US states could increase their efforts to raise tax from captives in coming months as they seek to raise money to offset reduced revenues during the COVID-19 pandemic, according to Dan Kusaila, a tax partner at Crowe.
Speaking on a Captive Insurance Companies Association (CICA) panel, titled “Non-Domiciliary State Taxation of Captives”, Kusaila warned that states will be looking for any way to raise money, at a time when economic activity has declined sharply.
“We could see increased activity from states as we come out of this COVID-19 crisis. A lot of states will be looking for revenue and this is an area where it can be increased,” said Kusaila.
US states all have their own rules for collecting tax from captives, with some charging self-procurement tax or premium tax, and some also charging income tax. In many cases it can be unclear exactly where, and how much, tax captives should be paying.
The Nonadmitted and Reinsurance Reform Act (NRRA) of 2010 was meant to provide clarity, stating that captives should pay self-procurement tax only in their home states. However, there is still a lack of transparency over how NRRA applies to captives, allowing non-dom states to collect taxes from captives that sell insurance in their jurisdictions.
“I expect there will be litigation at some point to challenge NRRA, but we do not see evidence of that happening yet,” said Joe Holahan, of counsel at Morris Manning & Martin.
Washington state has been among the most aggressive in going after captives for self-procurement tax, having taken action against Microsoft, Alaska Air and Starbucks. An administrative hearing to resolve the dispute between Alaska Airlines and the state had been scheduled for June.
However, Paul Shimomoto, partner at Goodsill Anderson Quinn & Stifel, noted a drop-off in activity in Washington state in particular, suggesting authorities in the state might be looking to find a consensual path forward.
“It looks as though the enforcement actions in Washington state have been terminated pending a review by the legislature,” Shimomoto said. “I think all sides want to find a better plan that better serves everyone’s interests.”
However, there are plenty of other taxes for captives to worry about. On the income tax side there hasn’t been an effort to harmonise approaches between states, as NRRA does for self-procurement taxes.
“Captives have to look state by state to see whether there is a filing obligation. There are 50 states and 50 different laws,” Kusaila said.
How the different states tax captives is hugely significant for their profitability and decisions about where to domicile and where to do business.
Joel Chansky, principal at Milliman, noted that captives often make decisions about where they domicile that are influenced by a federal tax deduction that is usually worth around 3 percent of premiums. That deduction is worth less than the self-procurement tax charged in many states, he said.
Dan Kusaila, Crowe, Joe Holahan, Morris Manning & Martin, Paul Shimomoto, Goodsill Anderson Quinn & Stifel, Joel Chansky, Milliman, CICA, NRRA