Are rate modifiers a Texas-based insurer buys to underwrite worker's compensation policies for insureds in other states taxed as data processing services or as insurance services, and does out-of-state use reduce the tax?

Plain-English summary

An insurance company asked the Comptroller about the taxability of "rate modifiers" it purchases to help underwrite worker's compensation policies for insureds located in other states.

The Comptroller classified these purchases as data processing services, not insurance services. That classification matters because a Texas-based insurer's purchase of a data processing service is taxable only to the extent the benefit of use is in Texas — since these rate modifiers are used to underwrite policies for out-of-state insureds, much of the benefit falls outside Texas. The purchaser may issue an exemption certificate claiming the multi-state benefit exemption, and should accrue and pay Texas sales tax only on an allocated portion reflecting the in-state versus out-of-state use, per Rule 3.330(a) and (f).

What this means for you

Insurance companies buying data-driven underwriting tools

If you buy underwriting tools, rate data, or similar data processing services used across multiple states, don't assume the full purchase price is taxable in Texas just because your company is based here. Classify the purchase correctly (data processing vs. an insurance-specific service), then allocate the taxable amount based on how much of the benefit of use is actually in Texas, using the multi-state benefit exemption certificate.

Accountants and tax professionals

This letter is a useful, compact example of Rule 3.330's multi-state benefit allocation mechanism applied to insurance-industry data purchases specifically — the underlying framework (allocate tax to the in-state benefit share via exemption certificate) generalizes to other multi-state data processing purchases by Texas-based buyers.

Common questions

Q: Are rate modifiers used for underwriting insurance policies taxed as insurance services or data processing?
A: As data processing services.

Q: If I use a data processing service partly for out-of-state business, do I pay full Texas tax on it?
A: No — you can claim the multi-state benefit exemption and pay Texas tax only on the portion of the benefit allocated to in-state use.

Q: How do I claim this allocation?
A: Issue an exemption certificate claiming the multi-state benefit exemption, then accrue and pay Texas sales tax based on an allocation between in-state and out-of-state use, per Rule 3.330(a) and (f).

Citations and references

Rule:

• 34 Tex. Admin. Code § 3.330(a) and (f) (data processing 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/9909713L

Original ruling text

September 27, 1999

Subject: Sales Tax on Rate Modifiers

Dear **:

Thank you for your e-mail concerning the taxability of purchases of rate
modifiers used in underwriting worker's compensation policies for insureds in
other states.

The purchases of rate modifiers are the purchase of data processing services
rather than insurance services. The purchase of a data processing service by a
Texas-based insurer is taxable to the extent the benefit of use is in Texas.
The purchaser may issue an exemption certificate claiming multi-state benefit
exemption. Texas sales tax should be accrued and paid on the purchases based on
an allocation between the in-state and out-of-state use. See Rule 3.330(a) and
(f) concerning data processing services.

You may download the referenced rule at the following website:
http://www.sos.state.tx.us/tac/34/I/3/O/index.html.

You may download a resale/exemption certificate at and
click on the following:

1. Tax Forms
2. Texas Resale/Exemption Certificate

You may view or down load a sales and use tax application at
and then click on the following:

1. Tax Forms
2. Sales & Use Tax
3. AP-201 (Texas Application for Sales and Use Tax Permit)

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. You may write to Tax Policy Division,
Comptroller of Public Accounts. My e-mail address is
.

Sincerely,

Eddie C. Washington
Tax Policy Division