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Self Procurement Taxes

Importance of the Looming Self-Procurement, Independently Procured, Non-Admitted Retaliatory Premium Tax Issue Often Overlooked

Insurance regulatory bodies, particularly in the US, have historically financed their consumer protection insurance function by charging licensing fees for insurers to do business in their state, plus premium taxes on premiums paid insurance companies by residents and businesses insuring risks in the state.

For constitutional reasons, residents and businesses are able to buy insurance from out of state insurance companies under many circumstances even if the out of state insurance company is not licensed to do business in their state. The rules get tricky here. This includes captives.

As discussed below, when a company in State A forms a captive in State (or Country) B, and buys insurance from the captive, whether or not State A can levy and collect premium taxes depends on the states laws and on the facts and circumstances of each situation. Generally if the captive does business wholly outside of State A, and negotiates the insurance contracts outside of State A, then State A would lack sufficient constitutional nexus to tax the captive in any way including premium taxes. State A may however have statutory authority to levy and collect from the business in State A that buys insurance from a related out of state captive.

Articles of Interest:

June 2013 Captive Review article update on the state of Dodd Frank and the NRRA on captive self-procurement taxes, click here to read.
Click here for an article by our managing director on state retaliatory self-procurement captive premium taxes (a shorter version of this article was published in Captive Review).

To read the full opinion of a 2001 Circuit Court decision over a controversy involving application of Texas's 4.85% independently procured insurance premium tax to Dow Chemical where the court upholds the US Supreme Court's Todd Shipyards ruling from the 1980s, click here. See a copy of a recent 2001 case, Dow Chemical, where Texas levied Dow Chemical $427,149 dollars for premium taxes on policies Dow purchased from insurance companies not admitted in Texas. In Dow Chemical, the Circuit Court confirmed the Todd Shipyard's constitutional doctrine established long ago by the US Supreme Court limited a state's capacity to tax an out of state company that does not conduct business within that state, negotiated its insurance arrangements outside of the state, and otherwise does not have the requisite constitutional nexus to become subject to the state's taxing powers. Most captives and their owners are not likely to have the resources needed to challenge a state's levy of self procurement premium tax on premiums paid an out of state captive.

The NAIC (US National Association of Insurance Commissioners) supports states extending their tax even to out of state insurers with no business presence in the state (See the NAIC's Amicus Curiae brief submitted in support of the State of Texas in the 2001 Dow Chemical by clicking here). The NAIC's "Nonadmitted Insurance Model Act," adopted by over 40 states since 1999, enables states to tax premiums (and levy insureds doing business in their state) paid out of state insurers on the portion of the premium fairly allocated to risks within the state.

The Dodd-Frank Act NRRA provisions attempt to streamline this compliance headache area by allowing only a "home state" of an insured to tax certain non-admitted insurance. Some states enterred compacts to share premiums with other states, many states are going it alone like Wisconsin and New York and intend to keep all such taxes. The NRRA provisions of the Dodd-Frank Act will need to be clarified, including whether or not they apply to captives which most industry experts believe they do not.

Click here to read more about the Dodd-Frank NRRA provisions.

Click here to read about retaliatory premium taxes and a state's right to tax out of state captive insurance companies.

The following chart and table is reprinted from Edwards Wildman's website, a surplus lines broker. No assurances can be given that the chart and information below is accurate or that the referenced state statutes and provisions apply to captive insuarance arrangements or can be constitutionally enforced by the applicable states. A careful review of applicable state laws and regulations by your lawyers and tax advisers is always required. For the full 100+ page manual with more detail than the following chart on self procurement premium taxes, excess and surplus lines premium taxes, and related state law summaries click here.

DIRECT PROCUREMENT TAX LAWS BY STATE - from Edwards Wildman's site

State	Statutory Citation to Insurance Code	Tax Rate Applied
Alabama	§27-10-35(c)	4% (within 30 days)

Alaska	§21.33.061(c)	3.7% (annually) 0.75% (wet marine, transportation)

Arizona	§20-401.07	3% (annually)(Industrial Insurance only)

Arkansas	§23-65-103(c)	2% (within 30 days after insurance procured, continued or renewed)

California	§1760(b) Cal Ins. Code Cal. Rev. & Tax Code §13201 Cal. Rev. & Tax Code §13210	3% (Payable on or before the 1st day of the 3rd month following the close of any calendar quarter during which a nonadmitted insurance contract took effect or was renewed)

Colorado	§10-3-903(2)(d) §10-3-209 §10-3-909 §10-5-111 §10-5-111.5	3% (annually)

Connecticut	§38a-271 §38a-277 (c)	4% (annually) (excluding wet marine and transportation)

Delaware	18 § 1925(b) and (e) 18 § 1926(d)	2% (annually)

District of Columbia	-	-

Florida	§626.938(3)	5% plus 0.3% service fee payable to the FSLSO (within 45 days)(Insured must also report the premium to the FSLSO using forms designated by the FSLSO or in a computer readable format)

Georgia	§33-5-33(b)	4% (within 30 days)

Hawaii	§431:8-205(c)	4.68% (within 60 days)

Idaho	§41-1233 §41-1229	1.5% (within 30 days after insurance procured, continued or renewed)

Illinois	-	-

Indiana	-	-

Iowa	§507A.9 §432.1 (4)(a) - (e)	2% - Prior to 2004 1.75% - 2004 1.50% - 2005 1.25% - 2006 1% - 2007 and subsequent calendar years.

Kansas	-	-

Kentucky	§304.11-030 §304.11-050(1)	2% (annually)

Louisiana	§22:439	5% (quarterly at the annual rate)

Maine	Title 24-A Title 36 §2531(2)	3% payable by insured

Maryland	§4-210 §4-211(b)(1)	3% (annually)

Massachusetts	-	-

Michigan	§500.1951	2% 0.5% (regulatory fee) (within 30 days)

Minnesota	§60A.19(8) §297I.05 (subd. 7)(b)	2% (annually) (except life insurance)

Mississippi	§83-5-61	4% premium tax and 5% non-admitted policy fee (for policies issued or renewed on or after 3/11/11; 3% for policies issued against fire, lightning or tornado)

Missouri	§384.051(6)	5% (annually)

Montana	§33-2-705	2.75% (annually)

Nebraska	§44-5515, §44-5506(4)(a)	3% (quarterly) (only with respect to exempt commercial purchasers)

Nevada	§680B.040 §680B.027(1)	3.5% (within 30 days)

New Hampshire	§405-B:6 §406-B:17(III) §406-B:17-a	4% (annually) 2% (marine)

New Jersey	§17:22-6.64	5% (within 30 days)

New Mexico	§59A-6-2 §59A-14-1 §59A-15-2 §59A-15-4	3.003% (within 90 days)

New York	N.Y. Tax Law §1551 N.Y. Tax Law §1554	3.6% (within 60 days after end of quarter in which business was procured)

North Carolina	§58-28-5(b)	5% (within 30 days)

North Dakota	§26.1-44-10 §26.1-44-03.1	1.75% (annually)

Ohio	§3905.36	5% (annually)

Oklahoma	§1115(B)(1)	6% (annually)

Oregon	§ 735.417 § 735.470	2%, payable by insured, and an additional 0.3% on “fire” related coverages, payable by insured. (Insured must also file a written report with Oregon Director, within 30 days after insurance was procured, showing name and address of insurer; the subject of the insurance; the amount of the premium charged; and any additional pertinent information reasonably requested by the Director).

Pennsylvania	§40-15-122(b)	3% (within 30 days)

Puerto Rico	T.26§702 T.26§1020	4% (1% on annuity renumeration)(only applies to insurers) 15% (for domestic brokers transacting insurance with unauthorized insurers, but not with eligible surplus lines brokers)

Rhode Island	§27-3-38.1	4% (Insured must also file written report with the tax administrator, in a form that he or she may prescribe, within 30 days after the date the insurance was procured, continued or received)

South Carolina	-	-

South Dakota	§58-32-47 §58-32-50	2.5% (within 30 days)

Tennessee	-	-

Texas	§226.053(a)	4.85% (annually)

Utah	§31A-15-104 §31A-3-301	4.25% (within 60 days) (excluding ocean marine, insurance premiums paid by institutions within the state system of higher education, and annuities)

Vermont	§5036(d)	3% (annually)

U.S. Virgin Islands	§603(b)	5% (quarterly)

Virginia	§38.2-1802(A)	-

Washington	-	-

West Virginia	-	-

Wisconsin	§618.42 §618.43(1)(a)	3% (within 60 days)

Wyoming	§20-11-118 §26-11-124	3% (annually)

Notes:

1. Direct Procurement Taxes are calculated in most states as a percentage of gross premiums.

2. In most of the states, written reports of direct placements are required to be filed with the Insurance Department within 30, 60 or 90 days.

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Self Procurement Taxes