fire marshal tax Archives

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

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.