New Jersey Headquartered Company to Pay Self-Procurement Tax on all Assets Insured by Its Captive
DALLAS, July 18, 2018 /PRNewswire/ -- In Johnson & Johnson v. Dir., Div. of Tax'n, N.J.T.C., No. 013502-2016, 06/15/18, the New Jersey Tax Court ruled that Johnson & Johnson ("J&J") was required to pay premiums tax on all U.S. assets insured by its captive insurance company. In its opinion, the Tax Court performed a lengthy analysis of the state taxation of insurance premiums in the U.S. The issue in the case was whether changes made to New Jersey's premium tax statutes, based on a federal insurance reform statute enacted in 20101 (NRRA), were intended to allow the state to impose a premiums tax on all of J&J's U.S. self-procured insurance risks insured by its captive insurance company.
The NRRA was passed to streamline and simplify the complexities that developed over many years related to multistate taxation of premiums paid to non-admitted insurers. Non-admitted insurers are those insurance companies that are not regulated by the insurance commission of the state in which the risks are located. The inconsistencies of state laws resulted in different rates and multiple taxation of the premiums assessed against non-admitted insurers. The NRRA provided that "no state other than the home state of the insured may require any premium tax payment for non-admitted insurance." In other words, the home state may tax all non-admitted insurance premiums in the U.S.
New Jersey began to regulate non-admitted insurers starting in 1960. From 1960 to 2011, New Jersey only imposed a premium tax, assessed against the insured ("self-procurement tax"), on insured risks within New Jersey. New Jersey amended its self-procurement tax effective July 2011, to bring its taxing policy into compliance with the broader mandate of the NRRA. However, the amendments did not explicitly include captive insurance companies in the broader taxing statute. The New Jersey Legislature specifically stated that the amendment to its premium tax law was to bring "surplus line" insurance taxation into conformity with the NRRA. "Surplus line" insurance policies are policies for hard to insure liabilities, which may not be available through in-state insurance companies. These policies may or may not be written by captive insurance companies.
The tax court was not persuaded by J&J's argument that the 2011 changes to the New Jersey law did not apply to captive insurance companies. The Court found that while the language used by the Legislature simply included "surplus lines" the intent was to include captive insurance companies under the new law because both surplus line insurance companies and captive insurance companies were subject to the self-procurement tax under the old law. Taxpayers with captive insurance companies should consider how this decision will affect them in New Jersey and possibly other states that have enacted similar law changes to conform to the NRRA.
1 The Nonadmitted and Reinsurance Reform Act of 2010, p.L. 111-2013, Title V, Subtitle B, Secs. 521-527; 531-533 and 541-542. 15 U.S.C. Secs. 8201-8206. Effective July 21, 2011.
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Ryan, an award-winning global tax services and software provider, is the largest Firm in the world dedicated exclusively to business taxes. With global headquarters in Dallas, Texas, the Firm provides an integrated suite of federal, state, local, and international tax services on a multi-jurisdictional basis, including tax recovery, consulting, advocacy, compliance, and technology services. Ryan is a six-time recipient of the International Service Excellence Award from the Customer Service Institute of America (CSIA) for its commitment to world-class client service. Empowered by the dynamic myRyan work environment, which is widely recognized as the most innovative in the tax services industry, Ryan's multi-disciplinary team of more than 2,200 professionals and associates serves over 14,000 clients in more than 45 countries, including many of the world's most prominent Global 5000 companies. More information about Ryan can be found at ryan.com. "Ryan" and "Firm" refer to the global organizational network and may refer to one or more of the member firms of Ryan International, each of which is a separate legal entity.
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