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					          INSURANCE TAX CONFERENCE
  SIXTH ANNUAL INSURANCE STATE TAX SEMINAR
         SEMINAR PAPERS AND OUTLINES


                  PREMIUM AND RETALIATORY TAXES
                   FOR NEWER TAX PROFESSIONALS

Introduction to Premium and Retaliatory Taxes . . . . . . . . . . . . . . . . . . . . 1

       ‚      Roger P. Mierzwa - Moderator
                    SMART Business Advisory and Consulting, LLC
                    New York, NY

       ‚      Lesley Alexander
                     Chubb Corporation
                     Warren, NJ

       ‚      Robert Sartori
                    TriTech Services & Consulting
                    Richardson, TX


                         STATE INCOME TAXES
                    FOR NEWER TAX PROFESSIONALS



State Income Tax for Newer Tax Professionals               . . . . . . . . . . . . . . . . . . . . 15

       ‚      Roger P. Mierzwa - Moderator
                    SMART Business Advisory and Consulting, LLC
                    New York, NY

       ‚      Timothy Mahon
                    Ernst & Young LLP
                    New York, NY
                        LEGISLATIVE, ADMINISTRATIVE AND
                              LITIGATION UPDATE

Legislative, Administrative and Litigation Update                                   . . . . . . . . . . . . . . 54

         ‚         James D. Hall - Moderator
                         American Council of Life Insurers
                         Lenexa, KS

         ‚         Gerardo S. Malanga
                         Chubb Corporation
                         Warren, NJ

         ‚         Craig Provenzano
                          PricewaterhouseCoopers LLP
                          Chicago, IL


                     STATE INSURANCE DEPARTMENT AUDIT
                        ISSUES FOR LIFE AND PROPERTY
                          AND CASUALTY COMPANIES

State Audit Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

         ‚         Frank Alberts - Moderator
                         Fireman’s Fund Insurance Company
                         Novato, CA

         ‚         Roxie Baird
                         USAA
                         San Antonio, TX

         ‚         William V. Chelchowski
                         GEICO Corporation
                         Chevy Chase, MD




                         Sixth ITC State Insurance Tax Seminar - Seminar Papers and Outlines - Page 2
                          STAFFING AND RECOGNITION
                          OF THE STATE TAX FUNCTION

Interstate Variation in Effective Rates for
Insurance Premium Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

        Article Reprinted from Tax Analysts’ State Tax News
        Reprinted with permission of Copyright Holder

Staffing and Recognition of the State Tax Function                                   . . . . . . . . . . . . 150

        ‚        Anne Simpson - Moderator
                       Allstate Insurance Company
                       Northbrook, IL

        ‚        Edward M. Burgh
                      Burgh, Balian & Bergstein, LLP
                      Studio City, CA

        ‚        Stephen D. Collier
                       Safeco Corporation
                       Seattle, WA


                             STATE ISSUES POTPOURRI

Health Insurance Company Issues                        . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

NAIC Schedule T Initiative                . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174

        ‚        John M. Harrington, Jr. - Moderator
                       CIGNA Corporation
                       Hartford, CT

        ‚        Joseph Zolecki
                       Blue Cross Blue Shield Association
                       Chicago, IL




                      Sixth ITC State Insurance Tax Seminar - Seminar Papers and Outlines - Page 3
                ADVANCED AUDIT AND LITIGATION ISSUES
                      IN THE STATE TAX ARENA

Advanced Audit and Litigation Issues and Considerations
in the State Tax Arena . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

        ‚       Richard Bromley - Moderator
                      Foley & Lardner LLP
                      Chicago, IL

        ‚       William C. Lane
                      Metropolitan Life Insurance Company
                      St. Louis, MO

        ‚       Mary Kay Martire
                     Foley & Lardner LLP
                     Chicago, IL

        ‚       Tracy D. Williams
                      Sidley & Austin LLP
                      Chicago, IL


                        ADVANCED INCOME TAX ISSUES
                          IN THE STATE TAX ARENA

Advanced Income Tax Concepts                    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201

        ‚       Christine A. Gustafson - Moderator
                       C. Gustafson Law
                       Milwaukee, WI

        ‚       Josie Lowman
                       AIG
                       New York, NY




                     Sixth ITC State Insurance Tax Seminar - Seminar Papers and Outlines - Page 4
                         OTHER TAXES PAID BY
                         INSURANCE COMPANIES

Other Taxes Paid by Insurance Companies . . . . . . . . . . . . . . . . . . . . . . 212

       ‚      Michelle Zahler - Moderator
                    PricewaterhouseCoopers LLP
                    Chicago, IL

       ‚      William Jozaitis
                    PricewaterhouseCoopers LLP
                    Chicago, IL




                  Sixth ITC State Insurance Tax Seminar - Seminar Papers and Outlines - Page 5
                    1



      Introduction to
Premium & Retaliatory Taxes


         Basic Concepts
      Bob Sartori – TriTech Services
    Joby Alexander – Chubb Corporation

                 2008
                    2
Agenda



Common terminology.
How are these taxes computed?
What are the typical data sources for
required information?
What are some of the trends & state audit
issues?
Tax Planning – What are the opportunities?
                               3
Terminology

Premium Tax - gross receipts tax imposed on insurance companies
dating back to the mid 1800’s. Administered through state
departments of revenue or departments of insurance. (Imposed
by all states. Four states also impose municipal level tax)


Domestic Company - An insurance company incorporated or
organized under the laws of a state. Referred to as Home State,
State of Domestication, or Domicile State.


Retaliatory Tax - generally result when the home state imposes a
higher tax rate than the taxing state. Intended to equalize the
rates between the higher and lower state tax rates. (Imposed by
all states except Hawaii & Virgin Islands.)


In Lieu Provision - provides for the payment of premium taxes in
place of other state taxes. (12 states also impose income tax on
insurers)
                                4
Terminology

Schedule T - statutory financial statement page reflecting
premiums by state. The starting point for premium tax
calculations.


State Business Page – a “state specific” statutory financial
statement page which contains further detail regarding premiums
and dividends paid.


“Aggregate” and “Item-by-Item” Retaliatory Taxes – application
and effects of these methods in the retaliatory calculation.


Types of Insurance premium taxes – Ocean Marine, Annuity Tax,
Fire Marshal Tax, Municipal taxes, Workers Comp., Health Tax
                             5
Basic
Premium Tax Calculation


                                        Domicile
                            State (A)   State (B)
Life Prem -                  $50,000     $50,000
A&H Prem -                    50,000      50,000
Total Taxable Prem -         $100,000   $100,000

State (A) tax rate @ 1.7%     $1,700
State (B) tax rate @ 2%                  $ 2,000
Retaliatory tax incurred      $ 300
Premium Tax Calculation With     6
Various “Line-of-Business” Tax
Rates


                                     Domicile
                                     State (A)           State (B)
 Life Prem -                         $10,000              $10,000
 A&H Prem -                           12,000               12,000
 Total Taxable Prem -                $22,000              $22,000

 State (A) Life tax rate @ 2.1%      $210
 State (A) A&H tax rate @1.05%       $126
                       Total         $336

 State (B) Life tax rate @ 1.75%                          $175
 State (B) A&H tax rate @ 1.75%                           $210
                                     Total                $385
 Retaliatory tax incurred                        $ -0-
                                     7
Municipal Taxes


 License Tax
 - Companies that conduct business within a municipality

 Why Are We Required To Pay?
 - Companies utilize municipality services
 - Fire & Police Pension Funds
 - To generate revenue for the Municipality

 Tax Assessment Methodology
 - Allocation of Premiums by location
 - Rate: Percentage of Premiums, Flat rate, or both
        ($50 + $1 of every $100 of DWP)
                                8
Source Information for Premium Tax Return
Preparation



 What are some of the basic data sources used for
 computing premium taxes?

  - Sch. T and State Business Pages


  - General Ledger Queries – Qualified Life/Annuity Information


  - Premium System Reporting – Municipal Taxation Information


  - Business Unit Account Reconciliations – Policy Contract
    Specific Information
                                9
State Audit Issues



What are States Looking to Capture in the
Retaliatory Tax Calculation:

- Taxes, Fees, Assessment


- What does Retaliatory Statute Allow (burdens, obligations)?


- Credit Comparisons – does Statute Support


- Methods of tax (item-by-item on fees)
                                              10
State Audit Issues

Allocations –
- Situs of risks
 - COLI/TOLI premiums (Life)
 - Surety Lines (P&C)


Accounting –
- Inclusions in the taxable premium base
 - TPA’s (Life)
 - Finance/Service Charges (P&C)
 - Modal Premiums (Life)


Systems –
- Internal exchange quantification
 - Excluded from premium base (Life)

Municipal Tax –
- Location, location, location
 - Florida: Naples V. North Naples (Police/Fire issue)
 - Kentucky: Allocation Issues
 - Alpha Mutual v. City of Mobile
                                11
Trends (External)



 States granting investment credits


 States lowering rates (Idaho, Indiana, Iowa,
 Kentucky, Ohio)


 Aggressive Retaliatory tax methods:
 - Credits in retaliatory computation
 - Inclusion of fees and assessments in domicile state
                                 12
Tax Planning

   What are some Premium Tax planning
               strategies?
 Redomestication of an existing insurance co. to a lower tax rate
state
     Reduces or eliminates retaliatory tax burden

 Utilization of other insurance companies in lower rate states
     Line of Business Driven to Reduce retaliatory taxes

 Creation of a Subs in favorable low tax states
    Eliminate or reduce retaliatory taxes

 Enactment of Legislation to provide for retaliatory tax relief
(retaliatory credit)
     Eliminates or substantially reduces retaliatory tax burden
13
             14
Questions?
                                                                  15




                 Insurance Tax Conference-State
State Income Tax for Newer Tax Professionals
                                                      April 28, 2008

 Albany ~ Atlanta ~ Baltimore ~ Chicago ~ Denver ~ Hartford ~ New York ~ Philadelphia ~ Portland ~ Washington, D.C. ~ Amsterdam ~ London
                                                           www.smartgrp.com
                 16

Presenters:
              Timothy Mahon
                  E&Y
              212-773-1541
         timothy.mahon@ey.com


              Roger Mierzwa
                 SMART
              212-971-5246
        rmierzwa@smartgrp.com
                                        17
                                     Agenda
1.   Income Tax – General Concepts (Mierzwa)
     a.      Nexus
     b.      Starting Point
     c.      Adjustments
     d.      Apportionment
     e.      Filing Methodologies
           i.     Separate Company
           ii.    Combined
           iii.   Consolidated

2.   Insurance Industry Application (Mahon)
     a.      States that Impose an Income Tax
     b.      Apportionment
     c.      Credits
     d.      Combined Groups

3.   Other State Income Tax Issues (Mierzwa)

4.   Specific States Analyzed (Mahon)

5.   Q&A
                                 18

   Income Tax – General Concepts
Nexus
Activities or minimum contacts that give rise to a filing responsibility.

Nexus Creating Activities:
  Physical Presence
  In-state Property
  In-state Payroll
  In-state Receipts (possibly)
    – Economic Presence (Lanco–NJ; MBNA–WV; Geoffrey–S.C.)
    – Agency (3rd Parties and Affiliated)
    – Partnership Investments (Corporate partner nexus)
                                  19

   Income Tax – General Concepts

Starting Point
Usually based on federal taxable income:
   Form 1120 - Line 28 (before NOL / special deductions)
   Form 1120 - Line 30 (after NOL / special deductions)
   For Property & Casualty Insurance Companies – Form 1120-PC, Line 37 (after
   NOL / Special Deductions).
   For Life Insurance Companies – Form 1120-L, Line 27 (after NOL / Special
   Deductions).
   Form 1120-F, Foreign Corporation Return – Line 32
          - Mainly for Mexican and Canadian branches of US Mutual Life Co
          - Tax treaties may exempt
                                     20

   Income Tax – General Concepts

Adjustments
Certain items are either added or subtracted from federal taxable income to arrive
   at the state tax base. Common adjustments include:
   NOL’s (“line 30” states only) and pre-apportionment states (NY)
   State Income Taxes
   Tax Exempt Interest (Muni and US)
   Capital Losses
   Depreciation Adjustments
   Dividends Received Deductions & Foreign Income Adjustments
   Allocable Income / Losses - Non Business Income
   Intercompany Transactions (interest, royalties, etc) (TJX case in MA 8-07)
                               21

  Income Tax – General Concepts
Apportionment
The state tax base is then apportioned to arrive at state apportioned
  income. Numerator is in-state activity. Denominator is total
  activity.

Historically, the apportionment formula consisted of 3 evenly
   weighted factors:
   Property
   Payroll
   Receipts
Now only about a dozen states left at an equal 3 factor
                               22

   Income Tax – General Concepts

Apportionment – cont.
The last several years have seen a move towards more heavily
  weighting the receipts factor, including the use of a single factor
  formula based on receipts.

Currently:
  Approximately 10 states use a single-factor receipts formula
  (some elective)
  Approximately 23 additional states at least double-weight the
  receipts factor
                              23

  Income Tax – General Concepts
Apportionment – cont.
Receipts factor sourcing:
  Receipts of TPP are generally sourced to their destination
  Receipts of other than TPP are sourced in one of several ways
   – Market based approach (e.g., MD, MN) (States looking)
   – Costs of performance / income producing activity
       • Majority (More than 50%)
       • Plurality (40-30-30)
       • Proportionate
   – Caution!!! – wording of law and application not always
     consistent. Direct costs and 3rd Party direct costs.
   – Special Industry Rules
      - Financial Corps and Transportation/Airlines, etc.
                                24

   Income Tax – General Concepts

After income has been apportioned, income or loss directly
   allocated to the state in question is added, to arrive at state
   taxable income (to which the tax rate is applied).
Types of allocated income:
   Non-business income
         Sale of non-unitary subsidiary and liquidations
         Rents to state of location
         Sale of special investments
   Investment versus Operational
                             25

  Income Tax – General Concepts
Filing Methodologies
Separate Company – PA, NJ, MD

Combined
  Unitary (pre-apportionment) CA, IL, NE, NH
  Nexus (post-apportionment) MA, VA, CT
  Watch for additional states considering adopting combination
   NY 2007 and WV 2009
   IN, IA, KY, MA, MO, PA, TN, WI
Consolidated – FL (with proper election)
                                26

  Income Tax – General Concepts

Filing Methodologies – cont.
Separate Company – each entity files on its own.
    Intercompany transactions are not eliminated
    – Exception in certain states for certain types of “add backs”
      for related party intercompany interest, royalties, etc.
   Income tax base is determined as if the corporation had no
   affiliates, consolidated return regulations don’t apply and “as if”
   separate company Form 1120 is to be filed.
   Transfer Pricing issues between affiliates.
                               27

  Income Tax – General Concepts

Filing Methodologies – cont.
Combined Methods
    Unitary / Pre-apportionment Combination – a method of
    calculating income of a unitary group. Generally must be at least
    50% common ownership and some flow of value between the
    entities (most common combination method).
    – If unitary criteria are met, entities are part of combined group
      regardless of nexus with a specific state (mandatory).
    – Intercompany transactions are eliminated similar to those in
      a federal consolidated return.
    – Apportionment factors are calculated on a combined basis.
                              28

  Income Tax – General Concepts

Filing Methodologies – cont.
Combined Methods
    Nexus / Post Apportionment Combination – More of a filing
    methodology. Only companies with nexus in a specific state are
    part of the report (e.g., CT).
    – Each company with nexus computes its income tax
      separately, and then the separate company tax liabilities are
      combined.
    – Most have no intercompany eliminations and apportionment
      factors calculated on separate company basis.
                                29

   Income Tax – General Concepts

Filing Methodologies – cont.
Consolidated – Based on ownership (generally must be 80%
    common ownership, as opposed to only 50% for unitary
    combined); may be nexus based, or follow federal consolidation,
    often elective
    Really a method of reporting for administrative ease in that it
    allows a group of companies with a filing responsibility in a state
    to file one report instead of multiple reports.
    Optional – certain eligibility requirements must be met.
    Intercompany transactions are eliminated.
                               30

   Income Tax – General Concepts

Filing Methodologies – cont.
Beware of terminology!!!!
    You must look at the specific provisions of each state to
    determine correct method of filing as states often use terms
    “combined” and “consolidated” interchangeably / incorrectly.
    Determination of a unitary group is very fact sensitive and one of
    the more litigated areas in state taxation.
                               31

    Insurance Industry Application

Since most states impose premiums taxes instead of income taxes,
   why do insurance companies care about income tax concepts?
   Limited number of states impose the corporate net income tax on
   insurance companies.
   Insurance companies often have significant operations contained
   in non-insurance affiliates, and such non-insurance affiliates are
   subject to these corporate net income tax provisions.
   Future implications of expanded non-insurance combined returns
   to include insurance companies (specific States & MTC
   proposal).
                                     32

    Insurance Industry Application
The following states impose an income tax on insurance companies (directly or
   indirectly):
          Alaska (Consolidated)        Nebraska
          Florida                      New Hampshire
          Illinois                     New York (Life insurance only)*
          Indiana (Domestic Only)      Oregon
         Idaho (New - combination)        Vermont (New - combination)
         Louisiana                        West Virginia (New - combination)
         Mississippi                      Wisconsin (Domestic only)

*-There is a NY income tax cap and a floor
                             33

   Insurance Industry Application
Apportionment
  In contrast to non-insurance companies, insurance companies
  generally apportion their income based on premiums revenue
  (ratio of in-state premiums to total premiums). However, some
  states also utilize a payroll factor for insurance companies.
   – Premium revenue is most often direct written premiums.
     Some states include reinsurance premiums.
                                  34

    Insurance Industry Application
Apportionment Formulas
   Alaska – payroll, property, sales/premiums
   Florida – single factor premium (reinsurance included for some)
   Idaho - payroll, property, sales/premiums
   Illinois – single factor premium (reinsurance included for some)
   Louisiana – some confusion on 1, 2, or 3 factors
   Mississippi – single factor premium
   Nebraska – single factor premium (reinsurance included for some)
   New Hampshire – payroll, property, sales/premiums
   New York (life only) – payroll (10%), premiums (90%)
   Oregon –2006 payroll, income from real estate, premiums; 2007 premiums
   Vermont – payroll, property, sales/premiums
   West Virginia – payroll, property, sales/premiums
   Wisconsin – single factor premium
                              35

   Insurance Industry Application

Tax Credits
Many of these states allow credits against the income tax for
  premiums taxes paid (or vice versa). The premium tax credit
  may cover the entire income tax liability. Some states may also
  allow other tax credits for insurance companies.
                             36

   Insurance Industry Application

Reporting Methodologies / Combined Groups
Similar to non-insurance companies, insurance companies may
   report their income either on a separate company basis, a
   combined basis, or a consolidated basis. However, special
   issues may arise with insurance companies concerning
   combined reports.
                             37

   Insurance Industry Application

Combined Group Issues
  In some states (e.g. AK, FL, NH, VT and WV) a consolidated or
  combined group may include both insurance and non-insurance
  companies.
  In other states, unitary insurance companies cannot be
  combined with non-insurance companies (e.g., IL, NE & NY).
  Further, some states do not allow life and P&C companies to be
  part of the same combined return (e.g., NY).
                            38

   Insurance Industry Application
Other State Income Tax Issues
  MTC proposal to include insurance companies in unitary
  combined returns.
  Non-nexus insurance companies included in non-insurance
  affiliated unitary return by aggressive states
   – Oregon
   – Kansas
   – Idaho (Tax Com Dec No 18719 & 19549, 4-20-07)
  Corporate partners in partnership / flow-through entities
   – Flow-through apportionment (KY Asworth case 6-14-07)
   – Withholding tax
                              39

Insurance Industry Application

Alaska
   Stand alone insurance company only subject to gross premiums
   tax. Income and modifications included when insurance company
   is part of waters edge combined group in AK
   Starting point for income tax is federal taxable income (line 28)
   Income is apportioned via three factors. Insurance company
   numerators excluded from calculation.
   No credit for premiums tax paid.
                               40

   Insurance Industry Application
Florida
   Taxes – Insurance companies subject to both income tax and
   gross premiums tax.
   Starting Point for Income Tax is federal taxable income (line 30)
   Income is apportioned via single-factor direct written premiums
   formula, with a special modified formula for reinsurance
   premiums. Three factors apply if consolidated return.
   Previous year’s income tax liability is a partial credit against
   premiums tax.
   May elect to file a consolidated return that includes both
   insurance and non-insurance companies (mirrors federal return).
                            41

Insurance Industry Application

Idaho
   ID Tax Commission Dec # 18719 & 19549, 4-20-07
   Non-premium tax paying insurance companies included in non-
   insurance group combined return.
   Start with 1120 Line 30, but federal NOL is an add back and
   state NOL is separately calculated.
   Insurance co apportionment denominator factors included in
   combined return but numerators excluded.
   Concern for open years and 2008 estimated tax payments.
                                    42

    Insurance Industry Application

Illinois
   Taxes – Insurance companies are subject to both the net income and
   replacement taxes, as well as a gross premiums tax.
   Starting Point for Income Tax is federal taxable income (line 30).
   Income is apportioned via single-factor direct written premiums formula, with a
   special modified formula for reinsurance premiums.
   Income tax calculation is very complex – Schedule INS
   Income taxes paid for previous year may be treated as a credit against the
   gross premiums tax if in excess of 1.5% of taxable premiums.
   Insurance companies cannot be included in a unitary group with non-
   insurance companies.
   I/C transactions subject to addback starting in 2009.
                              43

   Insurance Industry Application
Indiana
   Taxes – Foreign (non-Indiana) insurance companies must pay
   the gross premiums tax and are exempt from the adjusted gross
   income tax. Domestic insurance companies may annually elect
   between the gross premiums tax or the adjusted gross income
   tax. Since the gross premiums tax is usually elected by domestic
   insurers, the income tax is seldom in play.
   Starting Point for Income Tax is comparable to federal line 28,
   less line 29b special deductions (DRD)
   Income is apportioned via a single-factor premiums formula.
   Since the adjusted gross income tax and the gross premiums
   taxes are an either/or election, there is no credit.
                             44

   Insurance Industry Application

Louisiana
  Insurance companies are subject to both the income tax and the
  gross premiums tax.
  Starting point for income tax is federal taxable income after
  NOL’s and special deductions.
  Apportionment Formula – Uncertainty exists regarding which is
  correct formula.
  The amount of premium taxes paid are allowed as a credit
  against the income tax. Credit often exceeds income tax.
  Separate return mandatory, combination is not allowed.
                             45

   Insurance Industry Application

Mississippi
  Taxes – Insurance companies are subject to both the income tax
  and the gross premiums tax.
  Starting point for income tax is net income as reported on the
  NAIC annual statement.
  Generally, income is assigned using direct accounting (premiums
  earned less losses incurred). Non-life insurance companies may
  elect to use a single-factor premiums apportionment formula.
  Separate company return mandatory, combination is not allowed.
  No income credit against premiums tax or vise versa.
                              46

    Insurance Industry Application
Nebraska
  Taxes – Insurance companies are subject to both the corporate
  income tax and the premiums tax.
  Starting Point for Income Tax is federal taxable income after
  NOL’s and special deductions.
  Income is apportioned via single-factor premiums formula, with
  special provisions for reinsurance premiums.
  Premiums taxes paid are allowed as a credit against the income
  tax.
  Insurance companies may be combined but cannot be included
  in a unitary group with non-insurance companies.
                             47

   Insurance Industry Application

New Hampshire
  Taxes – Insurance companies are subject to the Business Profits
  Tax as well as the premiums tax.
  Starting point for income tax is federal income before NOL’s and
  DRD.
  For BPT purposes, New Hampshire receipts / premiums are
  double-weighted.
  Premiums taxes paid are allowed as a credit against the BPT.
  Combined groups may include insurance and non-insurance
  entities.
                             48

   Insurance Industry Application
Oregon
  Taxes – Insurance companies are subject to the corporate
  excise (income) tax as well as the premiums tax
  Starting point for excise tax is net income as reported on the
  NAIC annual statement.
  The excise tax is apportioned starting in 2007 only with
  premiums. For 2006 was via a three-factor formula consisting of
  insurance premiums, wages and commissions, and real estate
  income and interest.
  Premium taxes paid are allowed as a credit against the excise
  tax.
  Only domestic insurers may be combined.
                              49

   Insurance Industry Application

Vermont
  Taxes – Insurance companies are subject to the premiums tax.
  Starting point for income tax is federal income before NOL’s and
  DRD.
  Combined groups include insurance and non-insurance entities.
  See Reg. 1.5862(d)(4)
  Income allocated to insurance company is not subject to income
  tax.
                              50

   Insurance Industry Application

West Virginia
  Taxes – Insurance companies are subject to the premiums tax.
  Starting point for income tax is federal income before NOL’s and
  DRD.
  Combined groups include insurance and non-insurance entities.
  See Reg. 1.5862(d)(4)
  Income allocated to insurance company is not subject to income
  tax.
                              51

   Insurance Industry Application

Wisconsin
  Taxes – Only domestic (WI) insurance companies are subject to
  the corporate income / franchise tax; foreign insurers and
  domestic life insurers are exempt and pay a premium tax.
  Starting point for income tax is federal taxable income before
  NOL and DRD.
  Income is apportioned via a single factor premiums formula
  starting in 2006 (prior law was a two-factor premiums and payroll
  formula).
   52




QUESTIONS?
                             53




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                      relies on this publication.
                     54
Legislative, Administrative and
       Litigation Update
         April 28, 2008

                James Hall
         Regional Vice President
      American Council of Life Insurers

             Gerardo Malanga
          Assistant Vice President
               Chubb & Son

             Craig Provenzano
        State & Local Tax Manager
       PricewaterhouseCoopers LLP
                                  55

Overview


• New Laws

• Pending Legislation

• Administrative

• Litigation




ITC Insurance State Tax Seminar        April 28, 2008
                                               Slide 2
                                           56

New Laws
     • Alabama                    • Missouri         • Texas
     • California                 • Nebraska         • Utah
     • Idaho                      • Nevada           • West Virginia
     • Illinois                   • New Hampshire    • Wisconsin
     • Indiana                    • North Carolina
     • Louisiana                  • Rhode Island
     • Maine                      • South Carolina
     • Michigan                   • South Dakota
     • Mississippi                • Tennessee




ITC Insurance State Tax Seminar                                        April 28, 2008
                                                                               Slide 3
                                  57

New Laws


Alabama S 683: Insurance Commissioner shall assess all
members of Rural Risk Underwriting Association a fee not to
exceed $200 annually, if needed, for mailing fire department
renewal subscription notices. The fee had been $200 upon
joining the association.

Alabama H 785: Provides for a second allocation of premium tax
credits to investors that contribute certified capital to a CAPCO.




ITC Insurance State Tax Seminar                            April 28, 2008
                                                                   Slide 4
                                  58

New Laws


California A 1401: Requires an insurer to pay an annual special
purpose assessment that can not exceed $5,100. The annual
special purpose assessment replaces the annual fraud
assessment.
    - The assessment is a surcharge that can be recouped from
      the policy holders.




ITC Insurance State Tax Seminar                          April 28, 2008
                                                                 Slide 5
                                  59

New Laws


Idaho S 1021: Provides that for purposes of the Industrial
Special Indemnity Fund insurers are only required to report once
not twice a year. The assessment is due twice a year based on
equal installments of liability instead of based on the prior six
months of indemnity.




ITC Insurance State Tax Seminar                            April 28, 2008
                                                                   Slide 6
                                  60

New Laws


Illinois S 1544/S 783: Effective for tax years ending on or after
December 31, 2008, provides an add-back for interest expenses
and costs, intangible expenses and costs, and insurance
premium expenses and costs paid or accrued to an affiliate that
would otherwise be a member of the same unitary business
group if not for the fact that the member is required to use a
different apportionment method.

Also repealed the sales factor election for reinsurance
companies.


ITC Insurance State Tax Seminar                            April 28, 2008
                                                                   Slide 7
                                  61

New Laws


Indiana H 1722: Provides a premium tax credit for small
businesses equal to the lesser of 20% of the amount of
expenditures for energy star heating and cooling equipment
incurred by the taxpayer during the taxpayer year or $100.

Indiana H 1461: Provides a premium tax credit not to exceed
15% of the amount of qualified investments made by a taxpayer
to foster job creation and higher wages, reduce dependency
upon energy sources imported into the US, and reduce air
pollution as a result of the manufacture or assembly of
alternative fuel vehicles.

ITC Insurance State Tax Seminar                          April 28, 2008
                                                                 Slide 8
                                  62

New Laws


Louisiana H 481: Imposes a financial regulation fee of $1,000
per year per insurer. Repeals the annual statement fee of $100.
Companies paying the regulation fee are not required to pay
examination fees.

Louisiana S 211: The Secretary of Revenue will provide forms
for claiming the income tax credit for assessments levied by the
Louisiana Citizens Property Insurance Corporation.




ITC Insurance State Tax Seminar                            April 28, 2008
                                                                   Slide 9
                                  63

New Laws


Maine H 1054: Provides that insurance companies with less than
$1,000 in annual premium tax liability may file one annual return
on March 15 instead of quarterly returns.




ITC Insurance State Tax Seminar                           April 28, 2008
                                                                 Slide 10
                                  64

New Laws


Michigan S 94: Provides for a “new” Michigan premium tax to
replace the SBT at the rate of 1.25%. The retaliatory tax
provisions and the majority of the credit provisions were retained.
The MBT substantially changes the taxing regime for non-
insurance companies by providing for a gross receipts based tax
and a business income based tax.

Michigan S 1062: Provides an exemption from the Michigan
gross direct premiums tax for insurance companies authorized
as captive insurance companies or special purpose financial
captives.

ITC Insurance State Tax Seminar                             April 28, 2008
                                                                   Slide 11
                                  65

New Laws


Michigan H 5125: Insurance companies subject to the gross
direct premiums tax may claim the Renaissance Zone credit,
effective January 1, 2008.

Michigan H 5126: Insurance companies subject to the gross
direct premiums tax may claim the MBT Historic Preservation
Credit, effective January 1, 2008.




ITC Insurance State Tax Seminar                         April 28, 2008
                                                               Slide 12
                                  66

New Laws


Mississippi S 2563: The date by which insurance companies
are required to file with the State Tax Commission the report of
gross premiums and pay the taxes due for the period October 1
through December 31 is extended from February 20 to March 1.

Mississippi H 1662: Increases to 8% the amount of qualified
community development entity credit. The credit may be claimed
beginning in the year the investment is made and for two
additional years.




ITC Insurance State Tax Seminar                           April 28, 2008
                                                                 Slide 13
                                  67

New Laws


Missouri H 1a: Provides for a credit against the premium tax for
up to 50% of the acquisition costs and 100% of the interest costs
of a certified Distressed Area Land Assemblage. Also provides
that the Pregnancy Resource Center credit may be sold,
assigned and transferred but for no less than 75% of the par
value and not to exceed 100%. Also provides a premium tax
credit for amounts invested in qualified community development
entities equal to the applicable percentage as applied to the
purchaser’s investment.




ITC Insurance State Tax Seminar                            April 28, 2008
                                                                  Slide 14
                                  68

New Laws


Missouri S 86: Provides for a premium tax credit for donations
to a Residential Treatment Agency. The credit would be 50% of
the amount of an eligible monetary donation.

Missouri S 66: Provides for an increase in fees paid by HMOs
to the Insurance Department. Would also change how
examination expenses are charged to domestic insurers.




ITC Insurance State Tax Seminar                          April 28, 2008
                                                                Slide 15
                                  69

New Laws


Nebraska L 117: Provides for a 3% tax on premiums of policies
procured by industrial insured through non-admitted insurers.
Also provides for the organization and regulation of captive
insurance companies in Nebraska.




ITC Insurance State Tax Seminar                         April 28, 2008
                                                               Slide 16
                                  70

New Laws


Nevada A 161: Increases the maximum annual non prorated
assessment on member insurers of the Nevada Life and Health
Insurance Guaranty Association from $150 to $300.




ITC Insurance State Tax Seminar                       April 28, 2008
                                                             Slide 17
                                  71

New Laws


New Hampshire S 782: Allows the transfer of the business
enterprise tax credit form one insurance affiliate to another
insurance affiliate within the unitary business as long as the
transferor company is subject to the BET.

New Hampshire S 134: Establishes a research and
development credit against the BPT and BET. Also requires the
Commissioner of Resources and Economic Development to file
reports on the tax credit program.




ITC Insurance State Tax Seminar                              April 28, 2008
                                                                    Slide 18
                                  72

New Laws


North Carolina S 238: Reduces the additional premium tax on
property coverage rate from .85% to .74%. Additionally, the tax
base is expanded to include premium for wind damage.

North Carolina S 242: Provides for a change in the statute of
limitations for refunds and assessments. The new statute of
limitations for assessments is the later of 3 years after the due
date of the return or the date the return is filed. For refunds and
overpayments the statute of limitations is the later of 3 years
from the due date of the return or 2 years from payment of the
tax.

ITC Insurance State Tax Seminar                              April 28, 2008
                                                                    Slide 19
                                  73

New Laws


Rhode Island H 5300: Provides that HMOs, nonprofit hospital,
and medical service corporations are subject to a premium tax of
1.1%. The installment payments shall equal at least 90% of the
estimated liability in the first year.




ITC Insurance State Tax Seminar                           April 28, 2008
                                                                 Slide 20
                                  74

New Laws


South Carolina H 3820: A licensed insurer providing full
property and casualty coverage must include wind and hail
coverage to property owners within designated Wind Pool
territory and may claim as a nonrefundable credit against the
premium tax an amount equal to 25% of the tax that otherwise is
due on the premium written for the property owners for the
taxable year beginning with new policies written after December
31, 2007. The credit is available only for insurers licensed in
South Carolina and may be claimed only once for any one
structure, regardless of the number of policies written on the
structure.

ITC Insurance State Tax Seminar                          April 28, 2008
                                                                Slide 21
                                  75

New Laws


South Dakota H 1200: Retaliatory tax will not be imposed on
the portion of life insurance annual premiums exceeding
$100,000. No retaliatory tax will be imposed on the annual
consideration of an annuity contract exceeding $500,000.
Effective beginning July 1, 2008.

South Dakota H 1017: Provides that insurance companies are
subject to the sales and use tax on any product transferred
electronically, effective July 1, 2008.




ITC Insurance State Tax Seminar                         April 28, 2008
                                                               Slide 22
                                  76

New Laws


South Dakota H 1053: Provides that HMOs are subject to the
premium tax as regular insurers. The state, however, may not
collect premium taxes for insurance written on individuals
residing outside the state or property located outside the state
even if no comparable tax is paid by the health maintenance
organization to non South Dakota taxing authorities.




ITC Insurance State Tax Seminar                             April 28, 2008
                                                                   Slide 23
                                  77

New Laws


Tennessee S 2131: Provides that the Tennessee Life and
Health Insurance Guaranty fund will sunset June 30, 2008
instead of 2007.




ITC Insurance State Tax Seminar                            April 28, 2008
                                                                  Slide 24
                                  78

New Laws


Texas S 377: Companies that owe $10,000 or more in prior year
premium tax may be required by the comptroller to make
payments by means of electronic fund transfer.




ITC Insurance State Tax Seminar                        April 28, 2008
                                                              Slide 25
                                  79

New Laws


Texas H 2551: Provides that an insurer that has charged an
excessive rate for a personal automobile policy may not take any
credits against the premium tax liability.

Texas H 2636: Provides for a 100% credit against the premium
tax for contributions to a certified capital company over 4 years
beginning in 2008.




ITC Insurance State Tax Seminar                             April 28, 2008
                                                                   Slide 26
                                  80

New Laws

Texas H 3315: Expands the definition of taxable premium to
include membership fees, assessments, dues, revenues, home
warranty and any other considerations received by the insurer.
Premiums for surplus lines and unauthorized insurers taxes may
be considered to be on risks located in this state if insured’s
home office or state of domicile is located in the state; or to
accommodate changes in federal statutes or regulations that
would limited the comptroller’s ability to directly collect tax.
Texas may enter into cooperative agreements with other states
to collect the surplus lines or unauthorized insurers taxes on their
behalf. Also managed care organizations and personal and
commercial automobile insurance are subject to the maintenance
tax.
ITC Insurance State Tax Seminar                              April 28, 2008
                                                                    Slide 27
                                  81

New Laws


Utah H 466: Licensed title insurance agencies are required to
pay an annual assessment, not to exceed $1,000, to finance the
Title Insurance Recovery, Education, and Research Fund,
effective January 1, 2009. Additionally, effective January 1,
2009, an individual applying for a license or renewal of a license
as a title insurance producer must pay an assessment not to
exceed $20.




ITC Insurance State Tax Seminar                             April 28, 2008
                                                                   Slide 28
                                  82

New Laws


West Virginia S 680: On March 31st, the Governor of West
Virginia Governor signed into law a bill that modifies the
application of the state's combined reporting regime. Insurance
companies are now eliminated from participating in a combined
report beginning on or after January 1, 2009.




ITC Insurance State Tax Seminar                           April 28, 2008
                                                                 Slide 29
                                  83

New Laws


Wisconsin S 386: Effective April 9, 2008, any action to recover
a premium tax or designated insurance fees must be brought to
the Dane County circuit court within 6 months from the time the
tax or fee was paid.




ITC Insurance State Tax Seminar                           April 28, 2008
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                                  84

Pending Legislation

• Connecticut                      • Massachusetts

• Florida                          • Missouri

• Illinois                         • New York

• Iowa                             • Pennsylvania

• Kentucky                         • Tennessee

• Maryland


ITC Insurance State Tax Seminar                      April 28, 2008
                                                            Slide 31
                                  85

Pending Legislation


Connecticut SB 139: Proposed legislation would lower the
corporate business tax by one per cent and require combined
returns for all taxpayers that have affiliated corporations. The full
text of the bill is not yet available.




ITC Insurance State Tax Seminar                               April 28, 2008
                                                                     Slide 32
                                  86

Pending Legislation


Florida H 1237: Proposed legislation would require water’s-edge
combined reporting for corporations related through common
ownership. Insurance companies would be included in the group
filing with non-insurance affiliates.




ITC Insurance State Tax Seminar                          April 28, 2008
                                                                Slide 33
                                  87

Pending Legislation


Illinois S 2912: Provides for a new subtraction modification for
taxpayers required to add-back insurance premiums in an
amount equal to any reimbursement received from the insurance
company for any loss covered.

Also provides for an adjustment to the gross income definition
under the Special Rule for Life Insurance Companies to include
life insurance gross income under Section 803(a)(3) of the IRC
for taxable years ending on or after 12/31/08.




ITC Insurance State Tax Seminar                           April 28, 2008
                                                                 Slide 34
                                  88

Pending Legislation


Iowa HSB 715: Proposal would require combined reporting for
corporate income taxpayers engaged in a unitary business.

Iowa Senate Majority Leader indicated that the legislature was
not willing to consider the Governor’s budget recommendation to
adopt mandatory combined reporting.




ITC Insurance State Tax Seminar                          April 28, 2008
                                                                Slide 35
                                  89

Pending Legislation

Kentucky HB 524: Local Premium Taxes
For tax periods beginning after December 31, 2008, the statute
of limitations for filing amended municipal returns/ requesting
refunds would be two years from the due date of the annual
reconciliation. Insurers that include local premium taxes as part
of the policyholder premium charge would be required to
separately state the amount of tax charged and the name of the
taxing jurisdiction on the renewal certificate. The bill would
require the Office of Insurance to establish a risk location
verification system, and on a biennial basis insurers could be
assessed a fee not to exceed $200 for the administration of the
local premium tax provisions (sunsets on July 1, 2010). Would
be effective 90 days after 2008 legislative session adjourns.
ITC Insurance State Tax Seminar                             April 28, 2008
                                                                   Slide 36
                                  90

Pending Legislation


Maryland SB 444/ HB 664: Legislation would narrow the scope
of reporting entities to Maryland taxpayers and would limit the
reportable information to: 1) a pro forma Maryland combined
report, 2) sales factor throwback calculation, and 3) identification
of non-business positions. The bills would also exclude
insurance companies from the information report filing
requirements.




ITC Insurance State Tax Seminar                               April 28, 2008
                                                                     Slide 37
                                  91

Pending Legislation


Massachusetts HB 4645: Would mandate unitary combined
reporting. Insurance companies subject to the premium tax
would be excluded from the combined report.




ITC Insurance State Tax Seminar                        April 28, 2008
                                                              Slide 38
                                  92

Pending Legislation


Missouri SB 743: Proposed legislation would require
corporations doing business in Missouri and a member or a
unitary group to file a water’s edge combined report. Insurers
companies are not excluded from the combined reporting
provisions.




ITC Insurance State Tax Seminar                            April 28, 2008
                                                                  Slide 39
                                  93

Pending Legislation


New York Budget SB 6807-C/ AB 9807-C: On March 9, the
New York Assembly approved an amended budget bill that
would require a captive REIT or RIC to file combined corporate
franchise, bank franchise, and insurance tax combined reports
with its majority owners.




ITC Insurance State Tax Seminar                           April 28, 2008
                                                                 Slide 40
                                  94

Pending Legislation


Pennsylvania H 1186: Proposed legislation would require
corporations doing business in Pennsylvania to file a unitary
combined report. Insurance companies would be excluded.




ITC Insurance State Tax Seminar                            April 28, 2008
                                                                  Slide 41
                                  95

Pending Legislation


Tennessee H 4159: Provides that insurance companies are no
longer exempt from the franchise and excise tax. Instead
insurance companies would received a credit based upon the
amount of gross premiums tax paid plus any amount used to
offset payment to the Tennessee guaranty association that has
not otherwise been recovered, but not including the gross
premiums receipts tax paid by fire insurance companies for the
purpose of executing the fire marshal law.

Tennessee HB 3182: Proposed legislation would require
combined reporting for franchise and excise tax purposes.

ITC Insurance State Tax Seminar                             April 28, 2008
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                                   96

Administrative
• Alabama                         • North Carolina
• California                      • Ohio
• Connecticut                     • Oklahoma
• Florida                         • Oregon
• Illinois                        • Texas
• Iowa                            • Vermont
• Louisiana




ITC Insurance State Tax Seminar                      April 28, 2008
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                                  97

Administrative


Alabama: Rule 810-14-1-.30-.01
When a taxpayer fails to file any form or return required to be
filed with the Department, including premium tax returns, on or
before the statutory due date a failure to file penalty will be
imposed. The penalty will equal the greater of 10% of any
additional tax due after prepayments made on or before the due
date, or $50.




ITC Insurance State Tax Seminar                           April 28, 2008
                                                                 Slide 44
                                  98

Administrative


California: Proposed REG-2007-00002
• On March 25, 2008 California released for public comment a
proposed regulation regarding reporting premium on a cash vs. accrual
basis. Written comments were due no later than April 10, 2008.
• The regulation would allow insurers to elect to report premium on
either a cash or accrual basis.
• Taxpayers would need to report on the elected method for the entire
year unless involved in a merger.
• Once an insurer elects to report on a cash basis it may not report on
an accrual basis in subsequent years unless involved in a merger.
• Cash basis taxpayers would be subject to additional reporting
requirements.

ITC Insurance State Tax Seminar                                 April 28, 2008
                                                                       Slide 45
                                      99

Administrative

Connecticut: Payment Deadlines for Refunded Assessments
Announcement 2008(2)
Members of Connecticut Insurance Guaranty Association (CIGA) must pay a
portion of the recently refunded assessments to the Department of Revenue
Services (DRS) on or before February 11, 2008.
     - CIGA assessments payable by a member insurer prior to January 1,
       2000 are not permitted to offset the insurance premiums tax liability and
       none of the refundable amount must be paid to the DRS.
     - CIGA assessments payable by a member insurer on or after January
       1, 2000 are permitted to be offset against the member's Connecticut
       insurance premium tax liability and the refundable amount shown on
       the statement from December 27, 2007 must all be paid to the DRS.



ITC Insurance State Tax Seminar                                         April 28, 2008
                                                                               Slide 46
                                  100

Administrative

Florida: Rule 12B-8.0016 Premium Tax Database
The electronic Insurance Premium Tax Address/Jurisdiction
Database will be maintained by the Florida Department of
Revenue and used to assign insurance policies and premiums to
local tax jurisdictions. A formal policy and procedure exists for
change requests made by local tax jurisdictions and objections to
tax jurisdiction assignments.

Effective March 17, 2008, insurance companies may register and
create a user name and password to download
address/jurisdiction database files for Florida insurance premium
tax. The database is required to be used for calendar year 2009
to report premiums.
ITC Insurance State Tax Seminar                           April 28, 2008
                                                                 Slide 47
                                  101

Administrative


Florida: Legal Expense Insurers Filing Fees
Tax Information Publication 08(B)8-02.
Effective for calendar year 2008 and for each year thereafter, the
quarterly statement filing fee and the annual statement filing fee
for legal expense insurers should be paid directly to the Office of
Insurance Regulation, not to the Department of Revenue.




ITC Insurance State Tax Seminar                             April 28, 2008
                                                                   Slide 48
                                  102

Administrative


Florida: Project Income for Capital Investment Credit
Technical Assistance Advisement No. 08C1-001
Taxpayers must separately account for, using a “pro-forma”
format, the qualifying project’s annual taxable income and
subsequent tax credit.




ITC Insurance State Tax Seminar                          April 28, 2008
                                                                Slide 49
                                      103

Administrative

Illinois: Insurance Company Apportionment
Regulation 100.3420
Insurance companies are required to apportion income to Illinois by dividing
direct premiums written for risks in Illinois over direct premiums written for
risks everywhere.

“Direct premiums written” includes premiums, assessments, and annuity
considerations; does not include interest, dividends, gains or losses, deposit-
type funds, or premiums exempt from state income tax by federal law.

Reinsurers may elect to determine Illinois premium based on insurance
accepted from companies domiciled in Illinois or on the underlying location of
the direct premiums written by the ceding companies.


ITC Insurance State Tax Seminar                                          April 28, 2008
                                                                                Slide 50
                                  104

Administrative


Illinois: Subtraction Modification
Proposed Regulation 100.2430
When a taxpayer is required to add-back insurance premium
payments and/or expenses paid and/or accrued to a non-
combination entity, the non-combination entity is allowed a
subtraction modification for the amount of insurance premium
payments and/ or expenses added-back by the taxpayer, net of
deductions allocable to that income.




ITC Insurance State Tax Seminar                        April 28, 2008
                                                              Slide 51
                                  105

Administrative


Iowa: Rule 191-5.42(432)
An insurance company making an Iowa insurance premium tax
payment or prepayment and demonstrates an inability to recoup
the funds paid via a credit may obtain a cash refund of tax paid,
provided that the Insurance Division determines that the refund
is appropriate. The Insurance Division will authorize the
Department of Revenue to make the cash refund if the insurance
company meets the criteria and submits a timely written
application for the refund.




ITC Insurance State Tax Seminar                            April 28, 2008
                                                                  Slide 52
                                  106

Administrative


Louisiana: Hurricane Recovery Benefits & Insurance
Settlement, Rev. Rul. 08-001
Insurance settlement proceeds would not be deducted from
individual and corporate state income tax. However, the
hurricane recovery benefits would be included in income prior to
the inclusion of the insurance settlement proceeds in the case
that both were received by the taxpayer.




ITC Insurance State Tax Seminar                           April 28, 2008
                                                                 Slide 53
                                  107

Administrative

North Carolina: Allocation of Premium Income
Directive CD-08-1
Gross premiums from individual and group policies that cover
individuals living in North Carolina are taxable and should be
allocated to North Carolina regardless of the address of the
policyholder, policy owner, or beneficiary.

North Carolina: Insurance Gross Premiums Tax
2007-2008 Tax Technical Bulletin
Retaliatory gross premiums tax for insurance companies that
change domicile during the taxable year should be calculated by
taking into account the portion of the year the company was
domiciled in each state.
ITC Insurance State Tax Seminar                            April 28, 2008
                                                                  Slide 54
                                  108

Administrative


Ohio: Corporate Income Taxes
Attorney General Opinion No. 2007-017
The Superintendent of Insurance has the authority to use the
amount of “direct premiums written” on risks covered in Ohio, as
reported on Schedule T of the Annual Statement, as the basis
upon which to calculate the franchise tax imposed under the
premium tax statutes.




ITC Insurance State Tax Seminar                           April 28, 2008
                                                                 Slide 55
                                  109

Administrative


Oklahoma: 2009 Budget Revenue Raisers
A 2.25% market equalization assessment on direct written
premiums received by the state agency CompSource was
proposed in the fiscal 2009 budget.




ITC Insurance State Tax Seminar                            April 28, 2008
                                                                  Slide 56
                                  110

Administrative


Oklahoma: Surplus Line Insurance
Attorney General Opinion No. 07-38
Surplus line insurance policies that are sold to the state of
Oklahoma are subject to the 6% surplus line insurance tax. The
only exemption to the surplus line tax is for sales of policies to
federally recognized Indian tribes.




ITC Insurance State Tax Seminar                              April 28, 2008
                                                                    Slide 57
                                  111

Administrative


Oregon: Minimum Tax
Oregon amended Regulation 150-317.090 provides that the
minimum fee for a consolidated group may not be less than $10
times the number of companies in the consolidated return that
are doing business in Oregon. The regulation takes effect for tax
years beginning on or after January 1, 2006. The prior rule only
required a $10 fee for each consolidated group.




ITC Insurance State Tax Seminar                            April 28, 2008
                                                                  Slide 58
                                  112

Administrative


Texas: Guidance for Licensed Insurers
Tax Policy News, Vol. XVII, Issue 12
Taxation of property and casualty insurance is on a “written
basis” and the premiums must be allocated to each state to
reflect the location of the risks in that state. There are three
categories of deductions from the property and casualty premium
tax base: premiums from another authorized insurer for
reinsurance, returned premiums to a policyholder, and dividends
paid to policyholders.




ITC Insurance State Tax Seminar                          April 28, 2008
                                                                Slide 59
                                  113

Administrative


Texas: Guidance for Indemnity Insurance
Tax Policy News, Vol. XVIII, Issue 1
Indemnity insurance premiums should be sourced to the state
where the home office of the insured is located.




ITC Insurance State Tax Seminar                         April 28, 2008
                                                               Slide 60
                                  114

Administrative


Texas: Guidance on Allocation of Premiums
Tax Policy News, Vol. XVIII, Issue 1
Insurers licensed in Texas must allocate premiums according to
Texas tax statutes, not National Association of Insurance
Commissioners guidelines or Statutory Accounting Principles.




ITC Insurance State Tax Seminar                          April 28, 2008
                                                                Slide 61
                                  115

Administrative


Texas: Volunteer File Department Assistance Fund
Assessment
Proposed Rules, TRD 200800093
The Comptroller of Public Accounts proposed an amendment to
Texas Insurance Code §3.834 which concerns volunteer fire
department assistance fund assessment to implement and clarify
current practice and existing law.




ITC Insurance State Tax Seminar                         April 28, 2008
                                                               Slide 62
                                  116

Administrative


Texas: Guidance on Automobile Insurance
Tax Policy News, Vol. XVIII, Issue 3
Automobile insurance is taxed on a “written basis” and therefore,
insurers can only deduct from gross written premiums the
“unearned” portion that applied to cancelled policies. Additionally,
licensed insurers, that write any form of motor vehicle insurance
in Texas, are subject to the assessment for the Automobile
Burglary and Theft Prevention Authority, which is $1.00 per
“motor vehicle year.”




ITC Insurance State Tax Seminar                              April 28, 2008
                                                                    Slide 63
                                  117

Administrative


Vermont: Housing Investment Tax Credit
Vt. Dept. of Housing and Community Affairs, Housing
Division Rules, Part IV
Effective January 1, 2008, a credit may be claimed against
premiums tax for an approved charitable investment in an eligible
housing charity. The credit is the difference between the net
income that would have been received by the taxpayer at the
charitable threshold and the actual net income received by, or
credited to, the taxpayer.




ITC Insurance State Tax Seminar                           April 28, 2008
                                                                 Slide 64
                             118

Administrative


Wisconsin: Retaliatory Notice to California and Washington
Domestics
The Wisconsin Insurance Department has notified domestic
insurers in California and in Washington that Wisconsin
considers the California fraud assessment and the Washington
regulatory surcharge to be retaliable items under Wisconsin’s
retaliatory tax law.
                                  119

Litigation

• Alabama                           • Missouri

• California                        • New Jersey

• Hawaii                            • South Dakota

• Illinois                          • Washington

• Minnesota




ITC Insurance State Tax Seminar                      April 28, 2008
                                                            Slide 66
                                  120

Litigation


Alabama: Alfa Mutual v. City of Mobile
Related insurance companies that issued various policy types
including fire insurance owed 1% municipal license tax, not the
4% rate applicable specifically to fire and marine companies.
Insurance companies cannot, as the city argued, be taxed at the
4% rate on their fire insurance policies and at the 1% rate on
their other insurance policies because the insurer was not
chartered as a fire insurance company and the sale of fire
insurance was not its principal business activity.




ITC Insurance State Tax Seminar                          April 28, 2008
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                                  121

Litigation

California: Wilson v. Farmers Insurance Exchange
California Court of Appeals held that the insurance company did
not violate California False Claims Act (CFCA) by failing to pay
premium taxes on monthly service fees charged.
• The Court found that premium tax is imposed by California
Constitution, but premium tax returns are filed under rules in the
tax code. The allegedly false statements were on the returns.
• The CFCA prohibits bringing actions based on fraudulent tax
claims, thus CFCA barred the plaintiff’s action against insurance
companies.
• The Court refused to address whether service fees should be
included in premium tax base.

ITC Insurance State Tax Seminar                             April 28, 2008
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                                  122

Litigation

Hawaii: Hawaii Insurers Council v. Lingle
Payments to the State’s Insurance Regulation Fund were
determined to be an illegal tax instead of a permissible fee
because the taxing power cannot be delegated to the executive
branch. The assessment was a tax and not a fee because:
   - The charge to insurers benefited the public, not the
     insurers;
   - The assessment funds were transferred to the State’s
     general fund and not allocated to services provided to
     insurers; and
   - The assessments were not reasonably proportionate to the
     benefits received by the insurers.

ITC Insurance State Tax Seminar                        April 28, 2008
                                                              Slide 69
                                  123

Litigation


Illinois: Sun Life Assurance v. Manna
Sun Life (Canada) challenged Illinois retaliatory tax under the
Foreign Commerce Clause, Equal Protection Clause and Illinois
Uniformity Clause.
     - Illinois Supreme Court affirmed the Illinois Court of Appeals
       decision that the retaliatory tax statute was constitutional.
     - Retaliatory tax did not intentionally influence policies of
       other countries and was not prohibited under Illinois
       Uniformity Clause or the Foreign Commerce Clause.



ITC Insurance State Tax Seminar                              April 28, 2008
                                                                    Slide 70
                                  124

Litigation


Minnesota: Stewart Title v. Commissioner
Minnesota Tax Court concluded that gross premiums for 2000,
2001 and 2002 are the entire premium amount charged for title
insurance, including the amount retained by agents.




ITC Insurance State Tax Seminar                          April 28, 2008
                                                                Slide 71
                                  125

Litigation


Missouri: American National v. Director of Revenue
• The Missouri Administrative Hearing Commission found that
    stop-loss coverage premiums and, more specifically,
    reinsurance premiums were "direct premiums."
• The court held that the Missouri premium tax was not
    preempted by the Federal Employee Retirement and
    Income Security Act (ERISA).
• American National is not entitled to a refund for insurance
    premium tax paid on premiums received for stop-loss
    coverage for 2000, 2001 and 2002.


ITC Insurance State Tax Seminar                          April 28, 2008
                                                                Slide 72
                                  126

Litigation


New Jersey: NJ Division of Taxation v. Selective Insurance
The New Jersey Appellate Division of the Superior Court
concluded that the 10 year statute of limitations for actions to
collect unpaid taxes begins to run when the tax debt comes due,
not when a surety declines to make a payment on a tax bond.




ITC Insurance State Tax Seminar                           April 28, 2008
                                                                 Slide 73
                                  127

Litigation


South Dakota: Metropolitan Life v. Kinsman
South Dakota Supreme Court ruled that South Dakota’s taxing
method did not unconstitutionally discriminate against out-of-
state insurers by imposing a lower tax rate on businesses that
maintain a principal or regional home office in South Dakota. The
Court concluded that the foreign insurer has the option of
receiving the same favorable tax rate as a domestic insurer by
opening a principal or regional home office in South Dakota and,
therefore, it is a business decision that determines the ultimate
tax rate, not discrimination.


ITC Insurance State Tax Seminar                           April 28, 2008
                                                                 Slide 74
                                  128

Litigation


Washington: Laura Holden v. Farmer's Insurance Company
of Washington
The Washington Court of Appeals held that insurance coverage
of actual cash value of a property loss only indemnifies the
insured against actual loss. Actual cash value does not cover
sales tax unless the insured actually replaces the property,
therefore incurring the sales tax.




ITC Insurance State Tax Seminar                         April 28, 2008
                                                               Slide 75
                                                129

Questions?


                                            James Hall
                                     Regional Vice President
                                  American Council of Life Insurers

                                         Gerardo Malanga
                                      Assistant Vice President
                                           Chubb & Son

                                         Craig Provenzano
                                    State & Local Tax Manager
                                   PricewaterhouseCoopers LLP

ITC Insurance State Tax Seminar                                       April 28, 2008
                                                                             Slide 76
                  130
       Insurance Tax Conference
6th Annual Insurance State Tax Seminar
            Chicago, Illinois
           April 28 & 29, 2008



       State Audit Issues


                Frank Alberts
                       Fireman’s Fund
                Roxie Baird
                       USAA
                Bill Chelchowski
                         GEICO
                         131

             State Audit Issues

Arizona
• Inclusion of W/C large deductibles in the tax base by
  the Industrial Commission

California
• Written v. Received
    CA DOI has issued proposed rules governing
    use of cash or accrual basis for tax purposes

• Annuity Tax – Surrender Issues
    Surrender deduction for Front-end taxpayers
                        132


              State Audit Issues

Connecticut

• Guaranty Fund credits continue to be an issue on
  audit

Illinois

• Attempting to take back more of the credit for
  income taxes paid than was actually utilized when
  corporate tax returns are amended.
                           133

              State Audit Issues
Florida

• Fire and Police Pension fund reporting
       – TIP #08B8-01 (03 04 08)

• Salary Credit – exclusion of bonus amounts

• Agent Fees – FL amounts includable in the
  retaliatory calculation – base fee or total cost

• Naples v. North Naples Litigation - update
                          134

              State Audit Issues

Kentucky
• HB 524 - legislative fix or additional burden

• Hurstbourne – sent letters to all residents
  requesting them to provide information on which
  company provides their coverage to verify that the
  muni taxes are being correctly reported. Filed a
  “consumer complaint” with the DOI to obtain
  municipal coding information.
                          135


            State Audit Issues

Kentucky

• Fulton – notice sent by 3rd party firm requiring Gross
  receipts license tax, 1099 reporting on non-
  employee, payroll tax reconciliation of earnings, and
  withholding on agent commissions.

• Covington – Suits filed against 12 insurance
  companies on behalf of more than a dozen clients
  seeking refunds of overpaid taxes.
                     136

           State Audit Issues

New York

• Continues to add deductible Work Comp
  large deductible reimbursements as taxable
  “premiums” on audit.

• TSB-M-08(2)C – outlines the Department of
  Taxation’s interpretation of the 2007
  revisions to the statute including tax under
  Article 33.
                         137


            State Audit Issues

• Nevada
  – Market Conduct Exams


• South Carolina
  – Municipal Association of South Carolina requires
    insurance companies to include agent produced
    written premium from unincorporated (non-taxed)
    jurisdictions in the municipality where the agent is
    located.
                       138

           State Audit Issues

• Texas

  – Policy sample size requested for audits
  – Sales Tax on services

• Wisconsin
  – Inclusion of CA and WA surcharges in retaliatory
    calculations
                       139


         State Audit Issues

Other Issues:

• CT, FL, MA, MD, TN, WI - states which have
  introduced unitary income tax bills

• MI – unitary provision in the MBT

• WV SB 680 reversed the forced combination of
  insurers
     140




Other Issues?
                        141




                    Thanks!




Frank Alberts:      falberts@ffic.com

Roxie Baird:        roxie.baird@usaa.com

Bill Chelchowski:   bchelchowski@geico.com
142
143
144
145
146
147
148
149
                    150



 Staffing and Recognition
           of the
    State Tax Function

               Presented by:
    Anne Simpson – Alllstate Insurance
           Steve Collier – Safeco
Edward M. Burgh – Burgh, Balian & Bergstein
                        151
Recognition of, and Attention to,
State Tax Function in Insurance
Company Tax Departments (or lack
thereof?)

• History
  – Lots of $$$$
  – Little attention
• Present Day
  – Operations management v. finance
  – Expense ratio matters
                             152

What’s Changed ?? . . . i.e.
Message to Management


• Highly competitive marketplace
  – P & C pricing and market share
  – Complex life and annuity products
     • Thin Margins
     • Accurate pricing critical due to long term nature of
      products
                            153


What’s Changed??

• Complexity
  – Retaliatory tax – Companies are actively managing
    retaliatory tax liability to minimize pricing
    disadvantage
     • Careful review of retaliatory tax filing positions
     • Aggressive response to audit assessments, including
       litigation
     • Active lobbying for favorable (and against unfavorable)
       state of domicile legislation
     • Redomestication
                            154


What’s Changed??

• Complexity
  – Credits
     • Investment
     • Economic incentive
     • Salary
     • Income tax
     • Credits contribute to competitive pricing which may
       contribute to increased market share
                            155


What’s Changed??

• Complexity
  – Tax Accruals, management information and SOX
     • Permanent versus timing
     • Significant state tax $ may bring premium tax accrual
       process into SOX
     • FAS 5 reserves for premium tax issues
     • Less guidance in state insurance tax area than federal
       and state income tax produces added uncertainly
     • Regulator and tax collector may be the same person
                          156


Staffing and Retention Issues


• Recruiting and structure of function
  – Where do staff come from?
  – Where do they go?
• Buy or build premium tax expertise?
  – Premium and retaliatory tax expertise at accounting
    and law firms
                               157


Staffing and Retention Issues

• Buy or build premium tax expertise?
  – Profile within Tax Department relative to federal tax
     • Focus on income tax line of financial statements,
       footnotes
     • Focus on FAS 109 and FIN 48 excludes premium taxes
     • MST, LLM programs will not teach insurance tax
     • Marketability
  – Outsourcing and expenses control – drive is?
     • Repetitive processing
     • Analytics
                            158


Staffing and Retention Issues

• Career viability today
  – We need good people to deal with the complexity and
    significant $$
     • Profile with Government Relations through legislation
       and litigation
     • Strategic changes and M & A
     • Federal chartering and next stages of domicile planning
                             159


Staffing and Retention Issues


• Career viability today
  – Company and staff should have same end goal -
    Flexibility
     • Well-rounded
     • Diverse backgrounds
     • Broad experience
                    160


QUESTIONS ?

and hopefully answers !
                 161




Health Insurance Company
Issues

   John M. Harrington, Jr.
   CIGNA Corporation
                   162

Insurance Company – Tax rates

Alabama – 1.6% (vs. 3.6%)
Illinois – 0.4% (vs. 0.5%)
Nebraska – 0.5% group rate (vs. 1.0%)
New Jersey – 1.05% group rate (vs. 2.1%)
New York – 1.75% (vs. 2.0% P&C)
Ohio – 1.0% (vs. 1.4%)
Utah – 0.0% (vs. 2.25%)
Wisconsin – 0.0% (vs. 2.0%)
                        163

Insurance company - Allocation of
premiums
 NAIC Schedule T Working Group

 State Audits - Texas
                           164

Insurance Company -
Exclusions/Deductions/Credits
 Deductions and                  Credits
 exclusions                        CHIP/High risk pools
   State government
   employee groups
   Small employers (AZ,
   KS, OH)
   Children (IA, MN, NH)
   Elderly (NY)
   Military (NC)
   Employer and union
   groups (MO)
                         165

HMO’s and Dental Plans

 Premium tax issues
  Applicability of retaliatory taxes


 Income tax issues
  Tax exempt interest
  Illinois: Insurance vs. non-insurance
                     166

Legislative Developments

 District of Columbia – Extension of 2.0%
 premium tax to HMO’s and other health
 insurers (Healthy DC Act of 2008)

 Georgia – credits on high deductible health
 plan premiums (HB 977)
                    167

Federal law – US government employees

 FEHBP (5 U.S.C. § 8909)

 Long term care (5 U.S.C. § 9005(b))
                    168

Federal law – Other exclusions

 Medicare Part C (42 U.S.C. § 1395w-24(g))

 Medicare Part D (42 U.S.C. § 1395w-112(f))
                        169

Other issues - Fees

 Annual statement reporting – SSAP 47
 Premium tax issues
   Fidelity Security
   New York – SIF and WC Fund
 Income tax issues
   Apportionment
   Double taxation
 Texas
   Maintenance tax
   Sales and use tax
                      170

Other issues – Stop loss

 Minnesota
   BCBSM, Inc. v. Commissioner
   Blue Shield of MN v. MN CHA
   John Alden
   2005 HB 138a
 Texas - § 222.022(d)
 Missouri – Fidelity Security
 California – Great-West
 Guaranty funds – coverage issues
                       171

Other issues – Minimum premium

 Most states – ASO plus stop loss

 California
   Metropolitan Life
   Aetna/Prudential/Lincoln National cases
                     172

Other issues – HSA’s

 Conformity – tax and insurance codes

 Tax non-conformity – CA, NJ, MS and WI

 Rollover from FSA or IRA – state conformity.
            173

Questions
                                       174




  A Blue Cross and Blue Shield Association Presentation




NAIC Schedule T Initiative
Joe Zolecki
Financial Regulatory Services

Illinois Tax Conference
April 29, 2008

                                                          Brand Protection and
                                                          Brand Protection and
                                                          Financial Services
                                                          Financial Services
                              175

Agenda
  Overview of NAIC and Activities
  Overview of Financial Condition (E) Committee and
  Activities
  Timeline of Schedule T Project
  Overview of P&C Proposal
  Overview of Life Proposal
  Overview of Health Proposals
  Health Industry Cost Study Results
  Recent Industry and Regulator Concerns
  Questions
                                                      2
                                     176

Overview of NAIC and Activities


                                Executive/Plenary
                                   Committee

 Life Insurance and Annuities                       Health Insurance and Managed
         (A) Committee                                    Care (B) Committee

    Property & Casualty                             Market Regulation & Consumer
  Insurance (C) Committee                               Affairs (D) Committee

     Financial Condition                            Financial Regulation Standards
        (E) Committee                               & Accreditation (F) Committee

   International Insurance                             Information Resources
   Relations (G) Committee                           Management (H) Committee




                                                                                     3
                                    177

Overview of NAIC and Activities
• NAIC conducts business via quarterly meetings with interim
  conference calls
    – Commissioners and other insurance department personnel
    – Industry representatives
    – Only regulators vote

• Hierarchy of Committees, Task Forces, Working Groups and
  Technical Groups carry out NAIC agenda




                                                               4
                                      178
Overview of Financial Condition
(E) Committee and Activities

                                Financial Condition
                                   (E) Committee

       Risk Assessment                                Accounting Practices and
        Working Group                                  Procedures Task Force

      Disaster Reporting                                 Capital Adequacy
        Working Group                                      Task Force

        NAIC/AICPA                                     Valuation of Securities
        Working Group                                       Task Force

                                                       Examination Oversight
   Hybrid RBC Working Group
                                                           Task Force

   International Solvency and                            Receivership and
   Accounting Working Group                            Insolvency Task Force

                                                           Risk Retention
    Reinsurance Task Force
                                                             Task Force


                                                                                 5
                                       179
Overview of Financial Condition
(E) Committee and Activities
Overview of (E) Committee
The mission of the Financial Condition (E) Committee is to be the central forum and
coordinator of solvency-related considerations of the NAIC relating to accounting
practices and procedures, blanks, valuation of securities, the Insurance Regulatory
Information System (IRIS), financial analysis and solvency, zone examinations and
examiner training and issues concerning insurer insolvencies and insolvency
guarantees. In addition, the Committee interfaces with the technical task forces.




                                                                                      6
                                      180
Overview of Financial Condition
(E) Committee and Activities

                       Accounting Practices & Procedures
                                  Task Force

Blanks Working Group           Statutory Accounting        Emerging Accounting Issues
                             Principles Working Group           Working Group

Schedule T Subgroup




                                                                                   7
                                       181
Overview of Financial Condition
(E) Committee and Activities
• The NAIC specifies the financial reporting formats used
• Three industry-specific statement blanks filed both quarterly and
  annually:
    – Blue blank (life and accident & health)
    – Yellow blank (property & casualty)
    – Orange blank (health)

• The Blanks Working Group is responsible for the statement blanks
  and the instructions
• Generally, statement blank changes take effect 1-2 years in the
  future; instructional changes may take effect earlier

                                                                      8
                                    182

  Schedule T Project Timeline
• September 2005: Blanks WG exposes draft proposal with a Rule of 200
• December 2005: Blanks WG rejects Rule of 200 proposal and forms Sch
  T Subgroup
• March-November 2006: Numerous Subgroup meetings; industry survey
  on allocation methods; and life and health conclusion statements finalized.
• March 2007: Subgroup begins P&C discussion and life and health
  proposal exposed for comment at Blanks WG
• June 2007: Blanks WG rejects Subgroup life and group health proposal;
  refers back to Subgroup for consideration of a Rule of 500 and industry
  cost/benefit study; and P&C conclusion statement finalized


                                                                          9
                                     183

  Schedule T Project Timeline

• September 2007: Separate proposals created for life and health
  including a Rule of 500 and P&C proposal exposed for comment at
  Blanks WG
• December 2007: Health cost study finalized; life proposal initially
  adopted by Blanks WG; AP&P TF discusses life insurer concerns with
  Rule of 500 application; individual health removed from life proposal;
  and P&C proposal adopted by Blanks, AP&P TF and (E) Committee
• January-February 2008: Health industry presents cost study; Subgroup
  finalizes health proposal including “situs of the contract” definition; and
  AP&P TF adopts modified life proposal including “situs of the contract”
• March 2008: 3 health proposals exposed for comment at Blanks WG
  and life proposal adopted by (E) Committee after extensive discussion
                                                                            10
                                 184

Overview of P&C Proposal

• 2007-43 BWG
   – Principle-based instructions for P&C lines of business that
     require an allocation method based on the physical location of
     the risk or insured location
   – Instructions included for specific lines of business
   – Reporting of premiums, losses and other items regardless of
     reporting entity’s license status in a state or territory
   – Detailed explanation of basis of allocation by states
   – Effective for 1Q 2009



                                                                      11
                                          185

Overview of Life Proposal
• 2007-42 BWG:
     – Adopted by the (E) Committee based on a Rule of 500
     – 500 or greater groups allocate based on residence or employment location
     – 500 or less groups allocate to one state based on residence or employment
       location of greatest number of covered members or situs of the contract
     – Individual policies allocation by residence of policyowner, insured or payor
     – effective as of 1Q 2009
• Situs of the Contract:
     – the jurisdiction in which the contract is issued or delivered as stated in the
       contract
• Rule of 500
     – 3 states currently have a rule in statute, regulation or by reference
                                                                                        12
                                            186

 Overview of Health Proposals
• 2008-19 BWG:
    – Schedule T Subgroup proposal decided by a narrow vote
    – Limits allocation by situs of the contract only for groups less than 500 employees
    – Consistent with the Rule of 500 included in life industry proposal 2007-42 BWG
    – 1Q 2009 proposed effective date
• 2008-20 BWG:
    – Indiana sponsored proposal
    – Health industry supports this proposal
    – Permits situs of the contract option for all group and individual health business
       regardless of size
    – 1Q 2009 proposed effective date
• 2008-21 BWG:
    – Alaska sponsored proposal
    – Health industry strongly opposes this proposal
    – Annual reporting on Schedule T by both “situs of the contract” on Schedule T part 1
       and by Rule of 500 (using either residence or employment location) on a new Part 3
    – 1Q 2009 proposed effective date                                                       13
                                         187
Health Industry Cost Study
Results
• Approximately 17% of the more than 1,200 health insurers including almost all
  BCBS plans and major commercial medical insurers responded
• More than 2 out of 3 of the respondents currently use the situs of the contract for
  allocation of premiums by state on Schedule T
• Initial costs to the health insurance industry to capture the data and develop the
  systems changes is almost $1 billion
• Additional costs to the health insurance industry for ongoing compliance, in
  today's dollars, is nearly $100 million per year
• The amount of total health premiums that would be reallocated to a different state
  under the proposed Rule of 500 instructions is less than 2.5%




                                                                                        14
                                          188
Recent Industry and Regulator
Concerns
Health Industry
• Rule of 500 is not a health convention
• Costs are unwarranted and significantly outweigh the benefits
• Health instructions should codify existing allocation practices similar to life and
  P&C proposals

Regulators
• Virginia: “significant jurisdictional issues and various interpretations of location of
  risk are issues that commissioners on the Executive and Plenary Committees will
  need to address”
• Alaska: “if the proposal to add situs of the contract is adopted, than Alaska will
  have to require a state specific report of premium information based on location of
  the risk in order to determine premium taxes”.
                                                                                            15
            189

Questions




                  16
                             190

                        Sixth Annual
              ITC Insurance State Tax Seminar

            Advanced Audit and
  Litigation Issues and Considerations
          in the State Tax Arena
                        Richard Bromley
                      Foley & Lardner LLP
                          Chicago, IL
                           Moderator

William C. Lane     Mary Kay M. Martire     Tracy D. Williams
Metropolitan Life   Foley & Lardner LLP     Sidley Austin LLP
Insurance Company   Chicago, IL             Chicago, IL
St. Louis, MO

                         April 29, 2008
                   191


              Overview
• Anatomy of a Controversy
• Group Litigation
• Strategic Considerations
                       192


    Anatomy of a Controversy
• Audit considerations
  – Formulate your strategy early
  – Stay on message
  – Responding to IDRs
  – Consider all avenues available for State’s
    internal consideration
                       193


    Anatomy of a Controversy
• Dispute Resolution
  – Administrative hearings v. state courts
  – Making your fact record
  – Preserving issues for appeal
  – Consider options for mediation / ADR /
    assisted settlement
                           194


    Anatomy of a Controversy
• Nuts and Bolts
  – Written discovery - ask; don’t just respond
  – Using requests for admission and stipulations
    of fact
  – Preparing and protecting fact witnesses
  – Experts
     • Consulting v. testifying
     • Expert reports
  – Preserving confidentiality
                      195


    Anatomy of a Controversy
• Supervising outside counsel
  – Using technology to stay abreast of
    developments
  – Regular channels/time for communication
                       196


            Group Litigation
• Creating a group
  – Identifying interested parties
  – Management support
  – Initial investment of time/expense
  – Exit strategies
• Joining a group
  – Rights and expectations
  – Conflicts
  – Choice of counsel
                      197


           Group Litigation
• Working with a group
  – Attorney-client privilege
  – Joint defense agreements
  – Use of technology
  – Conflicts
  – Cost sharing
  – “Free rider” problem
                       198


            Group Litigation
• Litigation and settlement considerations
  – Lead plaintiff groups
  – Individual case groups
  – Joint issue resolution
  – Rights and responsibilities
                       199


     Strategic Considerations
• Within the company
  – Deciding whether to pursue an issue
  – Building internal support
  – Managing expectations vis-à-vis cost, timing
  – Selecting and retaining counsel
  – Alternative billing arrangements
                        200


     Strategic Considerations
• In connection with the controversy
  – Setting up a one-way appeal
  – Setting up a settlement
  – Alternatives to splitting the money
  – Legislative solutions
  – Multi-state effects
                              201




       Josie Lowman, State Tax Counsel for AIG
Christine Gustafson, Tax Counsel for C. Gustafson Law
                    2008 State Insurance Tax Conference
                    202




DEFINITION OF INSURANCE COMPANY
INCOME

COMBINED REPORTING

STATE LEGISLATION

MTC INITIATIVE



                      2008 State Insurance Tax Conference
                   203




REGULATORY DEFINITION

UNDERWRITING INCOME

INVESTMENT INCOME

REQUIRED CAPITAL

MTC COMMITTEE


                     2008 State Insurance Tax Conference
                          204




BUSINESS VS NON BUSINESS

◦ Blessing White v. Illinois Department of Revenue
   768 NE2d 332 (2002)

◦ American States Insurance Company v. Illinois
  Department of Revenue
   816 NE2d 659 (2004)

◦ Meadwestvaco v. Illinois Department of Revenue
   553 US ______ (2008)




                            2008 State Insurance Tax Conference
                           205




STATUTORY
◦ INSURANCE AND NONINSURANCE COMPANIES
  WITHIN SAME UNITARY/CONSOLIDATED GROUP (FL,
  NE, NH, VT)

◦ INSURANCE AND NONINSURANCE COMPANIES IN
  SEPARATE UNITARY GROUP (IL, NY)
   Cincinnati Casualty Case

◦ Apportionment Factors
   Single premium factor
   Three Factor
     No Nexus Companies


                              2008 State Insurance Tax Conference
                        206




DISCRETIONARY COMBINATION
◦ ALL COMPANIES WITHIN SAME UNITARY GROUP
  INCLUDABLE

◦ APPORTIONMENT
  SINGLE PREMIUM FACTOR

  SINGLE SALES FACTOR

  THREE FACTOR

  FINNIGAN/JOYCE ISSUES ?

                              2008 State Insurance Tax Conference
                     207




◦ LEGAL CONCERNS FOR NO NEXUS COMPANIES,
  COMPANIES WITH IN LIEU PROTECTION, COMPANIES
  FALLING WITHIN EXEMPTION

  STATUTORY OR CONSTITUTIONAL VIOLATION

  APPORTIONMENT RELIEF

  INCOME CARVE OUT

  STATUTORY RELIEF

◦ RETALIATORY TAX IMPLICATIONS


                         2008 State Insurance Tax Conference
                        208




WEST VIRGINIA (S 749)
IMPOSES COMBINED FILING FOR UNITARY GROUP WITHOUT
  INSURANCE COMPANY EXCLUSION. NOTE 2008
  LEGISLATION HAS EXLCUDED INSURANCE COMPANIES (S
  680).

MARYLAND (H2 OR S2)
WOULD REQUIRE COMBINED FILING FOR UNITARY GROUP
 WITH COMMISSIONER DETERMINING THE INCLUSION OR
 EXCLUSION OF INSURANCE COMPANIE


MASSACHUSETTS (H 3026)
WOULD REQUIRE COMBINED REPORTING BUT SPECIFICALLY
 EXCLUDES INSURANCE COMPANIES
                              2008 State Insurance Tax Conference
                          209



MASSACHUSETTS (H4672)
  WOULD REQUIRE COMBINED FILINGS FOR UNITARY GROUPS BUT
   SPECIFICALLY EXCLUDE INSURANCE COMPANIES
MASSACHUSETTS (H 3033)
  WOULD REQUIRE INSURANCE COMPANIES TO PROVIDE CERTAIN
   INFORMATION FROM FEDERAL TAX RETURNS
PENNSYLVANIA (H 1186)
  WOULD REQUIRE COMBINED FILINGS FOR UNITARY GROUPS BUT
   SPECIFICALLY EXCLUDE INSURANCE COMPANIES PAYING PREMIUM
   TAX OR THOSE THAT WOULD IF THEY WERE DOING BUSINESS IN
   THE STATE
WISCONSIN (AMENDED S 1)
  WOULD REQUIRE COMBINED FILING FOR UNITARY GROUP BUT
   EXCLUDES COMPANIES THAT WRITE EXCLUSIVELY LIFE INSURANCE
   OR PAY THE PREMIUM TAX
FORCED COMBINATION ON AUDIT




                             2008 State Insurance Tax Conference
                210




UPDATE ON WHERE THE MODEL LAW STANDS
AND HOW MANY OF THE MEMBER STATES
MAY ADOPT LAW




                      2008 State Insurance Tax Conference
                  211




JOSIE LOWMAN            212-770-8265



CHRIS GUSTAFSON         262-966-2587




                        2008 State Insurance Tax Conference
               212

     ITC Sixth Annual
Insurance State Tax Seminar
    Other Taxes Paid by
   Insurance Companies
       April 29, 2008
         Presented by:

         Michelle Zahler
         William Jozaitis

                            PwC
                             213

Agenda/Contents

Key Issues and Opportunities for Insurance Companies:
• Sales/Use Tax
• State Payroll Tax
• Nexus Considerations
                                     214

Sales/Use Tax

Majority of tax imposed on Insurance Companies is in the form of Sales/Use
Tax collected by the vendor.

• As a result many organizations do not consider a significant expenditure
since tax is not separately tracked nor remitted.

• Evaluation of major purchases or categories of purchases may be
appropriate to determine compliance with state laws as well as opportunities.

• Recently we have seen increased focus by state taxing authorities on
Financial Service Companies relative to sales/use taxation in terms of
legislative and audit activity.
                                          215

Consideration for Review of Sales/Use Tax

Significant Categories of Purchases:
• Printed and Promotional Materials
   - Exemptions
   - Delivery Method
   - Jurisdiction for Taxation
• Software Licenses
   - Off the Shelf v Customized Software
   - Maintenance
   - Jurisdictions for taxation
   - Delivery Method
• Utilities (electric, telephone, etc.)



Other Taxes Paid by Insurance Companies         April 29, 2008
PricewaterhouseCoopers                                  Slide 4
                                          216

Considerations for Review of Sales/Use Tax

Significant Categories of Purchases (continued)
Taxation of Services
• Automated Data Processing/Electronic Information Services
• General Service Categories
   - Landscaping
   - Accounting/Bookkeeping
   - Management (including intercompany services)
• Recent Legislation Proposed greatly expand these categories
   - Michigan
   - Maryland




Other Taxes Paid by Insurance Companies                         April 29, 2008
PricewaterhouseCoopers                                                  Slide 5
                                          217

  Michigan: Sales Tax
  Legislation enacted and repealed in 2007 subjected additional
  service transactions to use tax, including:
     • Business service center services (NAICS industry code
       56143).
     • Consulting services (NAICS industry code 5146).
     • Armored car services (NAICS industry code 56161).
     • Investment advice services (NAICS industry code
       52393).




Other Taxes Paid by Insurance Companies                   April 29, 2008
PricewaterhouseCoopers                                            Slide 6
                                          218

Considerations for Review of Sales/Use Tax

Exemptions to be considered
In Lieu of Provisions
•         Application to sales and/or use tax
•         State jurisdictions
•         Local Jurisdictions




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State and Local Payroll Tax

Non resident employee withholding
• Generally, the employer must withhold and remit tax from
  compensation to employee an amount that reasonably
  approximates the employee’s personal income tax to the
  taxing state
• Issue is for the employee and the employer
• Many payroll systems inadequate to capture multiple states,
  track varying rules and track employee location
• Recently there has been increased enforcement around this
  area

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                                          220

State and local Payroll Tax

New York State – significant audit program started in 2004
•         Responsibility of employer – reporting, record keeping,
          payment of withholding tax
•         Responsibility of employee – reporting, payment
•      Audit activity for employers
     -      employee compensation
     -      stock options, non-qualified deferred compensation
     -      allocation methodologies
•         Audit Methodology

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State and Local Payroll Tax

Other jurisdictions actively pursuing non-resident withholding
•         Minnesota enacted legislation HB 3201 (effective April 2,
          2007)
•         Local tax jurisdiction – Ohio municipalities




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                                          222

State and Local Payroll Tax

Federal Legislation, H. 6167 introduced 9/25/06
• Provides that the only states and localities that may tax an
  employee’s income, or require withholding of that income by
  the employer are:
  - The employee’s state/locality of residence, and
  - States/localities in which the employee is physically present
     and performing duties for more that 60 days during the
     calendar year




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Nexus considerations

  • Business Activity Tax (“BAT”) 110th Congress
       - S. 1726 (referred to Finance Committee, 6/28/07).
       - No corresponding House legislation.
       - Deletes several of the safe harbors found in the prior
         legislation, while retaining the core priniciples of “updating”
         P.L. 86-272 and “codifying” a physical presence nexus
         standard.




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                                          224
Nexus: Business Activity Tax (“BAT”)
  • “Update” of P.L. 86-272
    - Would extend P.L. 86-272 protections:
      • To all BAT, not just net income taxes.
      • To all “sales” and “transactions,” not just to sales of
         TPP.
      • To specified “business activities,” (such as business
         activities directly related to the taxpayer’s potential or
         actual purchase of goods or services within the state).
  • BAT nexus standard codified.
    - “Physical presence,” with a 14-day de minimis threshold
      (was 21 days under prior legislation).
    - “Limited or transient business activity” does not count
      toward the physical presence threshold.
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                                          225




  These slides are for educational purposes only and are not intended,
  and should not be relied upon, as accounting advice.
  Any tax advice contained herein was not intended or written to be used,
  and cannot be used, for the purpose of avoiding penalties that may be
  imposed under the Internal Revenue Code or applicable state or local
  tax law provisions.




Other Taxes Paid by Insurance Companies                            April 29, 2008
PricewaterhouseCoopers                                                    Slide 14

				
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