29 March 2019Accounting & tax analysis

Macy’s Vermont captive facing $23.8m in penalties in Maryland tax dispute

Leadville Insurance Company, the Vermont-based captive insurance subsidiary of US department store chain Macy’s, may be liable for $23.8 million in unpaid corporate income taxes to the state of Maryland, a recent court opinion has shown.

The opinion by Judge Michael Wilson Reed published on March 26, 2019, in the Maryland Court of Special Appeals (COSA) held that Leadville did not qualify as an authorised insurance company in Maryland - as it was not licensed to conduct insurance in that state - and would be subject to income taxes on its revenues.

Leadville provides insurance for Macy’s subsidiaries and affiliates, including Macy’s Retail Holding (MRHI), a holding company incorporated in New York that owns and oversees the management of various Macy’s department stores - including those in Maryland.

While Leadville was licensed in Vermont by the insurance commissioner in Vermont, it was held that it did not hold a certificate of authority from the Maryland Insurance Commissioner to engage in the insurance business in that state.

Following an audit of MRHI in 2010, the comptroller for the treasury found that Leadville earned over $2 billion in inter-company interest and $52 million in insurance revenue.

Leadville is alleged to have paid premium receipt taxes in Vermont, but paid no premium receipts tax or corporate tax in Maryland, despite earning substantial revenue from interest payments apportioned to the state.

As a result, the comptroller assessed Leadville having outstanding $23.8m in tax, penalties and interest on inter-company interest payments it received from MRHI during the 1996-2003 tax years.

Leadville had argued in an informal hearing with the comptroller that it was an insurance company under Title 6 of the Insurance Article and, therefore, exempt from paying income tax under Tax-General § 10-104. However, due to Leadville conceding it had not paid any Maryland premium tax or held a license to carry insurance business in Maryland, it was held by the hearing officer this corporate tax exemption did not apply.

Macy’s captive appealed the comptroller’s final determination to the Maryland Tax Court in 2017, which resulted in the Tax Court agreeing that Leadville was not subject to income tax in Maryland because it qualified as an insurance company under Title 6 of the Insurance Article. Then the comptroller appealed to the Circuit Court of Anne Arundel County, which upheld the Tax Court’s decision. The case ended up in the Maryland COSA, which resulted in Judge Reed’s most recent opinion.

The opinion is unreported, meaning it cannot be used as precedent or as persuasive authority for future cases.