Extras on Excise: Illinois’ Self-Procurement Tax on Captives—Will It Be Repealed the Second Time Around?

If you don’t succeed, try, try again. The Illinois General Assembly is taking this message to heart and is trying again to repeal a self-procurement tax on premiums paid to out-of-state captive insurance companies. The tax went into effect in January after an attempt at repeal failed last fall.

Repeal has been on the minds of the Illinois business community for several months, since S.B. 3324 (P.A. 098-0978) was enacted last summer. The bill revised the definition of “industrial insured” and narrowed the exception that allowed companies to purchase non-admitted insurance policies without paying a tax, limiting the “home state” advantage that Illinois companies enjoyed after enactment of the federal Nonadmitted and Reinsurance Reform Act (NRRA) in 2011, which says that only a company's home state can tax and regulate nonadmitted insurance. 

Before S.B. 3324 became law on Jan. 1, Illinois companies could self-procure insurance from out-of-state captives without paying a tax on those premiums. Under the new law, if a company does not qualify as an industrial insured under the amended definition, it will have to pay a 3.5 percent tax on premiums paid to an out-of-state captive, a 0.1 percent fee to support the Surplus Line Association of Illinois and a fire marshal tax of up to 1 percent (if applicable), bringing the total tax on premiums to range between 3.6 and 4.6 percent. 

The first opportunity for repeal came last year, as 47 representatives sponsored H.B. 6302, which would have restored the prior version of the law before S.B. 3324 was enacted. But this bill did not pass before the end of the fall legislative session.

A second opportunity has come in the form of two proposed bills, S.B. 1573 and H.B. 4193, which could restore Illinois’ industrial insured provisions that allowed companies paying premiums to captives in other states to avoid paying tax on those premiums.

As introduced, both bills would fully repeal the self-procurement tax and restore the definition of “industrial insured” to its pre-S.B. 3324 status, expanding the ability for companies utilizing captive insurance to pay zero tax on self-procured insurance premiums. An amendment to S.B. 1573 has also been proposed that would exempt captive insurance companies from the self-procurement tax and leave the amended definition of “industrial insured” intact. In effect, this means the new requirements to qualify as an “industrial insured” would still be in place and companies that self-procure insurance without using a captive will still be subject to tax.

One noticeable item missing from both bills and the senate amendment is a provision that makes the repeal of the tax retroactive or somehow provides relief to companies with policies currently subject to tax. 

Full consideration of either bill likely will not occur until closer to the end of the Illinois legislative session in May, which is common for tax legislation in Illinois. Budget concerns could weigh heavily in discussions this year, Mary Kay Martire and Matthew Boch, partners in McDermott Will and Emery's Chicago office, told Bloomberg BNA, as the state faces a $6.2 billion budget deficit, discussed by Illinois Gov. Bruce Rauner (R) in his Feb. 18 budget address.


But supporters of this legislation are optimistic that some kind of repeal will occur this year, Mark Denzler, vice president and chief operating officer of the Illinois Manufacturers’ Association (IMA), told Bloomberg BNA.

For now, it is a wait-and-see situation until closer to the end of Illinois’ legislative session, said Denzler, when debate on S.B. 1573 and H.B. 4193 could likely begin in earnest and deliberations about the effect of tax repeal on Illinois’ financial situation, including whether repeal should be made retroactive, could continue.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should the Illinois Legislature repeal the self-procurement tax on premiums paid to out-of-state captives?

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