Due to the McCarran-Ferguson Act of 1945, states were granted the authority to individually regulate insurance activity within their borders. As such, states have imposed some unique and specific tax provisions applicable to the insurance industry.
The primary tax distinction for insurance companies is that states impose premium tax on insurance companies licensed in their state in lieu of corporate income tax. Premium tax is a flat-rate, gross receipts tax based on direct written premium sourced to that state. All states (other than Oregon) and most U.S. territories subject insurance companies to a premium tax, which on average is imposed at a rate of 2 percent but does differ by state and insurance product type. Nexus for premium tax purposes has a low threshold of merely holding a license to conduct insurance operations in that state. Premium taxation is further complicated by its companion burden, the retaliatory tax. Retaliatory tax is an insurance industry-specific tax used by all states (other than Hawaii and New Mexico) that’s conceptually designed to equalize the state tax burden on insurers domiciled in-state with those domiciled in another state. The comparison results in additional tax if the tax liability computed under the home state tax provisions is higher than the tax liability computed under the state of business operations tax provisions.
The premium tax is a very important source of revenue for states. In 2016, the total amount of premium taxes received by all states and the District of Columbia was approximately $21.3 billion, or 2.9 percent of all state tax revenues, according to the U.S. Census Bureau state and local government finances survey. In comparison, the corporate income tax was $63.2 billion, or 8.7 percent of all state revenues. The premium tax is an extremely stable revenue stream year to year for states and isn’t subject to market fluctuations like the corporate income tax is prone to be.
While the premium tax is generally imposed on insurers in lieu of other state taxes, this exemption is usually only applicable against the income and/or franchise tax. Therefore, insurance companies are subject to sales/use tax, property taxes, etc., like most other taxpayers. In addition, there are other premium-related taxes that may be applied at the state or local level, such as municipal premium taxes and fire marshal taxes. Certain states impose both premium tax and income/franchise tax on licensed insurers, with a credit offset mechanism between the tax types that generally limits the tax to the liability generated under the premium tax method. These states are: Alabama, Florida, Illinois, Louisiana, Mississippi, Nebraska, Nevada, New Hampshire and Oregon. In addition, New York imposes an income/franchise tax on life insurance companies and Indiana and Wisconsin impose the corporate income tax on insurers domiciled in-state. In many cases, these taxes have special provisions applicable only to insurance companies.
Due to the states’ authority to regulate insurance within their borders, there can be significant differences from state to state in terms of applicable taxes, tax base, tax rate, deductions, exemptions, applicable credits and computation variances in the retaliatory tax. For many companies, the complexities of state insurance company taxation can result in tax exposure and/or missed opportunities for state tax savings.
BKD can help taxpayers with insurance companies in their group navigate this specialized tax regime. Specifically, BKD can assist with the following services:
- State and local tax (SALT) return reviews
- SALT return compliance
- Credits and incentives assistance
- Benchmarking to industry best practices and process improvement reviews
- Nexus reviews
- Organization structuring and redomestication analysis
Contact your trusted BKD advisor, Michael Palm or Bob Johnson to learn more about these taxes and how BKD can assist.