In late 2010, a New York State Administrative Law Judge held that deductible reimbursements accrued or received by an affiliated group of New York licensed insurance companies from their insured policyholders were not “premiums” under Tax Law § 1510(c)(1) and are therefore not subject to the tax on premiums. Matter of American Zurich Ins. Co., DTA Nos. 822840, et al. (N.Y.S. Div. of Tax App., Oct. 14, 2010). The Department did not appeal the decision, but since ALJ decisions are not precedential, the exact effect of the decision has remained unclear and insurance companies were left without clear rules on how to report. The Department has now issued guidance, and formally announced that it will be following the ALJ decision in American Zurich. Treatment of Deductible Reimbursement Payments to Insurance Corporations, TSB-M-12(6)C (N.Y.S. Dep’t of Tax. & Fin., July 9, 2012).
In American Zurich, the issue concerned workers’ compensation insurance policies, which included a deductible endorsement, under which the policyholder retains a certain dollar portion of the risk of workplace injury by agreeing to reimburse the insurance companies for compensable claims up to the amount of the deductible endorsement. The ALJ held that these deductible amounts do not constitute “premiums” as defined by Tax Law § 1510(c)(1), which narrowly defines “premiums” as consisting of only eight specified items, none of which include deductible reimbursements.
The Department has now agreed it will not treat amounts received as deductible reimbursements as premiums, as long as:
- The payments are received or accrued by an insurance corporation from or on behalf of an insured policyholder, pursuant to a contract of insurance containing a deductible provision, and requiring the policyholder to repay the amounts; and
- The insurance company did not include a cost (or factor) to cover the premiums tax as regards deductible reimbursement accounts in calculating the premiums charged to the policyholder, and the reimbursement amounts are not treated for statutory accounting purposes as premiums.
The Department also stated that its policy applies not only prospectively but also to any tax periods for which the statute of limitations is open for issuance of a notice of deficiency or for a claim for refund or credit.