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Captives that do not have to do business in Washington state should do everything they can to stay out of the state, according to Matthew Queen, general counsel and chief compliance officer at Venture Captive Management.
Earlier this month, the Washington Insurance Commissioner announced his plan to offer captives that have ‘unlawfully’ insured risk in the state the chance to pay a substantially reduced fine and penalty if they self-report the activity.
Commissioner Mike Kreidler is offering such captives an 18 month grace period the chance to pay significantly reduced fines and premium tax penalties by self-reporting the activity.
Following the grace period, which begins 1 January 2019 and closes 30 June 2020, the commissioner will pursue maximum fines and tax penalties.
Queen said the complexity surrounding the field of state and local tax made the position the commissioner was taking very concerning.
He commented: “What strikes me about the state of Washington is that they’re taking the most aggressive position they can on state and local taxes, which is a very concerning position given that the field of state and local tax is in of itself very complex.”
“I question whether the position Washington is taking is within the boundaries of the law.”
“The real problem with any state or local tax issue is that you can take a position and defend it, and that is not really conducive to good governance.”
Queen continued: “There are a couple of states where if you do not have to do business there from a captive insurance standpoint you should do everything you can to stay out of there–New Jersey, Washington and a few others.”
“Those states are taking a grey area and then wielding it like a weapon. If you don’t need to be there, minimise your exposure there.”
Queen suggested that he believed that the commissioner would follow through on his threat to pursuing maximum fines and tax penalties following the 18 month grace period.
“Washington is one of the most aggressive states. What they have done with the Microsoft case is send a message. Microsoft is the big dog in Washington and by going after them, they’re telling everyone else to get ready.
“They’re actively trying to establish a new regime, and I believe it's on shaky constitutional authority.”
Queen said it would be impossible to characterise the state, which had consistently taken an anti-captive stance, as captive friendly.
“If you look back over the past 15 to 20 years of captive insurance in Washington state, it has been a very difficult place to do business. And as a result, if you don’t have to be there, don’t.”
“My advice would be to look at what they’re trying to hit you with, if the cost of compliance exceeds the cost of fighting then you fight. It is as simple a calculus as that.”
Queen suggested that while some of the traditionally captive friendly states were very unlikely to follow suit, other states could take a similarly aggressive stance.
He added: “To the extent that this does sweep across the country and set some sort of precedent, you should absolutely expect captive managers to start taking a more aggressive position.”
However, Queen noted that even given the complexity of the state and local tax, a decisive victory in one state would not necessarily have any bearing in another state.
He explained: “State and local tax in its varying forms is one of the least visited areas by the US Supreme Court.”
“We have a fundamental lack of understanding at the Supreme Court as to what constitutes due process as it relates to the state and their ability to tax companies within their states, as a result, you should not expect any meaningful clarity on this for the rest of our careers.”
“This is a great battleground that has existed since the mid-1800s and is just never going to stop.”