2021 Midyear SALT Developments for Insurers
While we are not quite out of the COVID-19 woods yet (please no Delta variant relapse!), 2021 has shown signs of a return to some level of normalcy. That said, COVID-19-related matters continue to headline tax developments for the year.
Perhaps the biggest state tax challenge for most employers (including insurers) is how to deal with remote employees. As previously expounded on, complications from remote employees have the potential to create a maddening variety of state tax issues such as nexus exposure, payroll withholding, and individual income tax filing requirements. Further, as state emergency provisions are now being lifted and remote workforces become a workplace standard for many industries, these issues are transitioning from temporary disruptions to permanent tax matters.
Affected employers must update their HR policies to ensure the business organization can properly track and report employee-related tax matters based on where employees are actually working. In addition, the organization’s payroll systems might need to be enhanced or replaced to provide capability to track employee work locations, especially for those employees who travel or who have multiple work locations. Unfortunately for taxpayers, standardization and clarification on which jurisdiction has the proper authority to impose tax on remote employees was missed when the U.S. Supreme Court declined to hear New Hampshire v. Massachusetts. Employers also must analyze the related tax effects due to remote employees to determine if the physical presence creates nexus for additional business taxes and/or jurisdictions. Another common tax effect of remote employees is the potential to impact qualification for employee/salary-based credits and incentives; existing credits may be subject to clawback by taxing authorities if certain employment levels were not maintained.
Another ongoing COVID-19 issue specific to the insurance industry is the unique tax and accounting treatment for policyholder relief. During 2020 and continuing on into 2021, insurers generated unexpected underwriting profits as claims were substantially down for most lines of coverage (especially for automobile insurance) due to the stay-at-home environment. In an unprecedented industrywide response, most insurers opted to provide relief to their policyholders, such as a premium refund or credit, during 2020. While the National Association of Insurance Commissioners (NAIC) issued Interpretation 20-08 on the proper statutory accounting treatment for the various relief methods, minimal guidance was provided by state taxing jurisdictions on the respective premium tax effect due to the relief. Insurers remain under the close scrutiny of state regulators during 2021, who are monitoring and expecting a proportionate share of the profits to be returned to policyholders. In example, California Department of Insurance Bulletin 2021-03 contained the Commissioner’s Order for insurers to provide additional policyholder relief and to have insurers report their financial results and relief provided on a quarterly basis for “as long as the pandemic results in reduced risk of loss.” As such, policyholder relief will continue to create a potential gray area of concern for insurers on whether the relief measures have corresponding premium tax reductions.
A third multiyear issue facing insurers is the unintended side effect of state and local tax (SALT) workarounds, which have been implemented by about half of the states so far. Many states have passed legislation to allow passthrough entities to annually elect to pay income tax at the business entity level. Owners of the passthrough entity are then granted a credit for their portion of the entity-level tax or receive a deduction from income for their portion of the entity’s income subject to the entity-level tax. This assists individual owners of the entity by reducing their state income taxes and making it easier for them to squeeze under the $10,000 itemized deduction for SALT. Many insurers make investments through passthrough entities. Since insurers are generally exempt from state income taxes, if they are invested in an electing passthrough entity, they may be faced with a potential inability to use the passed-through credit or deduction. It is highly recommended that insurers monitor their investments and ensure that they are aware of elections being made by the downstream passthrough entities and the resulting tax effects.
Here are some other key state tax highlights affecting insurers so far during 2021:
- Colorado H.B. 1312 added a new qualification for the Home Office Credit against premium tax, which requires insurers have a percentage of their total domestic workforce in state (excluding agents). The qualifying percentage is 2 percent of their total domestic workforce in Colorado in 2022; then 2.25 percent in 2023; and then 2.5 percent in 2024 and future years.
- Colorado H.B. 1208 establishes a new $2-per-policy fee on Fire, Allied Lines, Private Crop, Farmers Multiple Peril, Homeowners Multiple Peril, and Commercial Multiple Peril lines of business. The policy fee can be recouped from policyholders.
- Florida H.B. 797 revises the Life and Health Guaranty Fund to change the Class A assessments to include both pro rata and non-pro rata charges. Pro rata assessments may be credited against Class B assessments. In addition, the former $250 limitation on Class A assessments is eliminated.
- Illinois S.B. 2017 included several revenue-raising corporate income tax provisions, including: limiting the deduction for net operating losses for the next three years at $100,000 and decoupling from the federal 100 percent bonus depreciation. In addition, the bill requires automobile insurers to collect and remit up to $4 per covered vehicle from policyholders.
- Louisiana H.B. 292 consolidates the current five-bracket corporate income tax brackets into three: 3.5 percent on the first $50,000 of net income, 5.5 percent on between $50,000 and $150,000 of net income, and 7.5 percent on income greater than $150,000. In addition, the bill repeals the income tax deduction for federal income taxes paid. Note that these provisions only become effective on January 2, 2022, if the general populace approves a constitutional amendment on October 9, 2021, to eliminate the federal income tax deduction.
- Nebraska L.B. 432 reduces the top corporate income tax rate on state taxable income exceeding $100,000 from 7.81 percent to 7.5 percent, effective for tax years beginning on or after January 1, 2022, and before January 1, 2023; 7.25 percent after January 1, 2023; 7.0 percent after January 1, 2024; and 6.84 percent after January 1, 2025.
- New Mexico S.B. 317 increases the health insurance premium surtax from 1 percent to 3.75 percent of gross health insurance premiums and membership and policy fees.
- New York A.B. 3009-B and S.B. 2509 restore the capital base tax (which was set to be eliminated in 2021) for tax years 2021 to 2023 and increase the tax rate to 0.1875 percent. This potentially increases the capital tax base for insurance groups with a noninsurance parent subject to the New York franchise tax.
- Oregon permanently adopted Admin. Rule 150-317-1060, which defines an insurer’s commercial activity subject to the Commercial Activity Tax (CAT) as all gross direct life, accident and health, and property and casualty insurance premiums written, as reported on the statement of premiums accompanying the annual statement required to be filed with the Division of Financial Regulation and the gross amount of surplus lines insurance premiums written on Oregon home state risks, as shown in the annual report. In addition, the rule specifies that the provisions in ORS 731.840 (“in lieu of” provision) do not apply to the CAT.
- Puerto Rico Circular Letter No. 21-12 details the Puerto Rico Department of Treasury’s (PRTD) updated procedures for the electronic filing of the Corporation Income Tax Return for tax year 2020, which may only be filed through electronic means on an approved software program. Note that most major tax software programs are not approved software per the PRTD, and for tax year 2020 no longer includes the PRTD’s own Internal Revenue Unified System (known by its Spanish acronym, “SURI”).
- Several states joined the travel insurance trend that clarifies travel insurance is classified as marine insurance and imposes the premium tax on travel insurance sold to residents, certain primary certificate holders, or certain blanket travel insurance policyholders, excluding any amount received for travel assistance services or cancellation fee waivers. These enacting states include Georgia, Maine, Oklahoma, and South Carolina.
To learn more about these developments and how they could affect your organization or for assistance with any of these new provisions, contact your BKD Trusted Advisor™ or submit the Contact Us form below.