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Insurance Tax

Plain and Simple: Maryland Tax Court Holds Insurance Company is Exempt from Corporate Income Taxes

by McDermott Will & Emery | May 13, 2015 | Income Tax, Insurance Tax, Maryland, Procedure

Although taxpayers often complain that complying with the tax laws imposed by the numerous state and local taxing jurisdictions that exist in the United States is a burdensome process, many of these tax statutes also provide benefits to taxpayers in the form of exemptions, deductions and credits. Taxpayers who structure their affairs according to the plain language of these favorable tax laws can be frustrated when state revenue departments attempt to deny them the benefits of the statute. A recent opinion from the Maryland Tax Court supports the argument commonly advanced by taxpayers in these situations – that when the language of a statute is clear, there is no room for the revenue department to interpret the statute in a contrary manner. See National Indemnity Co. v. Comptroller of the Treasury, Dkt. No. 14-IN-OO-0433 (Md. Tax Ct. April 24, 2015).

Maryland, like many states, exempts “insurance companies” from the payment of corporate income taxes because these entities are generally subject to tax under some other section of the tax law, insurance law or both. Also as in many states, insurance companies are defined for purposes of Maryland’s corporate income tax statutes by reference to the state’s insurance law. The taxpayer in National Indemnity Co. plainly fit within the definition of an insurance company under the Maryland insurance statutes because it was “in the business of writing insurance contracts.” See Md. Code Insurance § 6-101(a). While the facts of the case do not disclose whether the company did in fact pay taxes under a different statute, insurance companies in Maryland are subject to tax on all new and renewal gross direct premiums that are allocable to the state and written during the preceding calendar year. See Md. Code Insurance § 6-102. Nevertheless, the Maryland Comptroller’s office contended that when an insurance company invests money similar to a commercial bank, it should not be afforded the statutory exemption from corporate income tax. The Tax Court rejected the Comptroller’s argument, noting that under the plain language of the statute (as well as under the Comptroller’s regulations and other published guidance), insurance companies similar to the taxpayer were not subject to Maryland corporate income tax.

In National Indemnity, Maryland’s corporate income tax statute clearly exempted insurance companies from the payment of corporate income taxes, and clearly defined insurance companies by reference to the Maryland insurance law. The Comptroller’s argument appeared to be that, despite the fact that the taxpayer at issue fit within the statutory definition of an insurance company, it wasn’t “acting like” an insurance company and therefore shouldn’t be taxed like an insurance company. While the National Indemnity opinion is short, its import is clear—where the legislature has plainly spoken on a subject, the revenue department is obligated to follow the plain language of the statute, whether that statute is favorable to the revenue department or not. Companies should also be aware that Maryland (like a number of other states) does allow the prevailing party in a civil [...]

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One Down, One to Go: Illinois Senate Passes Captive Insurance Exemption to Illinois Self-Procurement Tax

by Mary Kay McCalla Martire | Apr 22, 2015 | Illinois, Insurance Tax

On April 21, 2015, the Illinois Senate unanimously passed Senate Bill 1573, as amended. As we have previously covered, the amended Bill creates an exemption from the 3.5 percent self-procurement tax and 0.2 percent Surplus Lines Association of Illinois stamping fee (and the up to 1.0 percent fire marshal tax, if applicable) for “contracts of insurance with a captive insurance company.” The amendment defines a “captive insurance company” broadly to include “any affiliated insurance company … or special purpose financial captive insurance company formed to insure the operational risks of the company’s parent or affiliates, risks of a controlled unaffiliated business, or other risks approved by the captive insurance company’s board or other regulatory body.” The definition also enumerates several kinds of captive insurance companies as specifically included. Insurance directly procured from a nonadmitted commercial carrier—or any other person not meeting the definition of “captive insurance company”—would continue to be subject to the tax.

The bill now goes to the Illinois House of Representatives, where it has been assigned to the House Rules Committee. The bill’s supporters are hopeful that the House could pass it as a standalone bill. There also is a possibility that the bill could be included in a broader package of tax legislation at the end of the legislative session.

Practice Notes

1. Even if enacted, the bill would not provide immediate relief to Illinois captive insureds. The bill’s effective date is January 1, 2016. Thus, insurance transacted with a qualifying captive in 2015 would still be subject to the tax.

2. The bill does not change the increased qualification requirements to be an “industrial insured” eligible to self-procure insurance from unadmitted carriers, which came into effect together with the tax on January 1, 2015. An industrial insured must still meet the requirements of an “exempt commercial purchaser” under 215 ILCS 5/445(1), which include having nationwide commercial property and casualty insurance premiums in excess of $100,000 annually and having any of (a) net worth of more than $20 million, (b) more than $50 million of annual revenues, (c) more than 500 full time employees or more than 1,000 employees in an affiliated group, (d) a nonprofit organization with at least a $30 million budget or (e) a municipality with a population in excess of 50,000 persons.

Captive Insurance Carve-Out: Illinois SB 1573 Amendment Proposed

by Mary Kay McCalla Martire | Mar 20, 2015 | Illinois, Insurance Tax

Members of the Illinois General Assembly continue to make efforts to ameliorate the impact of Illinois’ new self-procurement tax on captive insurance. On March 10, 2015, Sen. William Haine (D-Alton) filed an amendment to Senate Bill 1573, which was originally introduced under his sponsorship on February 20, 2015, and is now pending in the Senate Insurance Committee. As originally presented, the Bill would basically undo last year’s legislation (P.A. 98-978) imposing a self-procurement tax and narrowing the industrial insured exemption. The amendment takes a more nuanced approach, by carving out captive insurance arrangements from the tax while leaving the narrowed definition of industrial insured in place.

The amendment proposes to amend the law to simply provide that contracts of insurance with a captive insurance company are not subject to the taxes and fee (3.5 percent self-procurement tax, 0 percent to 1 percent fire marshal tax, 0.1 percent surplus lines association fee) imposed by Public Act 98-978. The amendment defines a “captive insurance company” broadly to include “any affiliated insurance company … or special purpose financial captive insurance company formed to insure the operational risks of the company’s parent or affiliates, risks of a controlled unaffiliated business, or other risks approved by the captive insurance company’s board or other regulatory body.” The definition also enumerates several kinds of captive insurance companies as specifically included.

This proposed exemption for insurance placed directly with captive insurance companies would leave unaffected the increased qualification requirements to be an “industrial insured” eligible to self-procure insurance from unadmitted carriers. Insurance directly procured from a nonadmitted commercial carrier would continue to be subject to tax. The amendment also changes the effective date of the Act to January 1, 2016, whereas previously the bill would have been effective immediately upon becoming law. Insurance transacted with a qualifying captive in 2015 thus would be subject to tax under the amendment.

On March 10, 2015, House Minority Republican Leader Jim Durkin introduced House Bill 4193, which mirrors Senate Bill 1573 (as originally filed) in basically repealing the changes made last year by Public Act 98-978.

It remains to be seen whether either version of the Bill will gain traction in the Democratic-controlled General Assembly, which is struggling with a large state budget deficit that will increase substantially with the 2015 rollback of Illinois’ temporary income tax increase.

Senate Bill 1573 Would Repeal Illinois Self-Procurement Tax

by Mary Kay McCalla Martire | Mar 5, 2015 | Illinois, Insurance Tax

On February 20, 2015, Sen. William Haine introduced Senate Bill 1573, which would repeal the self-procurement tax that came into effect January 1, 2015. As we have previously covered in detail, at the end of its 2014 regular legislative session,the Illinois General Assembly enacted a multimillion dollar tax on Illinois companies using captive insurance arrangements (P.A. 98-978). The bill had been passed by the General Assembly under the guise of technical corrections to the insurance code and went widely unnoticed throughout the legislative process. Governor Quinn signed it into law, and efforts to repeal the law during the veto session were unavailing. The new tax is currently in effect and applies to policies effective on or after January 1, 2015. Reports, due 90 days after the effective date of coverage, will begin coming due at the beginning of April, with taxes and fees due 30 days after reports are filed.

Now, with a new General Assembly and a new governor, efforts again are underway to repeal the tax. Senate Bill 1573 would reverse the changes made last year by Public Act 98-978 by repealing the self-procurement tax. In addition, the Bill restores a broader industrial insured exception to permit more Illinois-headquartered businesses that manage risks using captive insurance arrangements to transact non-admitting insurance without being subject to Illinois premium tax. The repeal would be effective upon enactment. As currently drafted, the Bill does not appear to provide relief for policies subject to tax before the effective date of the repeal.

Illinois Industrial Insured Self-Procurement Tax Guidance Announced

by Mary Kay McCalla Martire | Jan 14, 2015 | Illinois, Insurance Tax

As we have previously covered in detail, at the end of its 2014 regular legislative session, the Illinois General Assembly enacted a multimillion dollar tax on Illinois companies using captive insurance arrangements. The law was enacted under the guise of technical corrections to the insurance code.

Historically, Illinois businesses meeting basic levels of sophistication and size were entitled to obtain coverage from nonadmitted insurers under an “industrial insured” exception to the general prohibition on transacting unauthorized insurance. Senate Bill 3324, now Public Act 98-0978 (the Act), tightened the qualifying criteria for the industrial insured exception and imposed new taxes and fees totaling between 3.6 percent and 4.6 percent of premium—equivalent to those imposed on a policy procured by a surplus lines broker. The potential financial impact has been estimated at upward of $100 million, falling squarely on large- and mid-sized companies headquartered in Illinois. The affected business community was aghast when the surprising tax consequences were discovered, but its efforts to repeal the law in the General Assembly’s fall veto session proved unsuccessful.

The law now has come into effect, applying to policies effective on or after January 1, 2015. The statute provides that reports are due to the Surplus Lines Association of Illinois within 90 days of the effective date of a policy, and so reports for calendar year policies must be filed by April 1, 2015. Applicable taxes and fees are then due 30 days after the filing of the report. The Department of Insurance has not yet provided any guidance on the new law, but the Surplus Lines Association of Illinois has updated its website with an online filing system for businesses subject to the tax. Affected businesses must register and complete their online reports within the requisite 90-day deadline. Reporting is on a policy-by-policy and transaction-by-transaction basis. The system then calculates the applicable taxes and fees. Once a transaction is submitted, the website instructs that Surplus Lines Association of Illinois will e-mail an invoice for its 0.1 percent association stamping fee, and the Illinois Department of Insurance will mail an invoice for the 3.5 percent premium tax and any applicable fire marshal tax.

It remains to be seen whether another, more successful effort to overturn the law will be undertaken during the 2015 legislative session. In the interim, affected taxpayers are required to comply with the law’s filing requirements and will be assessed the new tax.

Unfinished Business: Illinois General Assembly Fails to Repeal Self-Procured Insurance Tax

by Mary Kay McCalla Martire | Dec 15, 2014 | Illinois, Insurance Tax

Despite a strong effort by a coalition of opponents, efforts to repeal the new Illinois self-procured insurance tax law in the veto session of the Illinois General Assembly were unsuccessful. As a result, the law will take effect on January 1, 2015.

As previously covered on this blog, Illinois allows “industrial insureds” to independently procure insurance. Prior to the enactment of the self-procured insurance tax law, Illinois had not imposed tax on these transactions. At the end of the spring legislative session, supposedly technical amendments to the insurance code were passed that imposed a 3.5 percent premium tax on these policies (plus an additional fire marshal tax and surplus line association fee, bringing the total to between 3.6 percent and 4.6 percent depending on the type of insurance). This tax is imposed on the nationwide premium if the insured’s home state is Illinois. Effectively, the statute is a tax on Illinois-headquartered businesses that use captive insurance risk management arrangements.

Despite being alerted to the unfriendly business impact of the bill, Governor Quinn signed it into law with an effective date of January 1, 2015. Since then, the Illinois business community has sought the repeal of the tax or its amendment to exempt captives. There had been hope that this could be achieved after the November election during the veto session or a lame duck session. The Illinois House of Representatives, however, has adjourned and does not plan to reconvene until the 99th General Assembly is inaugurated on January 14, 2015. (The Senate also has adjourned, although the Senate President has left open the possibility of reconvening before inauguration.) Going into the 99th General Assembly, efforts will continue to seek legislative relief for captive insurance arrangements.

The new tax applies to policies of insurance effective on or after January 1, 2015. Within 90 days after the effective date of such a policy, qualifying insureds must file a report with the Surplus Lines Association of Illinois (similar to that required of a surplus lines broker). Within 30 days of filing that report, the insured then must pay to the Department of Insurance the premium tax and, if applicable, the fire marshal tax. Also within those 30 days the insured must pay the 0.1 percent surplus lines association fee to the Surplus Line Association of Illinois. Neither the Department of Insurance nor the Surplus Line Association of Illinois has posted forms or guidance on their websites. Indeed, the guidance on the Surplus Line Association website is outdated and does not reflect the 2014 amendments.

Affected taxpayers should carefully consider their compliance obligations and how to proceed amidst this uncertainty. We will post on this subject again when/if additional guidelines are issued.

Illinois Enacts Legislation Imposing a Self-Procurement Tax While Also Narrowing the Industrial Insured Exception for Transacting Nonadmitted Insurance

by Eric D. Carstens and Mary Kay McCalla Martire | Sep 11, 2014 | Illinois, Insurance Tax

Illinois will soon begin taxing self-procured insurance premiums for the first time, as required by Senate Bill 3324, now Public Act 98-0978 (the Act). The Act, which was signed into law by Governor Quinn on August 15, was quietly ushered through the General Assembly as a supposed technical amendment. The Act is anything but—it substantively amends Illinois law to tax Illinois-based companies who self-procure insurance as though they were surplus lines brokers, imposing a 3.5 percent self-procurement tax, together with additional fees and charges. In addition, the Act makes it harder for Illinois companies to self-insure by narrowing the definition of an “industrial insured” and increasing the qualification requirements for risk managers. The new law applies to policies of insurance effective on or after January 1, 2015.

As we explained in a prior post, the Act hurts Illinois-headquartered businesses that manage risks using captive insurance arrangements. With the 2011 enactment of the Nonadmitted and Reinsurance Reform Act (NRRA), a company’s home state – typically its principal place of business – has exclusive authority to tax and regulate nonadmitted insurance. See 15 U.S.C. § 8201. For Illinois-headquartered businesses, this arrangement worked well because Illinois law previously allowed “industrial insureds” – companies meeting minimal size and sophistication requirements – to transact nonadmitted insurance without paying tax. An Illinois-headquartered company thus could obtain insurance from its captive domiciled overseas or in a captive-friendly U.S. state without paying any tax on its premiums.

The Act ends this business-friendly state of affairs. An industrial insured transacting nonadmitted insurance for a policy taking effect on or after January 1, 2015, will now have to withhold (or pay out-of-pocket if it does not withhold) a 3.5 percent premium tax on insurance contracts. Two additional charges increase the total effective rate to anywhere from 3.6 percent to 4.6 percent: a countersigning fee of 0.1 percent to support the Surplus Line Association of Illinois, and for certain lines of insurance, a fire marshal tax of anywhere from 0.01 percent to 1.00 percent of premium.

The Act also makes it more difficult for Illinois companies to self-insure by narrowing the definition of an “industrial insured,” where companies must qualify as an “industrial insured” in order to have the right to self-insure. Until now Illinois company could be an “industrial insured” if its annual premium for insurance of all risks except life and accident and health insurance exceeded $100,000 and it had either (a) at least 25 full-time employees, (b) more than $3 million of gross assets, or (c) gross revenues of more than $5 million. Under the Act, an industrial insured now must meet the requirements of an “exempt commercial purchaser” under 215 ILCS 5/445(1), which include having nationwide commercial property and casualty insurance premiums in excess of $100,000 annually and having either (a) net worth of more than $20 million, (b) more than $50 million of annual revenues, (c) more than 500 full time employees or more than 1,000 employees in an affiliated group, (d) a nonprofit [...]

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Favorable Ruling: HMOs Not Taxable Under New York City General Corporation Tax

by McDermott Will & Emery | Jul 28, 2014 | Income Tax, Insurance Tax, Pennsylvania

A New York City Tax Appeals Tribunal Administrative Law Judge (ALJ) recently ruled in favor of Aetna, Inc. (Aetna) on the question of whether a health maintenance organization (HMO) was “doing an insurance business” in New York State, thereby exempting it from the New York City General Corporation Tax (GCT). In Matter of Aetna, Inc., the ALJ determined that the HMO at issue was “doing an insurance business” in New York because insurance risk was present in contracts covering the members of the HMO, the members of the HMO spread the risk of loss due to unforeseen medical expenses to the HMO and the HMO was subject to significant regulation under New York State Insurance Law and Public Health Law. Aetna Health, Inc. (Health), a subsidiary of Aetna, qualified as an HMO under Article 44 of the New York State Public Health Law. Though the New York City Department of Finance (Department) argued that HMOs were subject to the GCT because they do not conduct insurance business, the ALJ engaged in a thorough examination of federal and New York State authorities on HMOs and concluded that Health was doing an insurance business in New York. Of particular note, the ALJ, relying on the United States Supreme Court decision in Rush Prudential HMO v. Moran, noted that HMOs could be (and were) “both insurer[s] and corporation[s] which arrange[] for the provision of medical services.” The Department has 30 days from the determination date to file an appeal.

McDermott is pleased to have represented Aetna, Inc. in this favorable ruling. If you have any questions regarding this determination and its past, present, and future impact on your company, please contact a member of the McDermott State and Local Tax group. For more please see McDermott’s On the Subject regarding this case.

The S.B. 3324 Self-Procurement Tax: No More “Home State” Advantage for Illinois Industrial Insureds?

by Mary Kay McCalla Martire | Jun 20, 2014 | Illinois, Insurance Tax

Illinois Senate Bill 3324, an insurance bill that would impose a premium tax on Illinois companies obtaining unauthorized insurance, has passed the General Assembly and is awaiting Governor Quinn’s signature. If signed into law, the bill will have a significant negative impact on captive insurance and any other unadmitted insurance arrangements used by businesses with a home state of Illinois. Such companies will be taxed on 3.5 percent of their premiums paid on unadmitted policies effective January 1, 2015, and thereafter.

The Favorable Status Quo for Illinois “Industrial” Insureds under the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA)

A state’s premium tax structure typically has three components:

A tax on the premiums received by insurers that are admitted to transact insurance and are regulated by the state;
A tax on the premiums received by surplus lines brokers (typically at a higher rate than the premium tax for admitted insurers); and
A tax on the premiums paid by insureds who obtain their own insurance from unauthorized insurers (sometimes called a self-procured insurance tax), often at the same rate as the surplus lines tax.

Until now, Illinois has not taxed self-procured insurance. Illinois traditionally has allowed “industrial insureds” – companies meeting certain thresholds of size and sophistication – to obtain coverage from non-admitted insurers without violating the prohibition against the unauthorized transaction of insurance in the state (see 215 ILCS 5/121-2 (prohibiting transacting insurance without a certificate of authority), 121-2.08 (excepting transactions with “industrial insureds” and defining the term)) and without the imposition of premium tax.

This exception became particularly beneficial to companies headquartered in Illinois after the enactment of the NRRA, which was part of the Dodd-Frank Act. See P.L. 111-203, tit. V, §§ 521-527, 124 Stat. 1589 (codified at 15 U.S.C. § 8201 et seq.). The NRRA provides that “[n]o State other than the home State of an insured may require any premium tax payment for nonadmitted insurance.” 15 U.S.C. § 8201(a). The “home state” is generally a company’s principal place of business. See 15 U.S.C. § 8206(6) (a detailed discussion of the definition of “home state” is beyond the scope of this post). With the enactment of the NRRA, companies having Illinois as their “home state” have experienced a significant savings: If they qualify as industrial insureds, they effectively can obtain unauthorized insurance coverage of their nationwide risks without paying any state premium tax, as Illinois doesn’t impose a premium tax and other states are precluded from collecting tax from non “home state” companies.

S.B. 3324 Would Impose a 3.5 percent Tax on Premiums Paid by Illinois Industrial Insureds

S.B. 3324 would end this happy state of affairs. It amends 215 ILCS 5/121-2.08 to require industrial insureds to pay tax at the 3.5 percent of premiums rate that is applicable to surplus lines transactions (imposed at 215 ILCS 5/445(3)(a)(ii)). The adverse impact of the tax could be significant, particularly for Illinois home state industrial insureds with captive insurance [...]

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Illinois Clarifies Treatment of Corporate Income Refunds in the Calculation of Retaliatory Tax

by Mary Kay McCalla Martire | May 1, 2014 | Illinois, Insurance Tax

Illinois is one of a small number of states that impose both an income tax and a premium tax on insurance companies. Disputes have arisen between insurers and the Illinois Department of Insurance (Department) regarding the proper treatment of income tax refunds in the calculation of retaliatory tax. The dispute typically concerns whether an income tax refund should be included in the Illinois Basis of an insurer’s retaliatory tax computation for the year in which the income tax refund is paid or in the Illinois Basis for retaliatory tax computation for the tax year to which the refund relates. The Department has taken the position that the income tax refund must be applied to Illinois Basis for the year in which the refund is paid, based on language of a Departmental regulation (50 Ill. Adm. Code Sec. 2515.50(b)) providing that Illinois Basis used to compute retaliatory tax must include “the amount of Illinois corporate and replacement income tax paid, decreased by the amount, if any, of any corporate and/or income replacement tax cash refund received in the same calendar year if that cash refund has been considered part of the Illinois corporate and replacement income tax paid in the calculation of the annual retaliatory tax in a preceding year.” (50 Ill. Adm. Code Sec. 2515.50(b)(5)) (emphasis added).

On March 3, 2014, the Illinois Appellate Court for the Fourth District issued an unpublished ruling in which it found that 50 Ill. Admin. Code Sec. 2515.50(b) was invalid because it conflicted with the state’s mandate that the retaliatory tax include corporate income tax imposed, not paid, in a particular year. The opinion authorized the taxpayers who challenged the Department’s interpretation to calculate their retaliatory tax by applying their corporate income tax refund to the tax year to which the refund related, regardless of the year in which it was paid.

In its opinion, the appellate court twice noted that if the Department’s interpretation had been upheld, the taxpayers would have been required to pay more retaliatory taxes than they would have originally owed simply because they initially overpaid their corporate income tax. This point of equity appears to have been a strong supporting factor for the appellate court in its decision to invalidate the regulation. United States Liability Ins. Co., et al v. The Department of Insurance, 2014 IL App. (4th) 121125-U (March 3, 2014) (Opinion issued pursuant to Illinois Supreme Court Rule 23).

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