tax Code makes no distinction between purchasers of 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/9907538L

Original ruling text

July 13, 1999

Dear Mr. **:

Thank you for your letter concerning COMPANY A's and COMPANY B's Texas sales
tax responsibilities.

You point out that neither COMPANY A nor COMPANY B render services to insurance
companies, but rather to attorneys representing clients who allegedly have been
injured by the wrongful acts of others or for attorneys representing those who
allegedly committed the wrongful act resulting in injuries to others.

You also state that whether plaintiffs or defendants maintain liability
insurance is of no consequence to COMPANY A or COMPANY B You draw the
distinction between first-party claims and third-party claims. First-party
claims are claims filed by the insured under his or her policy. A third-party
claim is a claim made by the injured party against the insured's policy.

Finally, you state that COMPANY A and COMPANY B are not involved in first-party
claims and do not assist companies in determining whether a claim made against
the insurance company made by its insured is covered by the insurance. COMPANY
A and COMPANY B provide services to litigants to determine liability between
litigants and the existence of insurance is incidental.

We disagree. COMPANY A and COMPANY B provide taxable insurance services when
the services are performed for others pertaining to a policy or policies of
insurance.

Texas Tax Code Section 151.0039 defines "insurance service" to mean insurance
loss or damage appraisal, insurance inspection, insurance investigation,
insurance actuarial analysis or research, insurance claims adjustment or claims
processing, or insurance loss prevention service. Section 151.0101 of the Tax
Code then defines "taxable services" to include insurance services. Therefore,
if COMPANY A or COMPANY B is paid to investigate a loss pertaining to
insurance, then the services are taxable insurance services. Please note in
subsection (b) that services performed pursuant to policies of insurance may be
on behalf of an insurance carrier, its insured, its policyholders, or others
(e.g., insurers, litigants, attorneys, etc.). Attorney General Opinion JM-1016
states that the Tax Code makes no distinction between purchasers of insurance
services. The statute makes no distinction between first and third-party
claims.

Section 151.0101(b) if the Texas Tax Code (the Limited Sales, Excise and Use
Tax Act) gives the Comptroller the exclusive jurisdiction to interpret what
activities constitute taxable services. On the basis of the description of
your activities in light of how we have ruled in similar fact situations, we
must advise you that your firm is providing 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 if you have any
questions or need more information. My direct line is 512-463-4683. You may
also write to the Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division