The New York State Appellate Division of the Supreme Court (court) recently affirmed¹ the decision of the New York City Tax Appeals Tribunal (Tribunal) In the Matter of Aetna, Inc.,² that, at least for the years at issue (2005 and 2006), health maintenance organizations (HMOs) are not exempt from New York City's General Corporation Tax (GCT) as insurance corporations.

History of NYC's taxation of insurance corporations

To briefly summarize: prior to 1974, New York City imposed an Insurance Corporation Tax (ICT) on "every insurance corporation … for the privilege of carrying on business in a corporate or organized capacity in the City."³ Corporations subject to the ICT were exempt from the GCT.⁴ New York City repealed the ICT effective July 1, 1974. The City's authority to impose the GCT was derived from New York State enabling legislation (i.e., "the Model Act") and the exemption from the GCT for insurance corporations was set forth in the Model Act. Importantly, the Model Act was never amended subsequent to the repeal of the ICT.⁵ Thus, the insurance company exemption was retained in the City's GCT provisions, despite the repeal of the ICT.⁶

Former section 41.4 of the Model Act defines "insurance company" as "a corporation, association, joint-stock company or association, person, society, aggregation or partnership, by whatever name known, doing an insurance business in [New York]". HMOs are not specifically referenced in this section. The term "doing an insurance business" is also not further defined in the Model Act or by the New York City Administrative Code or Rules.

In 2009, New York State amended certain provisions of Article 33 of its Tax law which imposes a franchise tax on insurance corporations to specifically add HMOs to the definition of an "insurance corporation." While the GCT generally mirrors the provisions of Article 9-A that impose a franchise tax on general corporations, New York City's tax law does not have an analogue to New York State's Article 33 insurance corporation tax after the ICT was repealed. Notwithstanding these amendments to New York State's insurance tax law, uncertainty continued as to whether HMOs were exempt from city-level taxes both prior and subsequent to the 2009 New York state insurance law changes. In response, the City's Department of Finance took the position that, prior to this amendment, HMOs were not "doing an insurance business" within New York State. Otherwise, the inclusion of HMOs within the definition of an insurance business set forth in the 2009 amendment to Article 33 of the New York State tax law would have been "superfluous" if these companies were "doing an insurance business" prior to the amendment.

The 2014 ALJ decision

In 2014, an Administrative Law Judge (ALJ) held that Aetna Health (which operated as an HMO) was doing an insurance business during the 2005 and 2006 tax years, and, therefore, should not be taxed under the GCT or included in a combined report for GCT purposes.⁷ The ALJ focused on the broad language of the definition of an insurance corporation, which is "a corporation … by whatever name known, doing an insurance business in this state" (ALJ's emphasis). The ALJ based her reasoning on several leading federal court decisions, including the US Court of Appeals for the Federal Circuit in Ocean Drilling & Exploration Co.,⁸ which concerned captive insurance companies, and the 2002 US Supreme Court case Rush Prudential HMO (the Rush decision),⁹ concerning an ERISA matter in Illinois, which, among other things, held that the petitioner HMO was both "an insurer and a corporation which arranges for provision of medical services."

The NYC Tax Appeals Tribunal's 2016 decision (affirmed Oct. 19, 2017, by NY App. Div.)

In 2016, the Tribunal reversed, noting, among other things, that the ALJ "erred in relying on authorities beyond the application statutes and from outside the State in interpreting the phrase 'doing an insurance business to the exclusion of other provisions of the Insurance Law.'" While the ALJ focused on whether an HMO was in substance "doing an insurance business," and cited to various authorities on this topic, the Tribunal focused more on how HMOs are regulated in New York State, noting that HMOs are generally exempt from any provision of New York's Insurance Law (with certain express exceptions). The Tribunal also looked to other language in the Rush decision cited by the ALJ and highlighted the fact that while most states regulate HMOs as insurers, New York is not one of them. According to the Tribunal, HMOs are primarily governed by the New York Public Health Law rather than the Insurance Law.

The Tribunal looked to the New York Public Health Law which was amended substantially in 1976 for the purpose of promoting the development of HMOs. It cited to several instances where the legislative text seemed to distinguish HMOs from insurance companies. For example, the Tribunal cited New York Public Health Law Section 4406, which provides that "the contract between a [HMO] and an enrollee shall be subject to regulation by the superintendent as if it were a health insurance subscriber contract" (Tribunal's emphasis).

The Tribunal also examined the legislative history behind the Legislature's 2009 amendment, which explicitly subjected HMOs to New York State's Article 33 tax on insurance corporations as support for its decision. Aetna Health argued that the 2009 amendment was simply a clarification of existing law. The Tribunal, however, pointed out that the State Senate's finance committee report stated that "this provision reclassifies for-profit health maintenance organizations as Article 33 insurance corporations from their current status as corporate franchise tax profits-based Article 9-A business corporations." The state budget revenue estimates also indicated that the switch from current taxation under Article 9-A to a tax on premiums would result in $120 million of additional revenue for the state and so the Tribunal concluded that this legislative change had some substance to it.

Implications

The Aetna decision is important for HMOs. It is possible the taxpayer could appeal to New York's highest level appellate court, the Court of Appeals. However, as it stands now, this decision provides binding appellate level authority on the subject of similarly situated HMOs being subject to the GCT.

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ENDNOTES

¹ Matter of Aetna, Inc. v. New York City Tax Appeals Trib., 2017 NY Slip Op 07311 (NY App. Div. Oct. 19, 2017).

² In the Matter of AETNA, Inc., Nos. TAT (E) 12-3 (GC), TAT (E) 12-4 (GC) (N.Y.C. Tax App. Trib. June 3, 2016) (the Tribunal overruled an Administrative Law Judge's ruling that an HMO was "doing an insurance business" in New York and, therefore, was exempt from the GCT).

³ Former R46.41.01.

⁴ L 1966, ch. 772, Model Act Section 3; part IV of tit R, ch. 46 of the former Administrative Code effect prior to 9/1/86, Section R46-3.0. Pursuant to Former Rules of City of New York section 11-04(b)(3), "an insurance corporation, as defined in former Section R46-41.04, Administrative Code" is exempt from New York City's GCT.

⁵ NYC Finance Letter Ruling 92-137, 1993 N.Y. City Tax LEXIS 5 (Feb. 19, 1993).

⁶ Id., and see New York City Rule Section 11-04(b)(3), citing former NYC Admin Code R46-41.0.4.

⁷ In Matter of Aetna, Inc., Nos. TAT(H) 12-3 (GC), TAT(H) 12-4 (GC) (N.Y.C. Tax App. Trib., ALJ Div., July 22, 2014).

⁸ Ocean Drilling & Exploration Co. v. United States, 988 F2d 1135 (1993).

⁹ Rush Prudential HMO v. Moran, 536 US 355 (2002).