More industry names have weighed in on the recently introduced legislation to clarify the Nonadmitted and Reinsurance Reform Act (NRRA).
Tax lawyer Stewart Feldman is a recognised expert on the independently procured premium (IPP) tax who first identified the legislative issues to the domestic domiciles that resulted in the now three-year-old legislative effort of the Coalition for Captive Insurance Clarity.
"The loose language of the NRRA resulted in a nationwide excise or gross receipts tax on captive insurance premiums," Feldman said.
"This contrasts with the fact that the NRRA was intended to simplify the tax reporting by brokers of nonadmitted policies. The language of the NRRA in referencing a 'nonadmitted insurer' is the culprit, leading states to argue that the NRRA encompassed all insurance programs from nonadmitted carriers."
Not only does this interpretation lead to double taxation, in both the captive's state of domicile and in the home state of the insureds, but this interpretation imposes an excise tax on an entity simply covering the risks of affiliates.
Tax attorney Logan Gremillion has also spoken up, claiming that various states have been in a revenue bind over the past few years and saw the NRRA as an opportunity to increase their revenue.
Gremillion said: "The NRRA was targeted at surplus lines brokers, but an unfortunate drafting issue in the 2300-page act left many states with the ability to tax captive insurance procured by their home state insureds.”
“This legislation would fix the legislative drafting issue by amending the definition of ‘nonadmitted insurer’ to specifically exclude a ‘captive insurer’. The Feldman Law Firm was among the first to identify the loose NRRA language in the Dodd Frank Act and its impact on captives.”
“For this reason, we have long worked with our clients in designing captive insurance programs to minimise the impact of IPP taxes and to break the nexus that leads to double tax."
At this time, the proposed legislation has only been introduced and referred to committees for review. The issues involving the ability of a state to tax out-of-state captive premiums remains a controversial and complicated tax issue.
While the proposed legislation would potentially correct the seemingly incorrect implications of the NRRA, several states have enacted laws regarding the taxation of captive insurance based upon the NRRA/home-state rule.
Gremillion warned that introducing the legislation is only a first step toward its enactment and the state laws remaining in place still require special attention from captive owners.
