Seemingly, the world continues to be full of turmoil; hopefully, this is not the new normal. Luckily, state and local tax (SALT) developments for the insurance industry do not mirror the chaos in world developments, but instead have remained somewhat uneventful for 2022. As of midyear, only about a quarter of the state legislatures are still in session for the year, and things (as highlighted below) are relatively calm and consistent from prior years.
Based on our client interactions and informal surveys, remote employee issues remain the consensus No. 1 state tax challenge for most employers (including insurers). Complications from remote employees can potentially create a wide variety of state tax issues, such as nexus exposure, payroll withholding, employee-based credit complications, and individual income tax filing requirements (see our prior article for more details: “Nomads Can Make You Go Mad – Tax Insights for Remote Workers”). While these impacts initially seemed to be temporary as COVID-19 pandemic emergency provisions were in place, these issues are becoming more permanent in nature as business organizations implement remote workforce policies under hybrid/flexible provisions or full work-from-home arrangements. Impacted employers must ensure their HR policies sufficiently address key considerations so the business organization can properly track and report employee-related tax matters based on where employees are actually working. The organization’s payroll system plays a critical role in tracking time and location by employee and workday, and often these systems need to be enhanced or replaced to provide such capability.
Unfortunately for business organizations and their employees, judicial and legislative clarification on remote employee taxation has failed to provide any meaningful needed guidance. Pending at the federal level, the Mobile Workforce State Income Tax Simplification Act of 2021 (Federal H.R. 429), Remote and Mobile Worker Relief Act of 2021 (Federal S.B. 1274), and the Multi-State Worker Tax Fairness Act of 2021 (Federal S.B. 1887) would all similarly limit the taxation of wages earned by employees in a state other than their state of residence unless they are physically present for a specified number of days. Similar federal legislative efforts have been attempted in prior congressional sessions but have all stagnated and failed due to the negative revenue flow impacts to large employer states (such as New York). The outlook for any “legislative fix” in 2022 is not optimistic. The courts have likewise failed to eliminate uncertainty for remote workers. The U.S. Supreme Court declined to hear New Hampshire v. Massachusetts,1 where a Massachusetts rule requires nonresidents working remotely from home but normally assigned to a Massachusetts office to pay Massachusetts income tax on those earnings. State-level cases have met similar obstacles, such as the Ohio Supreme Court declining to review Buckeye Inst. v. Kilgore, Ohio,2 where an appeals court held that the city of Columbus was permitted to keep taxes paid by in-city companies’ employees working elsewhere during the pandemic.
A common state legislative trend is the continued adoption of the National Alliance of Insurance Commissioners (NAIC) Travel Insurance Model Act (2018). The general provisions of the act clarify that travel insurance is classified as inland marine insurance (or health insurance as appropriate) and imposes the premium tax on travel insurance sold to state residents, certain primary certificate holders, or certain blanket travel insurance policyholders, excluding any amount received for travel assistance services or cancellation fee waivers. About half of the states have already adopted these provisions, and below are the developments during 2022:
- Alabama H.B. 235 – Passed, effective June 1, 2022
- Connecticut H.B. 5411 – Session adjourned; failed to pass
- Illinois S.B. 2111 – Carryover from the 2021 legislative session and still pending
- Indiana S.B. 277 – Passed, effective July 1, 2022
- Iowa H.B. 2540 – Passed, effective July 1, 2022
- Massachusetts H.B. 1220 – Carryover from the 2021 legislative session and still pending
- Mississippi H.B. 160 – Passed, effective July 1, 2022
- Missouri H.B. 2168, H.B. 2566, S.B. 742, S.B. 783, and S.B. 1116 – All pending
- Nebraska L.B. 863 – Passed, effective April 20, 2022
- Ohio S.B. 256 – Passed, effective April 21, 2022
- South Dakota H.B. 1130 – Passed, effective March 8, 2022
- Tennessee H.B. 1925 and S.B. 1868 – Passed, effective July 1, 2022
- Utah S.B. 338 – Passed, effective January 1, 2023
- Vermont H.B. 515 – Passed, effective August 25, 2022
- Wisconsin A.B. 491 – Died in committee; failed to pass
Here are some additional state tax highlights affecting insurers so far during 2022:
- State Farm is in the appeal process for State Farm v. Florida Department of Revenue, 18-CA-002180, August 16, 2021, in which the Second Circuit Court of Florida held that the department was correct in excluding the proration addback in Internal Revenue Code (IRC) Section 832 for purposes of determining the state income tax addition modification for tax-exempt interest. The department’s position is that IRC §103 and Florida Statutes §220.13 do not contain any reference to IRC §832, so no deduction is permitted.
- Indiana Department of Insurance Bulletin No. 264 provides guidance on requirements for electronic filing of insurance premium tax filings, annual renewal fees, and payments. Taxpayers must submit their annual premium tax, quarterly estimated tax, and annual renewal fees and payments electronically using the specified NAIC online premium tax filing system (OPTins), effective April 1, 2022. However, taxpayers may request an exemption from the electronic filing mandate by showing good cause. Issued March 10, 2022.
- Kentucky House Bill 8 phases out the personal income tax and replaces the lost revenue with an expansion of the sales tax base to professional services. The individual income tax rate would annually decrease by 0.5% beginning with tax year 2023, assuming the state rainy day fund is 10% or more of general fund receipts, and total receipts equal or exceed appropriations. The state’s 6% sales tax applies to a menu of new services including photography, cosmetic surgery, graphic design, marketing, lobbying, website design and hosting, financial planning, residential security, parking, travel, and rental cars. In addition, the bill creates a tax amnesty program for all taxes (including premium tax) due before December 31, 2021 and administered by the Department of Revenue except property taxes and sales tax on motor vehicles. The amnesty will abate civil penalties and interest otherwise due. The amnesty is anticipated to be administered by a third-party contractor on behalf of the state and run between October 1 and November 29, 2022. If no third party can be found, the department will run the amnesty itself in 2023. Passed via legislative override of governor’s veto, effective April 12, 2022. The governor said he vetoed the legislation because it imposed new taxes on 35 different services and industries, and the Kentucky Legislature did not provide a sufficient opportunity for public input.
- Maine House Bill 1062 (LD 625) would have phased down the premium tax on annuities by 0.2% per year between 2022 and 2031 only if the tax savings from the reduced rate are credited to the annuity holders. Unfortunately, the state’s legislative session adjourned and the carryover bill from 2021 failed to pass for a second consecutive year.
- Maine House Bill 1423 (LD 1917) revises the premium tax on nonadmitted insurance transactions to be the greater of the Maine tax rate of 3% or the highest rate of taxation that applies to nonadmitted insurance premium in the state, district, or possession of the U.S. or province of Canada in which the insurer is incorporated. An insurance company incorporated in another country is deemed to be incorporated in the state, district, or possession of the U.S. where it has elected to make its deposit and establish its principal agency in the United States. Passed, effective January 1, 2023.
- The Michigan Department of Treasury issued a notice explaining that the Michigan Catastrophic Claims Association (MCCA) surplus refunds received by insurers are subject to premium tax. On November 3, 2021, the MCCA voted to return an estimated $3 billion surplus to its member insurance companies, which were refunded to member insurance companies on or before March 9, 2022. Consistent with the accounting treatment prescribed by the Department of Insurance and Financial Services through its Bulletin 2022-06-INS, the MCCA surplus returned to insurance companies for subsequent distribution to policyholders is not regarded as a “gross direct premium” under the Income Tax Act. As such, the MCCA surplus received by an insurer will neither be included in “gross direct premiums” reported in 2022 nor impact “gross direct premiums” previously subject to the premiums tax in any prior year. Therefore, insurers are not permitted to make any adjustments to gross direct premiums related to the receipt of the MCCA surplus, such as the filing of an amended return to correct a prior tax year or the reporting of an adjustment to gross direct premiums otherwise received in 2022. Issued February 17, 2022. Note this guidance is opposite of the Treasury Department’s guidance in the last instance where the MCCA issued refunds in 1998.
- Nebraska Legislature Bill 873 phases down the top corporate income tax rate from 7.5% to 7.25% in 2023; 6.5% for 2024; 6.24% for 2025; 6% for 2026; and 5.84% for 2027 and beyond. It also expands the refundable income tax credit against school district property taxes paid to a local taxing jurisdiction and creates a new refundable income tax credit against community college property taxes paid. The credit percentage is set annually by the Department of Revenue to match the statewide total credit under the program ($195 million adjusted for inflation). Passed, effective April 13, 2022.
- West Virginia House Bill 4636 clarifies that municipal taxes and fees are considered remitted on time when the date on which the payment is postmarked is on or before the due date. In addition, municipalities can’t impose a late fee or penalty on a payment of the taxes or fees that is postmarked on or before the due date. Passed, effective June 10, 2022.
How FORVIS Can Help
Consulting with and involving your trusted tax professionals can help you keep current with state tax developments, which can potentially save you money and help you remain in compliance with new filing requirements and tax provisions. If you have any questions or need assistance, reach out to a professional at FORVIS or submit the Contact Us form below.