A recent article by David J. Slenn, former Chair of the American Bar Association’s Committee on Captive Insurance, highlights a significant risk for captive insurance arrangements that are insuring risks in Florida, Florida Commences Self-Procurement Tax Audits for Businesses with Captives (March 27, 2024). Basically, after years of blissfully ignoring captives and losing many millions, if not billions, in taxes from captive insurance transactions, the Sunshine State has started auditing these businesses who are paying captive premiums with an eye to assessing its 5.3% Independently Procured Tax (IPT). So, what is IPT anyway?
The average person almost always purchases insurance from a carrier that is licensed to conduct the business of insurance in their state. The average person also purchases that insurance through an insurance agent or broker in their state. But they don’t have to do this.
Instead, a person may go outside of their state — or even outside the United States — to purchase insurance. Nothing prohibits this. When a person does this, they also do not need to use an insurance agent or broker in their state. The insurance company outside the state does not need to be licensed in the state if the sole, only and exclusive thing that it is doing is insuring a risk within the state and administering any claims that might arise from that risk.
This situation is what commonly happens with a captive insurance company, which is an insurance company that is created by the parent company to insure the risks of its subsidiaries. Many, if not most, captives are formed and licensed as insurance companies in states other than the state in which the business is located and operating. Thus, a business which is operating in Miami may have a captive insurance company that it is purchasing insurance from, and sending premiums to, in Vermont or one of the numerous other states that attract captive insurance business. In that circumstance, the Miami company is essentially by-passing both the Florida-licensed insurance companies and the Florida insurance agents and brokers.
To discourage this sort of activity, and also to raise revenues, many states such as Florida have an IPT which imposes a tax on the person buying insurance for some percentage of the premium, such as the 5.3% tax in Florida’s case. So, if a person is purchasing out-of-state insurance without an in-state agent or broker, that person becomes liable to pay the IPT. There is a workaround, which is that the person could use an in-state surplus lines broker to purchase insurance from an out-of-state company, but captive insurance companies don’t do this because the very nature of the arrangement means that no broker is needed at all. So, most businesses that have a captive insurance company simply blow off the IPT and don’t pay it.
Even in the states that have IPT on their books, it has been rarely assessed by those states and that is why IPT is often just ignored. From time to time, some state or another will get aggressive about collecting the IPT. For some years, Texas was very aggressive about collecting the IPT, but then one day Texas itself adopted captive-enabling legislation and captives could avoid the IPT by being domiciled in the Lone Star state. For a few years, Washington state also became very active in collecting the IPT as I related in my article, Washington State Goes After Microsoft’s Captive For Unpaid Premium Taxes And Unauthorized Insurance (May 27, 2018), but then Washington also passed captive-enabling legislation that allowed Washington businesses to domicile their captives there so as to avoid the IPT.
Florida has captive enabling legislation, but for whatever reason Florida captives do not seem to have taken off (David Slenn’s article says that there is only one Florida captive presently) and thus most Florida companies with captives still have their captives domiciled elsewhere. The problem with this, however, is that the 5.3% Florida IPT will be assessed against the premiums paid to the captive and 5.3% is an amount large enough to wreck the economics of most captive arrangements. Until now, apparently, Florida has not been aggressive in collecting the IPT, but now is auditing companies to see if they are indeed paying this particular tax bill.
David Slenn’s article also suggests that there may be workarounds to reduce this tax burden, and one could presumably eliminate it altogether by re-domiciling a captive to Florida, but all that gets pretty technical and I’ll just refer interested readers to his article as he is much more knowledgeable about this type of tax stuff (and probably just generally smarter) than Yours Truly.
At any rate, this is something that Florida businesses with captive arrangements should be aware of and talking with their professional captive advisors about because the 5.3% IPT tax rate is one of the highest in the country, there may be penalties for non-payment, and in extreme cases non-payment could also apparently result in felony charges.
So don’t blow it off.
Read the full article here
