Surplus Lines Association of Illinois Archives

Illinois Industrial Insured Self-Procurement Tax Guidance Announced

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

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.