On September 30, 2010, the California Court of Appeal for the Second Appellate District affirmed a superior court ruling that California Constitution Section 28 taxes do not apply to surplus lines insurers. Section 28 provides that insurers doing business in California are subject to a 2.35% premium tax.

The case, Stephen F. Silvers v. State Board of Equalization, arose when Stephen F. Silvers and Steven Gold (“S&G”) filed a complaint with the State Board of Equalization (“SBE”) arguing that Lexington Insurance Company failed to pay Section 28 taxes. Lexington Insurance Company, an eligible surplus lines insurer in California and not a licensed admitted insurer, in accordance with California surplus lines law is not allowed to have offices, employees, or conduct any activity within the state of California. Also, its surplus lines policies are already subject to a 3% premium tax. Consequently, the SBE never assessed additional Section 28 taxes on Lexington Insurance Company.

S&G argued that Lexington Insurance Company should be subject to both the 3% and 2.35% premium taxes. However, the appellate court held that by operation of law, surplus lines insurers in compliance with surplus lines regulations are precluded from “doing business” in California, and therefore not subject to Section 28 taxes. It has been reported that S&G plans to appeal this ruling to the California Supreme Court, however it is unknown at this time whether the California Supreme Court will grant review.

Click here for a copy of the decision.