Capstone: Captive Insurance Companies Still On The Hook For State IPP Taxes?

HOUSTON, Aug. 20, 2014 /PRNewswire/ -- On July 31^st, two senior U.S. Senators, Patrick Leahy (D-Vermont) and Lindsey Graham (R-South Carolina), introduced legislation to clarify the Nonadmitted and Reinsurance Reform Act (NRRA), enacted as part of the 2010 Dodd Frank Act that does not apply to captive insurance programs. 

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 Stewart A. Feldman is a recognized expert on the IPP tax who first identified the legislative issues to the domestic domiciles that resulted in the now three-year-old legislative effort of the Coalition for Captive Insurance Clarity.

"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 Logan Gremillion said that various states have been in a revenue bind over the past few years and saw the NRRA as an opportunity to increase their revenue. 

"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." The Feldman Law Firm was among the first to identify the loose NRRA language in the Dodd Frank Act and its impact on captives. For this reason, we have long worked with our clients in designing captive insurance programs to minimize the impact of IPP taxes and to break the nexus that leads to double tax."

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 The Feldman Law Firm LLP, (www.feldlaw.com ), Capstone administers property & casualty insurance companies that provide alternative risk financing services throughout the U.S.  Now in its 17^th year, Capstone provides turnkey services to manufacturers, distributors, service providers and other types of operating businesses.

Capstone's insurance professionals who include Chartered Property & Casualty Underwriters, Associates in Risk Management and accountants and administrators, The Feldman Law Firm's tax, corporate, financing and regulatory lawyers, and outside CPAs, risk managers, property & casualty professionals, and actuaries combine to offer middle market companies the most comprehensive risk planning solution available. Today, captives are the premier risk management and risk-financing tool for qualified middle market companies.  To learn more about captive insurance and protecting your business from inherent, operational risk, please visit us at www.capstoneassociated.com or contact us at 800-705-4014.

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SOURCE Capstone Associated Services, Ltd.