The New York State Department of Taxation and Finance (Department) issued two technical services bulletins addressing the taxation of foreign surplus lines insurance companies (Surplus Lines Companies) (the June 2016 TSB-A's). The Department concluded that Surplus Lines Companies were subject to New York's Article 33 insurance franchise tax based on the highest of the allocated entire net income (ENI), capital, income and salaries, or the fixed dollar minimum tax base of $250 (collectively, Four Tax Bases).¹

Background — New York taxation of life and non-life insurance companies

Since the law governing New York's taxation of insurance companies changed in 2003, a number of judicial and administrative rulings (collectively, rulings) have been issued. The amendments to the law resulted in authorized, non-life companies being subject to a premium tax in lieu of a tax based on allocated ENI, capital, or income and salaries.² For the most part, the guidance offered in these recent rulings relate to whether foreign, unauthorized insurance companies are subject to tax in New York under N.Y. Tax Law Section 1502 (tax based on highest of four bases) or Section 1502-a (premium tax). The applicability of the "cap" is generally a key issue in these rulings, as unauthorized life and property and casualty (P&C) insurers will generally not have any New York premiums, so the "cap" will be zero. Additionally, all of these previous rulings involved unauthorized insurance companies that owned interests in partnerships that generated New York- source income and created nexus with New York State for tax purposes. Based on all of this previous guidance, the current position of the Department is that, for all years beginning in 2012, both unauthorized life and non-life companies must compute franchise tax based on the highest of the Four Tax Bases without the benefit of the cap.

Surplus lines companies

The June 2016 TSB-A's, on their face, are consistent with the findings of the Department in the previous TSB-A's and TSB-M as applied to unauthorized non-life companies. Specifically, the June 2016 TSB-A's hold that the Surplus Lines Companies, as unauthorized non-life companies, must compute their tax based on the highest of the Four Tax Bases without the benefit of the cap. The Department further concluded that such treatment is consistent with the law change enacted in 2003 when non-life companies became subject to the premium tax under N.Y. Tax Law Section 1502-a.

While the Department's new guidance appears consistent with its prior guidance, there remain some unanswered questions for the surplus lines industry. Of particular note, the Surplus Lines Companies argued that there is double taxation when both the tax on the highest of the Four Tax Bases (payable by the Surplus Lines Companies) and the tax on independently procured insurance (payable by the insured through the surplus lines broker) are applied to the same insurance business. The Department responded to this concern with only two sentences of analysis, concluding that "any potential concerns Petitioner might have regarding double taxation are unfounded," because, even though there is 3.6% surplus lines tax imposed on this insurance, the petitioners in this case are subject to the franchise tax on allocated entire net income, allocated capital, or allocated income and salaries, not their premiums. In reaching this conclusion, the Department relied upon, In the Matter of Disney Enterprises,³ a non-insurance tax case involving the application of "Finnigan" apportionment method to a non-taxable member of a New York combined group under Article 9-A of the N.Y. Tax Law.⁴ The June 2016 TSB-A's also do not consider whether or if compliance with the Excess Lines Association of New York may be sufficient to constitute being "authorized."

Implications

Surplus Lines Companies that have nexus with New York should determine whether they have filed consistently with the holding in the June 2016 TSB-A's since at least 2009 and arguably, since 2003 and reported their taxes on N.Y. Form CT-33 (not CT-33-NL) and paid tax based on the highest of the Four Tax Bases.

Overall, the analysis provided by the June 2016 TSB-A's is sparse and a number of additional surplus lines tax issues are left unaddressed. For example, because Surplus Lines Companies are generally licensed in few, if any, states except their state of domicile, if they have nexus with New York, they will not be subject to New York's premium tax but their insureds in New York will be subject to the 3.6% surplus lines tax. Also, unlike the manner in which unauthorized life and property and casualty companies are taxed, being an unauthorized Surplus Lines Company in New York does not always result in little or no New York premiums. To the contrary, many Surplus Lines Companies will write policies covering risks throughout the country, including New York. Thus, Surplus Lines Companies will necessarily have a premium factor and thus, be required to pay New York tax based on their insurance activities and income. In the previously issued guidance, the main issue addressed by the Department was whether the unauthorized insurance companies were required to pay tax on their distributive share of income received from underlying partnerships — and not necessarily on their allocated insurance operations.

Finally, the June 2016 TSB-A's did not address the effect, if any, of the Nonadmitted Reinsurance Reform Act (NRRA) enacted by the US Congress. Under NRRA, a surplus lines policy is taxable only in the insured's home state, regardless of where the underlying risk is located.⁵ Consequently, it is questionable whether New York has the authority under federal law to tax the allocated income or capital of Surplus Lines Companies by including any amounts in the premium numerator from any insured's that do not consider New York its home state. Moreover, the manner in which premiums are reported on Schedule T of the National Association of Insurance Commissioner's annual statement that they must file (presumably based on risk location) does not necessarily conform to the manner in which surplus lines taxes are collected and remitted (based on home state of insured). This would create a very significant administrative burden and result in the potential for taxing premiums on risks located in New York, but for which surplus lines tax may have been paid to another state.

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ENDNOTES

¹ TSB-A-16(4)C, June 10, 2016; TSB-A-16(5)C, June 10, 2016. It should be noted that an Advisory Opinion is not precedent and is issued at the request of a person or entity. It is limited to the facts set forth therein and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity fully and accurately describes all relevant facts. An Advisory Opinion is based on the law, regulations, and Department policies in effect as of the date the Opinion is issued or for the specific time period at issue in the Opinion.

² See, TSB-A-08(3)C, April 29, 2008 and TSB-A-09(2)C, March 2, 2009; TSB-M-12(4)C, February 17, 2012; and In the Matter of the Petition of Bayerische Beamtenkrankenkasse AG, DTA No. 824762 (N.Y. Div. Tax App. Mar. 3, 2016); In the Matter of the Petition of Landschaftliche Brandkasse Hannover, DTA No. 825517 (N.Y. Div. Tax App. Mar. 3, 2016); and In re AXA Verischerung AG, DTA No. 825518 (N.Y. Div. Tax App. Mar. 3, 2016).

³ Matter of Disney Enters., Inc. v. Tax Appeals Trib. of the State of New York, 10 N.Y.3d 392, 399, 888 N.E.2d 1029, 1033 (N.Y. 2008).

⁴ Of note, "double taxation" is only mentioned in the Disney case as part of the Court's discussion of California's Joyce and Finnigan decisions as applied to California's "throw-back" rule.

⁵ See 15 USCS section 8201 ("No State other than the home State of an insured may require any premium tax payment for nonadmitted insurance.")