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.

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.

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).

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 action to recover the costs of the action plus reasonable expenses (including reasonable attorneys’ fees) if the court finds that the conduct of any party in maintaining or defending any proceeding was in bad faith or without substantial justification.  See Md. Gen. Rule 1-341.  Thus, taxpayers facing a revenue agency that is attempting to contravene the plain language of a statute without substantial justification should consider whether litigation costs are potentially recoverable from the agency.

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.

Members of the Illinois General Assembly continue to make efforts to ameliorate the impact of Illinois’ new self-procurement tax on captive insurance.  On March 10, 2015, Sen. William Haine (D-Alton) filed an amendment to Senate Bill 1573, which was originally introduced under his sponsorship on February 20, 2015, and is now pending in the Senate Insurance Committee. As originally presented, the Bill would basically undo last year’s legislation (P.A. 98-978) imposing a self-procurement tax and narrowing the industrial insured exemption.  The amendment takes a more nuanced approach, by carving out captive insurance arrangements from the tax while leaving the narrowed definition of industrial insured in place.

The amendment proposes to amend the law to simply provide that contracts of insurance with a captive insurance company are not subject to the taxes and fee (3.5 percent self-procurement tax, 0 percent to 1 percent fire marshal tax, 0.1 percent surplus lines association fee) imposed by Public Act 98-978. 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.

This proposed exemption for insurance placed directly with captive insurance companies would leave unaffected the increased qualification requirements to be an “industrial insured” eligible to self-procure insurance from unadmitted carriers. Insurance directly procured from a nonadmitted commercial carrier would continue to be subject to tax. The amendment also changes the effective date of the Act to January 1, 2016, whereas previously the bill would have been effective immediately upon becoming law. Insurance transacted with a qualifying captive in 2015 thus would be subject to tax under the amendment.

On March 10, 2015, House Minority Republican Leader Jim Durkin introduced House Bill 4193, which mirrors Senate Bill 1573 (as originally filed) in basically repealing the changes made last year by Public Act 98-978.

It remains to be seen whether either version of the Bill will gain traction in the Democratic-controlled General Assembly, which is struggling with a large state budget deficit that will increase substantially with the 2015 rollback of Illinois’ temporary income tax increase.

On February 20, 2015, Sen. William Haine introduced Senate Bill 1573, which would repeal the self-procurement tax that came into effect January 1, 2015.  As we have previously covered in detail, at the end of its 2014 regular legislative session,the Illinois General Assembly enacted a multimillion dollar tax on Illinois companies using captive insurance arrangements (P.A. 98-978). The bill had been passed by the General Assembly under the guise of technical corrections to the insurance code and went widely unnoticed throughout the legislative process. Governor Quinn signed it into law, and efforts to repeal the law during the veto session were unavailing. The new tax is currently in effect and applies to policies effective on or after January 1, 2015. Reports, due 90 days after the effective date of coverage, will begin coming due at the beginning of April, with taxes and fees due 30 days after reports are filed.

Now, with a new General Assembly and a new governor, efforts again are underway to repeal the tax. Senate Bill 1573 would reverse the changes made last year by Public Act 98-978 by repealing the self-procurement tax.  In addition, the Bill restores a broader industrial insured exception to permit more Illinois-headquartered businesses that manage risks using captive insurance arrangements to transact non-admitting insurance without being subject to Illinois premium tax. The repeal would be effective upon enactment.  As currently drafted, the Bill does not appear to provide relief for policies subject to tax before the effective date of the repeal.

As we have previously covered in detail, at the end of its 2014 regular legislative session, the Illinois General Assembly enacted a multimillion dollar tax on Illinois companies using captive insurance arrangements.  The law was enacted under the guise of technical corrections to the insurance code.

Historically, Illinois businesses meeting basic levels of sophistication and size were entitled to obtain coverage from nonadmitted insurers under an “industrial insured” exception to the general prohibition on transacting unauthorized insurance.  Senate Bill 3324, now Public Act 98-0978 (the Act), tightened the qualifying criteria for the industrial insured exception and imposed new taxes and fees totaling between 3.6 percent and 4.6 percent of premium—equivalent to those imposed on a policy procured by a surplus lines broker.  The potential financial impact has been estimated at upward of $100 million, falling squarely on large- and mid-sized companies headquartered in Illinois.  The affected business community was aghast when the surprising tax consequences were discovered, but its efforts to repeal the law in the General Assembly’s fall veto session proved unsuccessful.

The law now has come into effect, applying to policies effective on or after January 1, 2015.  The statute provides that reports are due to the Surplus Lines Association of Illinois within 90 days of the effective date of a policy, and so reports for calendar year policies must be filed by April 1, 2015.  Applicable taxes and fees are then due 30 days after the filing of the report.  The Department of Insurance has not yet provided any guidance on the new law, but the Surplus Lines Association of Illinois has updated its website with an online filing system for businesses subject to the tax.  Affected businesses must register and complete their online reports within the requisite 90-day deadline.  Reporting is on a policy-by-policy and transaction-by-transaction basis.  The system then calculates the applicable taxes and fees.  Once a transaction is submitted, the website instructs that Surplus Lines Association of Illinois will e-mail an invoice for its 0.1 percent association stamping fee, and the Illinois Department of Insurance will mail an invoice for the 3.5 percent premium tax and any applicable fire marshal tax.

It remains to be seen whether another, more successful effort to overturn the law will be undertaken during the 2015 legislative session.  In the interim, affected taxpayers are required to comply with the law’s filing requirements and will be assessed the new tax.

Despite a strong effort by a coalition of opponents, efforts to repeal the new Illinois self-procured insurance tax law in the veto session of the Illinois General Assembly were unsuccessful.  As a result, the law will take effect on January 1, 2015.

As previously covered on this blog, Illinois allows “industrial insureds” to independently procure insurance.  Prior to the enactment of the self-procured insurance tax law, Illinois had not imposed tax on these transactions.  At the end of the spring legislative session, supposedly technical amendments to the insurance code were passed that imposed a 3.5 percent premium tax on these policies (plus an additional fire marshal tax and surplus line association fee, bringing the total to between 3.6 percent and 4.6 percent depending on the type of insurance).  This tax is imposed on the nationwide premium if the insured’s home state is Illinois.  Effectively, the statute is a tax on Illinois-headquartered businesses that use captive insurance risk management arrangements.

Despite being alerted to the unfriendly business impact of the bill, Governor Quinn signed it into law with an effective date of January 1, 2015.  Since then, the Illinois business community has sought the repeal of the tax or its amendment to exempt captives.  There had been hope that this could be achieved after the November election during the veto session or a lame duck session.  The Illinois House of Representatives, however, has adjourned and does not plan to reconvene until the 99th General Assembly is inaugurated on January 14, 2015.  (The Senate also has adjourned, although the Senate President has left open the possibility of reconvening before inauguration.)  Going into the 99th General Assembly, efforts will continue to seek legislative relief for captive insurance arrangements.

The new tax applies to policies of insurance effective on or after January 1, 2015.  Within 90 days after the effective date of such a policy, qualifying insureds must file a report with the Surplus Lines Association of Illinois (similar to that required of a surplus lines broker).  Within 30 days of filing that report, the insured then must pay to the Department of Insurance the premium tax and, if applicable, the fire marshal tax.  Also within those 30 days the insured must pay the 0.1 percent surplus lines association fee to the Surplus Line Association of Illinois.  Neither the Department of Insurance nor the Surplus Line Association of Illinois has posted forms or guidance on their websites.  Indeed, the guidance on the Surplus Line Association website is outdated and does not reflect the 2014 amendments.

Affected taxpayers should carefully consider their compliance obligations and how to proceed amidst this uncertainty.  We will post on this subject again when/if additional guidelines are issued.

Illinois will soon begin taxing self-procured insurance premiums for the first time, as required by Senate Bill 3324, now Public Act 98-0978 (the Act).  The Act, which was signed into law by Governor Quinn on August 15, was quietly ushered through the General Assembly as a supposed technical amendment. The Act is anything but—it substantively amends Illinois law to tax Illinois-based companies who self-procure insurance as though they were surplus lines brokers, imposing a 3.5 percent self-procurement tax, together with additional fees and charges.  In addition, the Act makes it harder for Illinois companies to self-insure by narrowing the definition of an “industrial insured,” limiting the types of risk that may be self-insured and increasing the qualification requirements for risk managers.  The new law applies to policies of insurance effective on or after January 1, 2015.

As we explained in a prior post, the Act hurts Illinois-headquartered businesses that manage risks using captive insurance arrangements. With the 2011 enactment of the Nonadmitted and Reinsurance Reform Act (NRRA), a company’s home state – typically its principal place of business – has exclusive authority to tax and regulate nonadmitted insurance. See 15 U.S.C. § 8201. For Illinois-headquartered businesses, this arrangement worked well because Illinois law previously allowed “industrial insureds” – companies meeting minimal size and sophistication requirements – to transact nonadmitted insurance without paying tax. An Illinois-headquartered company thus could obtain insurance from its captive domiciled overseas or in a captive-friendly U.S. state without paying any tax on its premiums.

The Act ends this business-friendly state of affairs. An industrial insured transacting nonadmitted insurance for a policy taking effect on or after January 1, 2015, will now have to withhold (or pay out-of-pocket if it does not withhold) a 3.5 percent premium tax on insurance contracts. Two additional charges increase the total effective rate to anywhere from 3.6 percent to 4.6 percent: a countersigning fee of 0.1 percent to support the Surplus Line Association of Illinois, and for certain lines of insurance, a fire marshal tax of anywhere from 0.01 percent to 1.00 percent of premium.

The Act also makes it more difficult for Illinois companies to self-insure by narrowing the definition of an “industrial insured,” where companies must qualify as an “industrial insured” in order to have the right to self-insure. Until now Illinois company could be an “industrial insured” if its annual premium for insurance of all risks except life and accident and health insurance exceeded $100,000 and it had either (a) at least 25 full-time employees, (b) more than $3 million of gross assets, or (c) gross revenues of more than $5 million. Under the Act, an industrial insured now must 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 either (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 with at least a $30 million budget, or (e) a municipality with a population in excess of 50,000 persons. In addition, the Act limits the types of risks that may be self-insured.  Even if they meet the new definition of an “industrial insured,” Illinois companies may no longer self-insure for policies of health or accident insurance.  Finally, the Act increases the qualification requirements for the “qualified risk managers” that must be used by industrial insureds to manage their self-insurance policies.

With the Act on the books, presumably the Department of Insurance and the Surplus Line Association of Illinois will begin preparing forms and guidance for industrial insureds to comply with the new requirements. An effort is underway to pass legislation during the post-election veto session to repeal the Act or ameliorate its effects.