Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...
By Che Odom
Revenue-hungry states are attempting to go beyond their statutory taxing authority as they become increasingly aggressive in auditing insurance companies.
That’s according to attorneys representing insurers who spoke June 2 at a Federal Bar Association event in Washington.
“We’ve seen increased audit activity in the last few years from a number of different angles,” said J. Steven Feldman, associate general counsel of New York Life Insurance Co.
States generally have a separate tax regime for insurance companies, often employing some combination of income tax, a tax on customer-paid premiums, and a retaliatory tax that seeks uniformity in insurance rates with other states.
State tax administrators and their auditors are being “very aggressive,” said Maria Eberle, a partner in the New York office of Baker McKenzie LLP.
Eberle identified New York as an example of a state that subjects companies to multiple taxes, and said that its auditors have attempted to go beyond their statutory authority to pull more revenue from companies. Washington is also a state that recently has been aggressive on income tax collection, Feldman said.
Thirty-nine states have lower spending than they did 10 years ago when adjusted for inflation, and half of the states have had back-to-back years of budget shortfalls, according to John Hicks, executive director of the National Association of State Budget Officers. Many are looking for ways to fill budget gaps, though raising taxes can be difficult to accomplish politically.
States lowering their corporate income tax rates, such as Arizona, Indiana, New Mexico, and North Carolina, are “very aggressive with audits” and “absolutely ignoring” their own laws, Matthew Mock, a Chicago-based partner with Baker McKenzie who focuses on state and local tax litigation and planning, told Bloomberg BNA.
However, states’ aggressiveness isn’t limited to taxes unique to insurers. Some states, such as West Virginia, Texas, and New Mexico, also focus on payroll, employment, sales, and other taxes, Mock said.
Florida and New York have been throwing around the idea of reducing or eliminating various credits offered to insurance companies, and their auditors in recent years seem to try to find any approach possible to reduce credits that are granted to insurers, Feldman said.
“You don’t always get it,” he said.
Subsidiaries may be scooped up in the tax calculation in states with combined reporting, and insurance companies with ownership interests in passthrough entities can count on states attempting to find ways to tax income, Eberle said. Massachusetts continues to consider ways of taxing disregarded entities owned by insurers, she said.
Andrew Appleby, counsel at Eversheds Sutherland US LLP, said that industry lobbying has been effective in preventing such legislation from being enacted in Massachusetts.
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