State Insurance Premium and Other Insurance Taxes

State Insurance Premium and Other Insurance Taxes

Premiums collected by insurance companies have been subject to state taxation in the United States since at least the mid-Nineteenth Century (see Section 12.01[1]). An insurance premium tax is a form of gross receipts or excise tax; it is not based on profits or earnings, and is not affected by the cost of ceded reinsurance or other expenditures, of an insurer (see Section 12.01[3]). Premium taxes or their equivalent may be imposed on the insurer, insurance producer or policyholder, depending on whether insurance is sold by a licensed insurer or through the non-admitted insurance market (see Section 12.02).
 
The premium tax is a very important source of revenue for the states. In 2008, the total amount of premium taxes received by all states and the District of Columbia was approximately $15.7 billion according to a survey of state government tax collections and accounted for approximately 2 percent of all state revenues.    For comparison purposes the corporate income tax is approximately 6.5 percent of all state revenues but it covers all corporate income revenues for the states (see Section 12.05[3]). Further, unlike the corporate income tax which is relatively volatile, the premium tax is stable providing similar yields on a year-to-year basis.
 
The different forms of premium tax ─ and the liability for its payment ─ mirror state insurance regulation, which has as its linchpin in all states a version of the Unauthorized Insurers Model Act promulgated by the National Association of Insurance Commissioners (the “NAIC”). The Unauthorized Insurers Model Act requires all insurers to obtain a certificate of authority before transacting the business of insurance in a state, subject to several exceptions including the transaction of surplus lines insurance by qualified non-admitted insurance companies and direct procurement of insurance by an insured. If premiums are paid to a licensed or admitted insurer, premium tax is imposed on the licensed insurer. If premiums are paid to a non-admitted insurer whose insurance policies are placed in a state through a surplus lines broker on a surplus lines basis, the tax is imposed on the surplus line broker. And, if premiums are paid to a non-admitted insurer whose policies are directly placed with a policyholder who procures the insurance, the tax is imposed on the policyholder. (State insurance premium tax base and rates are discussed in Section 12.02.)
 
Generally, there is no federal or state constitutional prohibition to a state’s premium tax whether levied on an admitted insurer, or on a non-admitted insurer in connection with either a surplus line placement or a direct placement of insurance. The usual constitutional limits on the powers of states are not present in the case of “business of insurance” activities covered by the McCarran-Ferguson Act, and especially with respect to the activities of non-admitted insurers. Some of the most significant limitations on the states’ police and taxing powers are based on the prohibition of state interference with interstate commerce under the Commerce Clause of the United States Constitution. Consequently, when a state’s regulation of a business enterprise is unfettered by the Commerce Clause, its powers are subject only to the more deferential Due Process and Equal Protection Clause concepts of “arbitrariness,” which invalidate state law only where it is not rationally or substantially, respectively, related to a legitimate state purpose. Once an insurer is found to have the minimal contacts with a state that support in personam jurisdiction, most courts have found that states have authority to regulate and to tax the insurer and that the amount of necessary contacts required for state regulation and taxation are substantially the same. (Constitutional issues are discussed in Sections 12.09[4], 12.09[5] and 12.12.)
 
Although the premium tax can be quite simple, complexities arise when an insurer is issuing insurance policies in multiple states. For example, to ensure that its domestic insurers do not pay a higher rate of premium tax to a second state than the second state’s domiciliary insurers pay to the first state, the first state may impose a retaliatory tax on premiums received by the second state’s domiciliary insurers for insurance policies sold in the first state (see Section 12.09). Another layer of complexity is created by an insurer covering risks that have contacts in more than one state so that insurers, producers and even insureds are potentially subject to premium tax, surplus line tax or direct placement tax in each of the states where the risk has contacts. Other complexities are created because of the variations among states as to the types of credits, deductions, and offsets that reduce the amount or rate of premium tax (see Section 12.03) as well as the ability of local governments to tax insurance premiums (see Section 12.07). Premium tax is usually a substitute for corporate income tax, but some states tax the income of insurers in addition to taxing insurance premiums usually providing a deduction from the income tax liability for premium taxes paid and vice-versa (see Section 12.01[6]). In addition to the premium tax levied by states, there is a federal excise tax on premiums paid to foreign insurers and reinsurers by United States persons (see Section 12.13).
 
Brian Casey is a Partner in the Corporate and Regulatory Insurance Practice Group of the Atlanta office of Locke Lord Bissell & Liddell LLP. Mr. Casey’s primary practice focus is on life insurance settlements, mergers and acquisitions and the multi-state regulation of insurance companies, insurance agencies, third party administrators, and other financial services firms. He also represents insurance clients in the areas of warranty, privacy, reinsurance, corporate finance and venture capital, and e-commerce. Mr. Casey is a nationally recognized speaker and regularly addresses some of the most prestigious organizations in the United States on issues regarding multi-state insurance regulation and trends affecting the insurance industry. In addition to general insurance matters, Mr. Casey’s speaking experience encompasses an array of varied topics including insurance taxation, life settlements and secondary life insurance products, life insurance market, privacy and security (Gramm-Leach-Bliley Act / HIPAA / Do-Not-Call / Do-Not-Spam / Data Security Breach), e-commerce, including electronic signatures and records, and extended warranties and service contracts. Mr. Casey graduated from Auburn University (B.S.B.A. Accounting, summa cum laude, 1984); The Ohio State University College of Law (J.D., 1987) and Emory University (Master of Laws in Taxation, 1992).