With the pandemic in our rearview mirror (mostly), life in general seems much closer to the normal we used to know. The bulk of the recent state and local tax (SALT) developments applicable to the insurance industry similarly reflect the optimism and promise of better times, as well as the development of policies to deal with what seems to be the new workplace standard of remote and hybrid workers.
Based on our client interactions, remote employee issues continue to be the primary state tax challenge for most employers (including insurers). Complications from remote and hybrid workers can potentially create a wide variety of state tax issues for employers, such as nexus exposure, payroll withholding, and employee-based credit complications—not to mention complexities and confusion for the employees on their individual income tax filing requirements. See our FORsights™ article, “Nomads Can Make You Go Mad – Tax Insights for Remote Workers,” for additional information.
As of midyear, a little less than half of the state legislatures are still in session for the year. Below is a summary of some of the key legislative and judicial developments applicable to insurers to date in 2023. Note that most of these relate to taxpayer-friendly new credits and decreases to tax rates.
- Alabama House Bill (HB) 247
Creates the Innovating Alabama Act, which includes tax credits against income, premium, and bank tax. The credit is 50% of the cash contribution to an economic development organization as approved by Innovate Alabama. Passed, effective January 1, 2023.
- California/Myers v. California State Board of Equalization, Court of Appeal of California, Second District, No. B307981, April 24, 2023
A California trial court was deemed to have properly applied the standard for deciding whether certain healthcare service plans (HCSPs) were insurers for gross premium tax purposes. In this matter, an individual sought to compel the state to impose the premium tax from certain HCSPs, which were regulated by the Department of Managed Health Care under a different regulatory scheme than standard insurers. The California Court of Appeal previously established a standard for deciding whether HCSPs are insurers for tax purposes that requires determining whether the indemnity aspects of their operations constitute a significant financial proportion of the business as compared to the direct servicing aspects. Here, the HCSPs established that they were not insurers under this standard.
Caution: Myers appealed to the California Supreme Court on June 1, 2023. - Colorado HB 1288
Establishes a FAIR (Fair Access to Insurance Requirements) plan to offer property insurance coverage not otherwise available in the market. The plan will be funded by a market share assessment imposed on member insurers based on the three most recent calendar years for which information is available bears to premiums received on property and commercial property insurance lines in the state for such calendar years by all assessed member insurers. Passed, effective May 12, 2023.
- Colorado HB 1303
Conforms the Life & Health Insurance Guaranty Fund provisions to the National Association of Insurance Commissioners (NAIC) Model Act provisions to include: 1) requires health insurance corporations as member insurers; 2) allocates the Class B assessments pertaining to long-term care to 50% life/annuity and 50% health insurers; and 3) permits a policyholder surcharge for assessments paid. Passed, effective May 15, 2023.
- Florida Senate Bill (SB) 102
Creates the Live Local Act, which includes an income and premium tax credit for contributions to the program. The program in turn provides loans for the construction of large-scale projects of significant regional impact. Passed, effective July 1, 2023.
- Indiana HB 1001
Establishes a tax credit against adjusted gross income, financial institutions, and premium tax for qualified childcare expenditures for when employers provide childcare to their employees. The credit is the lesser of 50% of the employer's qualified expenditures in the taxable year, or $100,000. Passed, effective January 1, 2024.
- Indiana HB 1454
Establishes a historic rehabilitation income tax credit equal to 25% (30% if the property is an Internal Revenue Code (IRC) Section 501(c)(3) or non-income producing) of the qualified expenditures incurred in the restoration and preservation of a qualified historic structure, depending on the type of historic structure. In addition, creates a tax credit against income, premium, or financial institutions tax for an eligible taxpayer that employs disabled individuals. The amount of the credit varies from 20% to 50% of the wages paid to the employee, depending on the type of employer and the year of employment. Passed, effective January 1, 2024.
- Indiana SB 2
Permits pass-through entities (PTEs) to make an election to pay tax at the entity level at the 4.9% corporate income tax rate. Owners are then able to claim a refundable tax credit equal to the amount of tax paid by the PTE. Passed, effective retroactively to January 1, 2022.
Caution: There does not appear to be any carve out for insurers, which then would require a foreign insurer to file an income tax return to obtain the credit/refund. - Iowa HB 685
Imposes a premium tax of 2.5% of taxable premium on health maintenance organizations. Passed, effective January 1, 2024.
- Kansas HB 2090
Decreases the surplus lines tax rate from 6% down to 3%. Passed, effective January 1, 2024.
- Louisiana/Louisiana Health Service & Indemnity Co. D/B/A Blue Cross/Blue Shield of Louisiana v. Robinson, Louisiana Court of Appeal, Fifth Circuit, Dkt. No. 2023 CA 0052, June 2, 2023
The Louisiana Court of Appeal upheld a decision by the Louisiana Board of Tax Appeals, which found that an insurance company owed additional corporation income tax for the income tax period at hand as the insurer had improperly claimed the investment tax credit against its premium tax as an offset against its Louisiana corporate income tax, i.e., treating the credit as if it were premium tax paid. The court determined that the Louisiana Legislature did not intend for the investment tax credit to be claimed against both the premium tax and the state corporate income tax.
- Michigan/Nationwide Agribusiness Insurance Company et al v. Michigan Department of Treasury, Michigan Tax Tribunal, No. 21-000039, January 23, 2023
The court held that an affiliated group of insurance companies was precluded from filing combined returns for Michigan premium and retaliatory taxes. Although the companies satisfied the elements of a unitary business group, they could not, under Michigan law, file combined returns as the statutory definition of “insurance company” does not include unitary business groups, and tax law requires the premium and retaliatory taxes to be calculated on an entity-by-entity basis.
- Minnesota SB 2909
The surcharge imposed on Minnesota homeowner’s insurance, commercial fire, and commercial nonliability insurance policy premiums to fund firefighter training is increased from 0.5% to 0.65%. Passed, effective August 1, 2023.
- Nebraska Legislative Bill 754
Phases out the two bracket corporate tax rate system and implements rate reductions over four years as follows: 5.58% on the first $100,000 and 5.84% above that for 2024; a flat 5.2% for 2025; a flat 4.55% for 2026; and a flat 3.99% for 2027 and after. Currently, the state imposes a rate of 5.58% on the first $100,000 of corporate income and a rate of 7.25% on income higher than $100,000. In addition, the bill creates a corporate income tax credit for contributions to an eligible childcare program. The credit is 100% of the contribution if the childcare program is located in an opportunity zone or has a child covered under the state’s childcare subsidy program; otherwise, the credit is 75% of the contribution. Passed, effective May 31, 2024.
- New Jersey/N.J. State Firemen’s Association v. N.J. Division of Taxation, New Jersey Tax Court, Docket 000151-2019, January 20, 2023
The Tax Court held that the Division of Taxation was improperly using the 12.5% cap on taxable premium to compute the offset/refund due to foreign insurers for the fire tax credit against the premium tax. The 2% fire tax is imposed on all foreign insurers doing business in New Jersey by the New Jersey State Firemen’s Association. The fire tax base is an all-New Jersey premium covering fire risk on property. To prevent double taxation, the fire tax is a credit against the standard 2.1% premium tax administered by the Division of Taxation. The premium tax base is limited to the lesser of New Jersey premium or 12.5% of their worldwide premium per New Jersey Statutes Annotated §54:18A-6. The Division of Taxation historically refunded the excess of fire tax over premium tax but issued a notice in 2016 to clarify its position that the 12.5% cap applies to the fire tax base as well as the premium tax base. The court found that the division’s decision via its web-published notice changing the fire tax computation by applying the 12.5% cap to the foreign insurers’ fire insurance premiums is contrary to the plain language and intent of New Jersey Revised Statute §54:18-1.
- New York Assembly Bill 3009/SB 4009
A component bill of the 2023–24 budget package that contains a variety of tax provisions. A number of existing credits are extended, expanded, and/or revised. Of significant concern to insurance companies with a noninsurance parent with New York nexus or included in a New York combined return, the current capital base tax rate is extended for three years, through tax year 2026. Passed, effective May 3, 2023.
Caution: The general position of the New York State Department of Taxation and Finance is that the investment in the insurance subsidiary(s) should be included in the capital tax base. - North Carolina/North Carolina Farm Bureau Insurance Company, Inc. v. NCDOR, No. 20 CVS 10244 (Wake County), April 3, 2023
The Wake County Superior Court ruled in favor of the taxpayer, reversing Judge Stacey Bawtinhimer’s administrative hearing from August 17, 2020. This restores the renewable energy property credits purchased from Monarch Capital through partnership investments that the Department of Revenue had disallowed. The department’s position was that a person not qualifying as a partner under federal income tax law would not qualify for allocation of a credit and/or some transfers of tax credits may be viewed as disguised sales under IRC §707, which would prevent the credits from being allocated to a taxpayer under IRC §704. The court also noted that the department did not seek to affirm the judgment based on the administrative law judge’s (ALJ) reasoning, namely that Farm Bureau could not claim tax credits because it “did not construct, purchase, or lease renewable energy property” as the department realized the ALJ appeared to have mistaken the criteria for earning a tax credit with those for allocating one.
Caution: The department has appealed to the state supreme court. - North Dakota SB 2211
Adds hail crop to the lines of business to be reported on the fire marshal return. Passed, effective April 17, 2023.
- Texas SB 1013
Extends the Historic Structure Rehab Credit to premium tax (currently only available for credits sold or assigned to insurers). Passed, effective September 1, 2023.
- Washington/Envolve Pharmacy Solutions, Inc. v. Wash. Dept. Rev., Washington Court of Appeals, Dkt. No. 83563-7-I, February 27, 2023
The Washington Court of Appeals affirmed the decision of the superior court holding that the taxpayer’s activities were functionally related to insurance business on which a premiums tax had been paid, and thus exempt from business and occupations (B&O) tax. The taxpayer, a subsidiary of Centene Corporation, was contracted to fulfill pharmacy benefits services to enrollees of Coordinated Care, another Centene subsidiary. In a letter ruling, the Department of Revenue explained that affiliates could qualify for the B&O exemption only if they were providing services that were “functionally related” to Coordinated Care’s insurance business. Thereafter, the taxpayer requested a refund of B&O taxes paid, claiming that all services provided to Coordinated Care were functionally related to Coordinated Care’s insurance business. Both the department and the Board of Tax Appeals disagreed, finding that the taxpayer failed to establish that it was entitled to avoid B&O tax on all its pharmacy benefits services income. However, the appellate court agreed with the superior court, which held that the taxpayer’s activities were exempt insurance business activities.
Caution: The department filed an appeal in the Washington Supreme Court on March 28, 2023. - Travel Insurance
Several states adopted the NAIC model travel insurance provisions (2018) that clarify that travel insurance is classified as inland marine insurance (or health insurance as appropriate) and imposes the premium tax (and applicable fire taxes) on insurance on travel insurance sold to state residents, certain primary certificate holders, or certain blanket travel insurance policyholders, excluding any amount received for travel assistance services or cancellation fee waivers.
- Delaware SB 62 / effective May 31, 2023
- Kansas SB 85 / effective April 24, 2023
- Montana HB 591 / effective May 18, 2023
- North Dakota SB 2173 / effective March 28, 2023
- West Virginia HB 2540 / effective March 29, 2023
How Forvis Mazars Can Help
Consulting with and involving your tax professionals can help you keep current with the above and/or other state tax developments, which can potentially save you money and help you remain in compliance with new filing requirements and tax provisions. If you have any questions or need assistance, reach out to a professional at Forvis Mazars or submit the Contact Us form below.