Illinois expands applicability of insurance self-procurement tax
TAX ALERT |
UPDATE: On Feb. 20, 2015, Illinois State Sen. William Haine introduced SB 1573 to repeal Public Act 98-0978, which expanded the application of Illinois’ insurance self-procurement tax to many previously exempt insureds effective Jan. 1, 2015. Pursuant to the bill, the repeal of Public Act 98-0978 would be effective upon enactment of SB 1573, and not retroactively to Jan. 1, 2015. Further, the bill does not currently provide relief for insurance policies subject to the tax between Jan. 1, 2015, and the effective date of SB 1573. Given the changes in the Illinois General Assembly and the state governor’s office since the enactment of Public Act 98-0978, there is reason to be hopeful that SB 1573 will move to a quick resolution. Accordingly, insureds subject to the tax that were previously exempt should consider postponing policy renewals until SB 1573 is enacted.
UPDATE: Contrary to expectations, Illinois did not amend or repeal SB 3324, Public Act 98-0978, in the second half of 2014. While there is still the possibility of a retroactive review, taxpayers should follow the current law under SB 3324, which went into effect on Jan. 1, 2015, narrows the definition of exempt industrial insureds, and expands the applicability of the tax to many businesses that were previously exempt. In addition, taxpayers should note that the law provides for two additional fees on self-procuring businesses, resulting in an increase in the total effective rate of self-procurement tax from 3.5 percent of premiums paid to between 3.6 and 4.6 percent.
On Aug. 15, 2014, Illinois Governor Pat Quinn signed SB 3324, Public Act 98-0978 (the Act), amending the state's insurance self-procurement tax effective Jan. 1, 2015, to narrow the definition of exempt industrial insureds, effectively expanding the applicability of the tax to many businesses that were previously exempt.
The Illinois insurance self-procurement tax is a 3.5 percent insurance premiums tax imposed on Illinois-based businesses that procure insurance from non-Illinois insurers that are not licensed to do business in the state. Under current law, the state provides a self-procurement tax exemption for industrial insureds. An Illinois-based company is an industrial insured if (1) the company's annual premium paid for insurance of all risks, other than life and accident risks and health insurance, exceeds $100,000, and (2) the company meets at least one of the following criteria:
- Has at least 25 full-time employees
- Has more than $3 million of gross assets
- Has gross revenues of more than $5 million
Pursuant to the Act, an Illinois-based business will be an industrial insured only if it (1) purchases casualty, fidelity, surety, fire, or marine insurance from a non-admitted insurer and retains or employs a qualified risk manager to negotiate all coverage, (2) purchased aggregate commercial property and casualty coverage in excess of $100,000 in the prior year, and (3) meets at least one of the following criteria:
- Has more than 500 full-time employees (or 1,000 employees in an affiliated group)
- Has a net worth of over $20 million
- Has annual revenues in excess of $50 million
- Is a not-for-profit organization with at least a $30 million budget
- Is a municipality with more than 50,000 residents
Additionally, pursuant to the Act, the state will impose two additional fees on self-procuring businesses: a countersigning fee of 0.1 percent of premiums paid to support the Surplus Line Association of Illinois and, for certain lines of insurance, a fire marshal tax ranging from 0.01 percent to 1.0 percent of premiums paid. These two additional charges will increase the total effective rate of self-procurement tax from 3.5 percent to anywhere from 3.6 percent to 4.6 percent of premiums paid.
The impact of the Act will be fairly wide-ranging for Illinois-based companies, as many businesses purchase some insurance from non-admitted insurers. However, the businesses that will likely bear the brunt of these changes are middle market Illinois-based businesses that obtain a substantial portion of their casualty, fidelity, surety, fire and marine insurance from a captive insurance company. Although it is our understanding that efforts are ongoing to address the potential impact of the Act on captive insurance transactions, Illinois-based businesses employing a captive to insure casualty, fidelity, surety, fire, and marine risk should review the impact of the Act on cash flow and the viability of continued captive operations.