New York Issues Two Advisory Opinions Regarding Surplus Lines Insurance
The New York State Department of Taxation and Finance (Department) issued two advisory opinions determining that unauthorized non-life insurance corporations (here, surplus lines insurance companies) are subject to insurance franchise tax (under N.Y. Tax Law § 1502) instead of premium tax (under N.Y. Tax Law § 1502-a). TSB-A-16(4)C; TSB-A-16(5)C (June 10, 2016). In addition, the Department reiterated its view that these insurance companies’ insurance franchise tax liability will not be capped by N.Y. Tax Law § 1505(a)(1), consistent with Service Lloyds Ins. Co., TSB-A-09-(2)C (Mar. 2, 2009).
The insurance franchise tax is based on an insurance company’s allocated entire net income or capital (instead of gross premiums). The tax base is apportioned to New York based 90% on a ratio of the New York premiums over the everywhere premiums (the other 10% is a compensation ratio). The capital tax base often applies to insurance companies, which may have nominal taxable income but substantial capital. In contrast, authorized non-life insurance corporations are subject only to a premium tax, which is based solely on gross premiums.
The Department rejected the insurance companies’ argument that New York’s direct placement tax1 or surplus lines tax2 is imposed in lieu of the insurance franchise tax for surplus lines companies. New York imposes direct placement tax or surplus lines tax on the insured or broker at a rate of 3.6% of premiums paid for unauthorized insurance. Thus, it is arguably improper for New York to also impose insurance franchise tax based on those same premiums. The Department asserts that because the insurance franchise tax is not a direct tax on premiums, but rather is just allocated using a premiums factor, that imposing insurance franchise tax on surplus lines companies does not result in double taxation.
|Sutherland Observation: The federal Nonadmitted and Reinsurance Reform Act (NRRA) likely preempts New York from imposing insurance franchise tax on a surplus lines company to the extent that the premiums are derived from insureds whose home state is not New York. The NRRA provides that no state other than the home state of an insured may require any premium tax payment for nonadmitted insurance. The NRRA defines “premium tax” very broadly as: (1) any charge; (2) imposed by a government entity; (3) directly or indirectly; (4) based on any payment made as consideration for nonadmitted insurance. New York’s insurance franchise tax is a charge by a governmental entity that is, at least indirectly, based on a payment made as consideration for nonadmitted insurance.|
New York is not the first state to address whether a direct placement tax is imposed in lieu of a tax on an unauthorized insurance company.3
|Sutherland Observation: In Silvers, the California Court of Appeals analyzed whether a surplus lines insurance company that was not doing business in California was subject to the premium tax. The Court of Appeals held that the California direct placement tax was in lieu of the California premium tax, at least when the insurance company is not “doing business” in California. Essentially, the Court of Appeals determined that the legislature intended only one tax on nonadmitted insurance, not both the premium tax and the direct placement tax.|
These advisory opinions come on the heels of a recent New York State Division of Tax Appeals administrative law judge (ALJ) determination addressing unauthorized non-life insurance company taxation, which is currently on appeal with the New York State Tax Appeals Tribunal. The Department’s guidance is consistent with the ALJ determination, but is potentially much broader. The ALJ determination subjected unauthorized non-life insurance companies (non-surplus lines insurance companies) to insurance franchise tax only on their distributive share of income and capital from limited partnerships doing business in New York, as the limited partnerships were the companies’ only connection with New York. However, the advisory opinions do not provide this limitation for surplus lines companies, which receive New York premiums. For additional information on this ALJ determination and a detailed overview of New York’s insurance tax regime, see our previous Legal Alert: New York State Division of Tax Appeals Addresses Unauthorized Insurance Company Taxation.
1 The direct placement tax is an insurance procurement premium tax, which New York imposes on insureds when they purchase insurance directly from an unauthorized insurance company.
2 The surplus/excess lines tax is a premium tax that New York imposes on surplus/excess lines brokers when they facilitate insurance from an unauthorized insurance company.
3 Silvers v. State Bd. of Equalization, 116 Cal. App. 4th 1215 (Cal. Ct. App. Sept. 30, 2010), review denied (Jan. 12, 2011).