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US Treasury Issues Guidance on the ARPA Claw-Back Provision

Earlier this week, the US Department of the Treasury (Treasury) issued formal guidance regarding the administration of the American Rescue Plan Act of 2021 (ARPA) claw-back provision. The guidance (Interim Final Rule) provides that the claw-back provision is triggered when there is a reduction in net tax revenue caused by changes in law, regulation or interpretation, and the state cannot identify sufficient funds from sources other than federal relief funds to offset the reduction in net tax revenue. The Interim Final Rule recognizes three sources of funds that may offset a net tax revenue reduction other than federal relief funds—organic growth, increases in revenue (e.g., a tax rate increase) and certain spending cuts (i.e., cuts that are not in an area where the recipient government has spent federal relief funds). According to the Treasury, this framework recognizes that money is fungible and “prevents efforts to use Fiscal Recovery Funds to indirectly offset reductions in net tax revenue.”

The Interim Final Rule also provides guidance on what is considered a change in law, regulation or interpretation that could trigger the claw-back (called covered changes), but that point remains somewhat ambiguous. The Rule provides that:

The offset provision is triggered by a reduction in net tax revenue resulting from ‘a change in law, regulation, or administrative interpretation.’ A covered change includes any final legislative or regulatory action, a new or changed administrative interpretation, and the phase-in or taking effect of any statute or rule where the phase-in or taking effect was not prescribed prior to the start of the covered period. [The covered period is March 3, 2021 through December 31, 2024.] Changed administrative interpretations would not include corrections to replace prior inaccurate interpretations; such corrections would instead be treated as changes implementing legislation enacted or regulations issued prior to the covered period; the operative change in those circumstances is the underlying legislation or regulation that occurred prior to the covered period. Moreover, only the changes within the control of the State or territory are considered covered changes. Covered changes do not include a change in rate that is triggered automatically and based on statutory or regulatory criteria in effect prior to the covered period. For example, a state law that sets its earned income tax credit (EITC) at a fixed percentage of the Federal EITC will see its EITC payments automatically increase—and thus its tax revenue reduced—because of the Federal government’s expansion of the EITC in the ARPA. This would not be considered a covered change. In addition, the offset provision applies only to actions for which the change in policy occurs during the covered period; it excludes regulations or other actions that implement a change or law substantively enacted prior to March 3, 2021. Finally, Treasury has determined and previously announced that income tax changes—even those made during the covered period—that simply conform with recent changes in Federal law (including those to conform to recent changes in Federal taxation of unemployment insurance benefits and taxation of loan [...]

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Texas Governor Signs Bill Exempting Medical Billing Services from Sales Tax

Texas Governor Greg Abbott has signed HB 1445 into law, making “medical or dental billing services” exempt from sales tax. Under the statute, a “medical or dental billing service” is defined as “assigning codes for the preparation of a medical or dental claim, verifying medical or dental insurance eligibility, preparing a medical or dental claim form for filing, and filing a medical or dental claim.” Beginning in 2002, the Texas Comptroller’s office took the position for sales tax purposes that “medical billing services” were not taxable data processing services. In November 2019, the Comptroller published a notice stating that it was going to treat “medical billing services” as taxable “insurance services.” Implementation of that notice was delayed multiple times, most recently through October 2021. The Comptroller’s office may now take the position that the legislative definition of “medical or dental billing services” is narrower than the definition the Comptroller has applied in its recent guidance and assert that some items are still subject to tax effective October 2021. Companies should consider whether their medical billing services fall within the legislative definition of “medical or dental billing services.”




The US Department of the Treasury Says State IRC Conformity Bills Do Not Trigger Federal Relief Claw-Back Provision

As we’ve blogged about in the past, the recently enacted American Rescue Plan Act of 2021 (ARPA) includes an ambiguous claw-back provision. If broadly interpreted, it could result in states losing relief funding provided under the APRA if there is any state legislative or administrative change that results in the reduction of state revenue. This provision is causing havoc in the state tax world, rightfully so.

After much yelling and screaming from state attorneys general and those in the tax world, including McDermott (see McDermott letter to Treasury Secretary Janet Yellen attached), the US Department of the Treasury issued a press release announcing forthcoming “comprehensive guidance” on this provision. Treasury also addressed a question that has been on the top of our minds since the provision was enacted: Could state legislation addressing state conformity to the Internal Revenue Code trigger the claw-back? States routinely conform to and decouple from changes to the Internal Revenue Code, so if such actions could trigger the claw-back, state legislatures would be reluctant to consider them. We were so concerned about this issue that we specifically addressed it in our letter to Secretary Yellen.

This week, we received the Treasury’s guidance on this issue: Conformity bills will not trigger the claw-back. In its press release, Treasury stated:

… Treasury has decided to address a question that has arisen frequently: whether income tax changes that simply conform a State or territory’s tax law with recent changes in federal income tax law are subject to the offset provision of section 602(c)(2)(A) of the Social Security Act, as added by the American Rescue Plan Act of 2021. Regardless of the particular method of conformity and the effect on net tax revenue, Treasury views such changes as permissible under the offset provision.

This is a step in the right direction and should ease concerns of state legislatures. Passing a conformity bill will not cause any loss of federal funding. Treasury’s guidance, because it applies to all “methods of conformity,” should cover any legislation that either couples with or decouples from the Internal Revenue Code.

But our work is not done. In our letter to Secretary Yellen we also asked for guidance confirming that state actions in other areas will not trigger the claw-back. Specifically, we made concrete suggestions that actions to correcting tax statutes or rules that are either unconstitutional or barred by or violate federal law also should not trigger the claw-back. Treasury’s recent press release gives us a glimmer of hope that Treasury will exclude such actions from the clutches of the claw-back provision as well. Stay tuned for more!




McDermott Provides Treasury Department with Concrete Suggestions for Guidance on the American Rescue Plan Act’s Claw-Back Provision

The recently enacted American Rescue Plan Act of 2021 (ARPA) includes an ambiguous claw-back provision that has brought the world of state and local tax policymaking to a grinding halt. Because ARPA’s adoption occurred during the final weeks of many states’ legislative sessions, rapid issuance of guidance from the US Department of the Treasury is needed before the sessions adjourn to prevent the irreversible damage that will occur if a state foregoes enacting policies aimed at alleviating the economic disruption caused by COVID-19 out of fear of facing claw-back of federal relief.

McDermott recently sent a letter to Treasury Secretary Janet Yellen, urging the issuance of guidance giving a balanced interpretation of the claw-back provision. This guidance is necessary to avoid putting state legislatures, governors and tax administrators across the country in an untenable situation where every tax change or adjustment being considered—no matter how innocuous or routine—will carry the risk of a reduction to their state’s share of federal funding for the next three years.

In the letter, we provided concrete suggestions on areas where the ARPA left room for such balanced interpretation. We suggested that Treasury interpret the claw-back provision as either inapplicable to or provide a safe harbor for:

  • Changes addressing state conformity to the Internal Revenue Code (IRC)
  • Corrections of unconstitutional tax statutes or rules
  • Corrections of tax provisions barred by or that violate federal law
  • Actions in which there is no or only a weak connection between the law change reducing net revenue and the use of federal relief funds
  • Changes in the law announced before the enactment of ARPA
  • Reductions in net revenue related to purposes that further ARPA’s objectives.

The letter pointed out that states need concrete guidance, whether formal or informal, addressing these areas. Such guidance will alleviate the concerns of state governments and allow state policymakers to function and continue the orderly administration of state taxes.




Illinois Moves One Step Closer to Enacting Captive Reform

On November 14, the second day of its 2018 veto session, the Illinois Senate voted unanimously to override Governor Rauner’s amendatory veto of Senate Bill 1737 (Bill). As we have previously reported, the Bill is a proposed new law that would reform the Illinois Insurance Code’s regulatory framework for captive insurance companies and significantly drop the state’s current premium tax rate on self-procured insurance. The Illinois General Assembly passed the Bill on May 31, 2018, with bi-partisan support. The Illinois Department of Insurance, key industry groups and several large Illinois-based taxpayers also support the legislation.

If it becomes law, the Bill would create a much more favorable regulatory framework for Illinois captives, following the lead of multiple jurisdictions, including Vermont, Hawaii, South Carolina and the District of Columbia. (more…)




Finishing SALT: August Wrap-Up & Looking at September

A Grain of SALT: September State Focus – New Hampshire

With the road paved in the US Supreme Court’s now famous South Dakota v. Wayfair Inc. decision, many states have begun releasing remote-seller sales tax collection guidance. Interestingly, the state of New Hampshire has joined the fray as well even though it does not impose a state sales tax. New Hampshire’s efforts are specifically directed at preventing out-of-state taxing authorities from imposing remote-seller sales tax collection obligations on New Hampshire businesses located solely in the state. These efforts come via a bill sponsored by Rep. Jess Edwards (R) and Rep. Kevin Scully (R) and planned to be introduced in early 2019. The bill would make sales and use tax collection obligations on New Hampshire remote-sellers by out-of-state jurisdictions unlawful. According to Rep. Edwards, this bill is being filed because “we do not recognize any other taxing jurisdiction other than New Hampshire to impose a tax obligation on our businesses.”

Top Hits You May Have Missed

Reform Pending for Illinois Captive Insurance Framework

House Judiciary Committee to Consider Wayfair Decision Impact

More States Respond to Federal Tax Reform

Looking Forward to September

September 12, 2018: Diann Smith will be presenting “Post-Wayfair” at the Tax in the City® event in Seattle, WA. You can still register! Just click here.

September 19, 2018: Jane May is presenting “Anatomy of a Whistleblower Case” at the inaugural Dallas Tax in the City® event in Dallas, TX. You can still register! Just click here.

September 19, 2018: Alysse McLoughlin is presenting “US Supreme Court’s Decision on Wayfair” at the inaugural Dallas Tax in the City® event in Dallas, TX. You can still register! Just click here.

September 19, 2018:  Steve Kranz and Eric Carstens are speaking at the Tax Executives Institute Seattle Chapter Meeting regarding the South Dakota v. Wayfair Supreme Court decision in Seattle, WA.

September 19, 2018:  Steve Kranz and Katherine Quinn are speaking at the Tax Executives Institute Seattle Chapter Meeting regarding State Tax After (federal tax) Reform and will also cover key captive insurance company developments in Seattle, WA.

September 19, 2018:  Charles Moll is speaking at the Tax Executives Institute Seattle Chapter Meeting regarding California SALT developments in Seattle, WA.

September 20, 2018: Catherine Battin is presenting “So Wayfair Happened—What’s Next?” at the Taxpayers’ Federation of Illinois’ Annual Conference in Rolling Meadows, IL.

September 20, 2018: Mary Kay Martire is presenting “Audits and Beyond—Tips, Traps, and War Stories” at the Taxpayers’ Federation of Illinois’ Annual Conference in Rolling Meadows, IL.

September 25, 2018: Peter Faber, Alysse McLoughlin and Mark Yopp are presenting “New Jersey Corporate Business Tax Overhaul: What You Need to Know” and “A Discussion on the States’ Reaction to Wayfair” at the Tax Executives Institute, Inc. (TEI) New York Chapter – State and Local Tax Meeting in New York, NY.




Reform Pending for Illinois Captive Insurance Framework

Illinois Governor Bruce Rauner has until August 28 to sign or veto Senate Bill 1737, a proposed new law that would reform the Illinois Insurance Code’s regulatory framework for captive insurance companies and significantly drop the state’s current premium tax rate on self-procured insurance.

If enacted, this new law would provide a substantially improved environment for Illinois-based companies looking for captive solutions.

Access the full article.




Focus on Tax Controversy – December 2015

McDermott Will & Emery has released the December 2015 issue of Focus on Tax Controversy, which provides insight into the complex issues surrounding U.S. federal, international, and state and local tax controversies, including Internal Revenue Service audits and appeals, competent authority matters and trial and appellate litigation.

Mark Yopp authored an article entitled “Waiting for Relief from Retroactivity,” which discusses how courts are expanding the ability of state legislatures to retroactively change taxpayer liability going back many years.

View the full issue (PDF).




Plain and Simple: Maryland Tax Court Holds Insurance Company is Exempt from Corporate Income Taxes

Although taxpayers often complain that complying with the tax laws imposed by the numerous state and local taxing jurisdictions that exist in the United States is a burdensome process, many of these tax statutes also provide benefits to taxpayers in the form of exemptions, deductions and credits.  Taxpayers who structure their affairs according to the plain language of these favorable tax laws can be frustrated when state revenue departments attempt to deny them the benefits of the statute.  A recent opinion from the Maryland Tax Court supports the argument commonly advanced by taxpayers in these situations – that when the language of a statute is clear, there is no room for the revenue department to interpret the statute in a contrary manner.  See National Indemnity Co. v. Comptroller of the Treasury, Dkt. No. 14-IN-OO-0433 (Md. Tax Ct. April 24, 2015).

Maryland, like many states, exempts “insurance companies” from the payment of corporate income taxes because these entities are generally subject to tax under some other section of the tax law, insurance law or both.  Also as in many states, insurance companies are defined for purposes of Maryland’s corporate income tax statutes by reference to the state’s insurance law.  The taxpayer in National Indemnity Co. plainly fit within the definition of an insurance company under the Maryland insurance statutes because it was “in the business of writing insurance contracts.”  See Md. Code Insurance § 6-101(a).  While the facts of the case do not disclose whether the company did in fact pay taxes under a different statute, insurance companies in Maryland are subject to tax on all new and renewal gross direct premiums that are allocable to the state and written during the preceding calendar year.  See Md. Code Insurance § 6-102.  Nevertheless, the Maryland Comptroller’s office contended that when an insurance company invests money similar to a commercial bank, it should not be afforded the statutory exemption from corporate income tax.  The Tax Court rejected the Comptroller’s argument, noting that under the plain language of the statute (as well as under the Comptroller’s regulations and other published guidance), insurance companies similar to the taxpayer were not subject to Maryland corporate income tax.

In National Indemnity, Maryland’s corporate income tax statute clearly exempted insurance companies from the payment of corporate income taxes, and clearly defined insurance companies by reference to the Maryland insurance law.  The Comptroller’s argument appeared to be that, despite the fact that the taxpayer at issue fit within the statutory definition of an insurance company, it wasn’t “acting like” an insurance company and therefore shouldn’t be taxed like an insurance company.  While the National Indemnity opinion is short, its import is clear—where the legislature has plainly spoken on a subject, the revenue department is obligated to follow the plain language of the statute, whether that statute is favorable to the revenue department or not.  Companies should also be aware that Maryland (like a number of other states) does allow the prevailing party in a civil [...]

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One Down, One to Go: Illinois Senate Passes Captive Insurance Exemption to Illinois Self-Procurement Tax

On April 21, 2015, the Illinois Senate unanimously passed Senate Bill 1573, as amended. As we have previously covered, the amended Bill creates an exemption from the 3.5 percent self-procurement tax and 0.2 percent Surplus Lines Association of Illinois stamping fee (and the up to 1.0 percent fire marshal tax, if applicable) for “contracts of insurance with a captive insurance company.” The amendment defines a “captive insurance company” broadly to include “any affiliated insurance company … or special purpose financial captive insurance company formed to insure the operational risks of the company’s parent or affiliates, risks of a controlled unaffiliated business, or other risks approved by the captive insurance company’s board or other regulatory body.” The definition also enumerates several kinds of captive insurance companies as specifically included. Insurance directly procured from a nonadmitted commercial carrier—or any other person not meeting the definition of “captive insurance company”—would continue to be subject to the tax.

The bill now goes to the Illinois House of Representatives, where it has been assigned to the House Rules Committee. The bill’s supporters are hopeful that the House could pass it as a standalone bill. There also is a possibility that the bill could be included in a broader package of tax legislation at the end of the legislative session.

Practice Notes

1.  Even if enacted, the bill would not provide immediate relief to Illinois captive insureds. The bill’s effective date is January 1, 2016. Thus, insurance transacted with a qualifying captive in 2015 would still be subject to the tax.

2.  The bill does not change the increased qualification requirements to be an “industrial insured” eligible to self-procure insurance from unadmitted carriers, which came into effect together with the tax on January 1, 2015. An industrial insured must still meet the requirements of an “exempt commercial purchaser” under 215 ILCS 5/445(1), which include having nationwide commercial property and casualty insurance premiums in excess of $100,000 annually and having any of (a) net worth of more than $20 million, (b) more than $50 million of annual revenues, (c) more than 500 full time employees or more than 1,000 employees in an affiliated group, (d) a nonprofit organization with at least a $30 million budget or (e) a municipality with a population in excess of 50,000 persons.




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