Capstone: Captive Insurance Companies Still On The Hook For State IPP Taxes?
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By clarifying that the NRRA was not directed at captive insurance programs, the proposed legislation would limit the states' ability to impose or collect independently procured premium (IPP) tax from out-of-state insurers and on out-of-state premiums. Most states have used the NRRA definition of "nonadmitted insurer" to allow them to tax 100 percent of the captive insurance premium, regardless of the domicile of the insurer and regardless of where the benefit of the insurance lies.
Tax lawyer
"The loose language of the NRRA resulted in a nationwide excise or gross receipts tax on captive insurance premiums," Feldman said. "This contrasts with the fact that the NRRA was intended to simplify the tax reporting by brokers of nonadmitted policies. The language of the NRRA in referencing a 'nonadmitted insurer' is the culprit, leading states to argue that the NRRA encompassed all insurance programs from nonadmitted carriers."
Not only does this interpretation lead to double taxation – in both the captive's state of domicile and in the home state of the insureds – but this interpretation imposes an excise tax on an entity simply covering the risks of affiliates.
"The interpretation of the states is as if Amazon.com collected sales tax out-of-state wherever its warehouses are located and then the recipient paid another sales tax upon the goods entering the home state because the company maintained a physical presence in that other state as well. It just doesn't make sense," Feldman added.
Tax attorney
"The NRRA was targeted at surplus lines brokers, but an unfortunate drafting issue in the 2300-page act left many states with the ability to tax captive insurance procured by their home state insureds. This legislation, would fix the legislative drafting issue by amending the definition of "nonadmitted insurer" to specifically exclude a "captive insurer."
At this time, the proposed legislation has only been introduced and referred to committees for review--no other action has been taken. The issues involving the ability of a state to tax out-of-state captive premiums remains a controversial and complicated tax issue. Meanwhile tax lawyers specializing in these areas have taken recognized precautions to minimize the consequences of any double taxation overhang.
While the proposed legislation would potentially correct the seemingly incorrect implications of the NRRA, several states have enacted laws regarding the taxation of captive insurance based upon the NRRA/home-state rule. Gremillion warns that introducing the legislation is only a first step toward its enactment. The state laws remaining in place require special attention from captive owners.
About Capstone
Capstone Associated Services, Ltd. is the most integrated and largest outsourced provider of captive insurance services for the middle market. In association with
Capstone's insurance professionals who include Chartered Property & Casualty Underwriters, Associates in Risk Management and accountants and administrators,
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