2021 SALT Developments for Insurers
Looking back on 2021, most people may have thought or hoped things would be back to “normal” by now, but instead we basically got a “same as 2020.” That tagline also can be applied to state and local tax (SALT) developments for 2021, as there were a lot of similar issues and developments that continued from 2020.
COVID-19-related matters continue to be the big issues for all taxpayers, including insurance companies. The biggest SALT concern noted in our informal surveys with insurers remains those issues related to remote employees. The bulk of insurance job functions are well suited to the remote work environment, and the industry has largely embraced work-from-home as its new norm during pandemic conditions. As previously described in our BKD Thoughtware® article “Nomads Can Make You Go Mad – Tax Insights for Remote Workers,” a transition from in-office to remote employees has the potential to create a whole litany of complex SALT issues—nexus exposure, payroll withholding, employee-based incentives, and individual income tax filing requirements. Unfortunately, some clarification on which jurisdiction(s) has the right to impose tax on remote employees was lost when the U.S. Supreme Court declined to hear New Hampshire v. Massachusetts. BKD anticipates that remote employees will increase burdens on employers to develop work-from-home HR policies; implement robust payroll systems that can track time and locations for employees; and navigate the hazards of trying to determine when and where withholding should apply for remote employees. Failure to properly address these issues could lead to potential tax and penalty exposures.
While COVID-19-related matters also remained a priority focus for state legislators, administrators, and judicial bodies, there were a number of other state tax developments affecting insurers that transpired during 2021:
- The biggest development for the insurance industry during 2021 was the legislative correction to create an Oregon Corporate Activity Tax exemption for insurance companies subject to the Oregon retaliatory tax, effective January 1, 2021.
- Colorado added a new requirement to qualify for the Home Office Credit against premium tax. For tax year 2022, qualifying insurers will need to have 2 percent of their total domestic workforce located in Colorado. This increases to 2.25 percent in 2023 and then 2.5 percent in 2024 and thereafter.
- Colorado also narrowed the premium tax exemption for annuities to only exclude annuity considerations related to a qualified retirement account or a Roth 401(k). As such, standard investment annuities will be subject to premium tax as of January 1, 2021.
- Colorado also established a new $2-per-policy fee on policies covering the following lines of business: fire, allied lines, private crop, farmers multiperil, homeowners multiperil, and/or commercial multiperil. Insurers are eligible to recoup the fee from policyholders. The fee will be used to fund the newly established Natural Disaster Mitigation Enterprise Fund.
- Litigation in Florida is continuing under the appeal of State Farm v. Florida DOR, 18-CA-002180, August 16, 2021. This case will ultimately decide if Florida’s position is correct that the income tax addback for tax-exempt interest excludes the insurance adjustment for proration contained in Internal Revenue Code Section 832.
- The Illinois budget bill contained a number of nonconformity provisions for corporate income tax purposes, including requiring an adjustment for all forms of federal bonus depreciation. The legislation also limits the amount of net operating loss deduction for Illinois corporate income tax purposes to $100,000 for tax years ending on or after December 31, 2021, and prior to December 31, 2024.
- The Illinois budget bill also contained a new provision requiring insurers to collect and remit up to $4 per private passenger motor vehicle policy written in Illinois. This assessment funds the newly created State Police Training and Academy Fund and the Law Enforcement Training Fund, with the first annual payment due April 1, 2022.
- Litigation also is continuing in North Carolina in a series of cases—such as Integon, Monarch Capital, and NC Farm Bureau—pertaining to whether the common investment structures for credits in North Carolina (and other states) are subject to federal anti-abuse provisions, which the North Carolina Department of Revenue has cited to deny credits.
- About half of the states have now passed elective pass-through entity tax provisions to counter the federal SALT deduction limitation for individuals. Under these elections, a pass-through entity pays the tax and its owners receive a corresponding income tax deduction or credit for their pro rata share of the tax paid at the entity level. These provisions can create issues for insurance companies invested in an electing pass-through entity since there is no premium tax allowance/exclusion available to the insurer and the insurer does not generally file or pay state income tax.
- There also were several states that effected tax/fee rate changes impacting insurers:
- Florida reduced the corporate income tax rate to 3.535 percent for tax years beginning on or after January 1, 2021, but the rate increases back to 5.5 percent for tax year 2022.
- Effective January 1, 2022, Louisiana consolidated its five-bracket corporate income tax rate structure into just 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.
- Michigan reduced the gross premium tax rate attributable to qualified health plans to 0.4835 percent for tax year 2021.
- Nebraska reduced its top corporate income tax rate from 7.81 percent on state taxable income exceeding $100,000 down to 7.5 percent on state taxable income exceeding $100,000, effective for tax years beginning on or after January 1, 2022; 7.25 percent after January 1, 2023; 7 percent after January 1, 2024; and 6.84 percent after January 1, 2025.
- New Hampshire reduced the business enterprise tax rate to 0.55 percent and the business profits tax rate to 7.6 percent, effective as of January 1, 2022.
- New Mexico increased its health insurance premium surtax from 1 percent to 3.75 percent of gross health insurance premiums and policy fees, effective January 1, 2022.
- Oregon increased the workers’ compensation premium assessment rate for 2022 to 9.8 percent for insurance providers.
- Utah decreased the premium tax rate for workers compensation premium to 1.25 percent, effective January 1, 2021.
To learn more about these and other developments for 2021, along with 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.