Self Procurement taxes

Transcription

1 Self Procurement taxes Daniel J. Kusaila, Tax Partner Crowe Horwath LLP Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP

2 Agenda What is a procurement tax Nexus standards and Todd Shipyards Non admitted Reinsurance Reform Act Todd Shipyards vs. NRRA States Reaction Industries Reaction What we are seeing Impact on captive domicile selection Delaware statute Questions Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 2

3 What is a Procurement tax A procurement tax is a tax to the insured entities on gross premium paid to nonadmitted (unauthorized out of state) insurance companies that was obtained without a broker. Approximately 80% of the states have a form of procurement tax. By using a nonadmitted carrier, the insured has no access to the state s insurance department resources or associations in case of a default or insolvency States discourage using nonadmitted carriers through the self-procurement tax Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 3

4 Procurement taxes by state State Procurement Tax Rate State Procurement Tax Rate State Procurement Tax Rate Alabama 4% Kentucky 2% North Dakota 1.75% Alaska 3.7% Louisiana 4.85% Ohio 5% Arizona 3% Maine 3% Oklahoma 6% Arkansas 2% Maryland 3% Oregon 2% California 3% Massachusetts Pennsylvania 3% Colorado 3% Michigan 2% Rhode Island 4% Connecticut 4% Minnesota 2% South Carolina Delaware 3% Mississippi 3% South Dakota 2.5% District of Columbia Missouri 5% Tennessee 5% Florida 5% Montana 2.75% Texas 4.85% Georgia 4% Nebraska 3% Utah 4.25% Hawaii 4.68% Nevada 3.5% Vermont 3% Idaho 1.5% New Hampshire 4% Virginia Illinois 3.5% New Jersey 5% Washington Indiana New Mexico 3.003% West Virginia Iowa 1% New York 3.6% Wisconsin 3% Kansas North Carolina 5% Wyoming 3% The general procurement tax rates disclosed above are for discussion purposes. Please note that other fees, taxes and exceptions may apply. Consult your tax adviser or the state statute prior to remitting tax. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 4

5 Nexus Standards In general, in order for a state to have authority to tax an entity such as an insurance company, the entity needs to have sufficient nexus, or connections, with the state. The nexus standards applicable to procurement taxes differ from the income tax nexus standards. In 1868, the Supreme Court ruled in Paul v. Virginia that the interstate commerce clause did not apply to the insurance industry. 75 U.S. 357 (1868). Unlike other industries the business of insurance is regulated by the states and is not subject to federal interstate commerce regulation insurance is not commerce. New York Life Insurance Co. v. Deer Lodge County reaffiimed that the insurance industry is only subject to state regulation. 231 U.S. 495 (1913). Then in 1944 the Supreme Court ruling United States v. South-Eastern Underwriters Ass n., held that insurance was in fact interstate commerce which Congress could regulate under the Commerce Clause. 322 U.S. 533 (1944). Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 5

6 Nexus Standards Continued With the contradictory Supreme Court ruling, clarification was needed regarding whether and to what extent the states could continue to regulate and tax insurance companies. As a result, in 1945 the McCarran Ferguson Act, 59 Stat. 33 (1945), was passed leaving the authority of regulation and taxation of insurance up to states without the restrictions of the Commerce Clause. Therefore an analysis of nexus is left up to the Due Process and Equal Protection Clauses of the Fourteenth amendment. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 6

7 Nexus Standards Todd Shipyards In State Board of Insurance v. Todd Shipyards Corp., 370 U.S. 451 (1962), the Texas Board of Insurance levied and collected self-procurement taxes on a New York domiciled company that insured property in Texas. Facts: Policies issued outside of Texas Adjusted and paid outside of Texas Insurers did not solicit business in Texas Insurers had no agents in Texas Insurers did not investigate risks or claims in Texas Although the Due Process Clause nexus standard is much lower than the Commerce Clause, The United States Supreme Court held that merely insuring a risk in a state was not sufficient activity under the Due Process Clause to subject a company to a procurement tax. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 7

8 Nexus standards continued Although Todd Shipyards is still good law, the Supreme Court of Rhode Island argued that use of correspondence directed to insured entities in Rhode Island was sufficient to provide Due Process nexus for a procurement tax. Associated Elec. & Gas Ins. Services, Ltd. v. Clark, 676 A. 2d 1357 (1996). Generally, there is a risk that sufficient activities will be conducted in the home state of the insured entities when officers of such entities are also officers of the captive. Then in 2001, a case with similar fact patterns to Todd Shipyards reaffirmed that the ruling in Todd Shipyards is the current law and precedent. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 8

9 Dodd-Frank Implications The federal Nonadmitted and Reinsurance Reform Act (NRRA) which was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L (July 21, 2010), did not specifically exclude captive insurance companies and many states have used this to justify imposing self-procurement taxes on the insured entities in their states. A number of states, generally captive domicile states, have argued that Dodd- Frank does not apply to captive insurance companies, however, these public statements are not binding on the states. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 9

10 Home state defined under NRRA (6) HOME STATE. - (A) IN GENERAL. - Except as provided in subparagraph (B), the term "home State" means, with respect to an insured- (i) the State in which an insured maintains its principal place of business or, in the case of an individual, the individual's principal residence; or (ii) if 100 percent of the insured risk is located out of the State referred to in clause (i), the State to which the greatest percentage of the insured's taxable premium for that insurance contract is allocated. (B) Affiliated groups. - If more than 1 insured from an affiliated group are named insureds on a single nonadmitted insurance contract, the term "home State" means the home State, as determined pursuant to subparagraph (A), of the member of the affiliated group that has the largest percentage of premium attributed to it under such insurance contract. 527(6) of the Nonadmitted and Reinsurance Reform Act of Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 10

11 Home state defined under NRRA The home state analysis is performed on a separate policy by policy basis. ABC Insurance Company Policy 1 Policy 2 Premium allocation of Named Insured 1 Premium allocation of Named Insured 2 Named Insured Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 11

12 Impact of home state Under the NRRA, the home state of the insured entity is the only state with authority to collect premium taxes with respect to an insurance policy. Under this new law states can now be liable for self-procurement tax in states where they may never have been required to pay this before. Although there are several agreements for splitting the premium once collected, if the NRRA applies to captives, then the home state of the insured determines which state collects either the premium or the procurement tax. NIMA Non-Admitted Insurance Multi-State Agreement: 14 states 22% of surplus lines market Currently 5 states remaining board voted to dissolve in April 2016 SLIMPACT Surplus Lines Insurance Multi-State Compact Currently inactive - 9 states Need 10 to become effective Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 12

13 Todd Shipyards vs. NRRA Assume Delaware is the location of the headquarters of the holding company and each of its subsidiaries. The captive is domiciled in Nevada and collects property insurance premium from the subsidiaries of $1 million. The holding company only has activity in Delaware. Each subsidiary has 60% of insured risk related to Delaware operations and 40% insured risk related to Kentucky operations. Assume the Delaware self procurement rate is 3%. Insurer ABC Captive Insurance Company (NV) Insureds Holding Co. (DE) $100,000 X Sub. Co. (DE) $100,000 Y Sub. Co. (DE) $300,000 Z Sub. Co. (DE) $500,000 Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 13

14 Todd Shipyards vs. NRRA (continued) Home state of holding company and the insured subs would be Delaware. Under NRRA, procurement tax paid to Delaware because it is home state and there is insured risk in the state. Under NRRA self procurement tax due from subs would be $1,000,000 x 3%= $30,000. Due to numerous open questions regarding the laws, this is not always as straight forward as it would appear. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 14

15 Todd Shipyards vs. NRRA (continued) Based on the old precedent of Todd Shipyards the analysis will be as follows: Based upon Delaware risks, the tax would be $1,000,000 x 60% x 3% = $18,000 and the insured entities would also have to determine if they owed Kentucky any procurement tax. Insurer ABC Captive Insurance Company (NV) Insureds Holding Co. (DE) $100,000 X Sub. Co. (DE) $100,000 Y Sub. Co. (DE) $300,000 Z Sub. Co. (DE) $500,000 Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 15

16 States Reaction Section 521(b)(1) of the Act suggests that the States may enter into a compact or establish procedures to allocate the premium taxes paid to the insured s home State among the states in which the risk reside. NIMA Non-Admitted Insurance Multi-State Agreement Gained membership of 14 states With only currently 5 states remaining on April 28, 2016 board voted to dissolve SLIMPACT Surplus Lines Insurance Multi-State Compact Gained membership of 9 states Needs 10 to become effective National Association of Professional Surplus Lines Offices sees costs of supporting tax sharing systems exceeds their benefit Some states have amended their statutes to tax 100% of the premium for home states with no compact authorized, such as NY. Some states have used this to try to incentivize captives to redomicile. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 16

17 Industries Reaction In November of 2012, a Coalition was developed for Captive Insurance Clarity ( CCIC ). Organized by the Vermont Captive Insurance Association. Actively working with Congress to craft new language to clarify ambiguities in the present law. In a letter written by Chairman Judy Biggert of the Subcommittee on Insurance, Housing and Community Opportunity, she states: As a supporter of NRRA and an advocate for its inclusion and passage as part of Dodd-Frank, I can tell you unequivocally that the NRRA was never intended to include the captive insurance industry. Unfortunately, the varying interpretations from different states are having a detrimental impact on the industry. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 17

18 What we are seeing Mature captives are using their historical positions and taking a wait and see approach before making a change. Some re-domesticated the captive to the home state. Some established a new captive to direct write and cede to its original captive. New formations are being setup with more thought in this area. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 18

19 Impact on domicile selection A procurement tax in the home state of the insured entities may influence the selection of a domicile because it can result in double taxation but it is one of many factors to consider in domicile selection. Captive statute differences Threshold number of risk bearing captive entities under regulation Reputation and knowledge of the regulators Familiarity of the regulators with the types of risks to be insured by the captive Pool of qualified service providers Ease and desirability of location if annual meetings required Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 19

20 Delaware Procurement statute Title 18 Insurance Code, Chapter 19. Delaware Nonadmitted Insurance Act, Subchapter II. Surplus Lines Insurance, 1925 Tax on surplus lines: (b) Every surplus lines broker shall collect and pay to the State Treasurer through the Commissioner a 3 percent tax on the gross premiums charged, less any returned premiums and exclusive of sums collected to cover federal and state taxes and examination fees, for insurance placed or procured under his or her surplus lines license in which this State is the home state of the insured. (e) Annually, on or before March 1, unless more frequent reporting and payment is ordered by the Commissioner, each surplus lines broker shall pay the premium tax due according to subsection (b) of this section for the policies written during the preceding calendar year as shown by his or her annual statement filed with the Commissioner pursuant to 1924 of this title. Payment shall accompany such forms and shall be made in such manner as is prescribed by the Commissioner Independently procured insurance: (d) At the time of filing the report required in subsection (b) of this section, the insured shall pay to the State Treasurer through the Commissioner a tax at the same rate and in the same manner as surplus lines brokers, as required in 1925(e) of this title. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 20

21 2016 Delaware law The rate of the procurement tax is basically the surplus lines rate of 3% (tax is imposed on the insured). Dodd-Frank Adopted: 1926 (b) Each insured whose home state is this State that independently procures or continues or renews insurance with a nonadmitted insurer on properties, risks, or exposures located or to be performed in whole or in part in this State, other than insurance procured through a surplus lines broker, is subject to the same tax reporting requirements under this chapter as apply to a surplus lines broker. Additional Requirements: 1926 (c) On or before March 1 each year, the insured that independently procures insurance must file a written report with the Commissioner, upon forms prescribed by the Commissioner, showing the name and address of the insured or insureds, name and address of the insurer, the subject of the insurance, a general description of the coverage, the amount of premium currently charged, and additional pertinent information reasonably requested by the Commissioner. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 21

22 Other issues Note: most statutes that exempt an insurance company from a state corporate income tax are tied into the insurance company paying that states premium tax and do not reference the procurement tax. Although, the captive may not have nexus in the state, whether it is included in the unitary or consolidated return is often a very difficult determination. Texas Rule States increasing aggressiveness in looking to find income tax or other revenue from insurance companies. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 22

23 Disclaimer The information provided herein is educational in nature and is based on authorities that are subject to change. You should contact your tax adviser regarding application of the information provided to your specific facts and circumstances. Audit Tax Advisory Risk Performance 2015 Crowe Horwath LLP 23