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Inclusion of Insurance Company in Unitary Return - When Is an Insurance Company "Subject to" Premium Tax?

When is an insurance company “subject to” premium tax? Recently, the Indiana Tax Court answered this question in United Parcel Service, Inc. v. Indiana Department of Revenue

When is an insurance company “subject to” premium tax? Recently, the Indiana Tax Court answered this question in United Parcel Service, Inc. v. Indiana Department of Revenue, 49T10-0704-TA-24 (December 29, 2010), concluding that an insurance company is “subject to” premium tax when it is placed under the authority, dominion, control, or influence of the tax, and not simply when it is required to pay the tax. 

In United Parcel Service, the Indiana Department of Revenue had determined that UPS should have included the income of two affiliated foreign reinsurance companies in its Indiana worldwide unitary corporation income tax return. UPS, however, maintained that its affiliated foreign reinsurance companies should be excluded because the Indiana statutes provided that there is no income tax on the adjusted gross income of insurance companies “subject to” the Indiana gross premium tax.

The Department argued that, because the foreign reinsurance companies never filed premium tax returns or paid premium tax, such companies were not “subject to” the Indiana gross premium tax and should have been included in the UPS return. However, the Tax Court sided with UPS, and concluded that the phrase “subject to” does not mean that one must “pay” the tax. Rather, the phrase “subject to” simply means “that one is placed under the authority, dominion, control, or influence” of the premium tax. Accordingly, UPS was entitled to exclude the income of its affiliated foreign reinsurance companies from its Indiana worldwide unitary corporation income tax returns. 

State revenue authorities have struggled with interpreting the phrase “subject to,” particularly as it relates to the interplay between corporate income taxes and premium taxes. Many states exempt insurance companies from traditional corporate income taxes by providing an exemption or exclusion for insurance companies that are “subject to” or, alternatively, are “paying” insurance premium tax. As is evidenced by the Tax Court’s holding, if a state wanted to limit the exclusion of insurance companies from corporation income tax only if such companies were actually paying the premium tax, the state’s legislature could have done so explicitly by limiting the language in the statute such that it only applied to insurance companies “paying” the premium tax. In fact, the exemption statutes in certain states specifically provide exemptions for only those taxpayers actually paying the premium tax. 

Interestingly, however, while Arizona’s statutes provide an exemption from its corporate income tax for insurance companies “paying” the Arizona premium tax, the Arizona Department of Revenue concluded in a Private Letter Ruling that an insurance company that provided Medicare Part D benefits, the premiums for which were exempt from premium tax under federal law, and therefore did not “pay” any premium tax, was still “subject to” the premium tax and exempt from the corporate income tax. Private Taxpayer Ruling LR08-10, Arizona Department of Revenue (Oct. 27, 2008).  Furthermore, Missouri recently amended its exemption statute that had required insurance companies to “pay” Missouri premium tax in order to claim exemption from Missouri corporate income tax. In fact, a 2008 Missouri ruling that addressed the statute prior to the amendment, in sharp contrast to the Arizona ruling, concluded that an insurance company that exclusively provided Medicare Part D benefits, the premiums for which were exempt from premium tax, and thus, did not actually pay premium tax, was subject to the Missouri corporate income tax. Missouri Private Letter Ruling No. LR 5192 (Oct. 22, 2008). Subsequent to this ruling, Missouri amended its exemption statute to provide an exemption from corporate income tax to insurance companies that are “subject to” the Missouri premium tax.

As apparent in UPS, some state revenue authorities interpret the phrase “subject to” tax as requiring actual payment of the tax. In addition to its treatment of UPS, the Indiana Department of Revenue also dealt with this issue in the premium tax area as it related to an insurance company that provided Medicare Part D benefits. In Indiana Revenue Ruling 2008-01 IT, the Department concluded that, because premiums for Medicare Part D benefits were excluded from premium taxation under federal law, the taxpayer, an insurer that offered Medicare Part D benefits only in Indiana, was not “subject to” the premium tax and, therefore, not exempt from the corporate income tax. This ruling appears to be contrary to the Tax Court’s decision in UPS

The question of who is “subject to” the premium tax for purposes of an exemption or exclusion from the corporate income tax remains unanswered in several states, and this area of law is expected to continue to evolve.

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Elizabeth S. Cha, Associate
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