New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

Eliot Spitzer
Governor

Eric R. Dinallo
Superintendent

The Office of General Counsel issued the following opinion on December 17, 2007, representing the position of the New York State Insurance Department.

Re: Adjustments to Retaliatory Tax Obligations

Question Presented:

Is Insurance Company entitled to use its 2001 payment of additional New York franchise taxes1 for the 1992-1994 tax years to offset retaliatory taxes2 otherwise due in other years, or to obtain a cash refund to the extent more franchise tax has been paid than can be offset?

Conclusion:

Yes, as to the offset. No, as to the cash refund. Insurance Company’s payment of additional franchise taxes in 2001 (for the 1992-1994 tax years) is creditable against the retaliatory tax assessment for tax years 1998 through 2005 – the latest year for which retaliatory taxes have been assessed.3 Further, once that crediting process has been completed, the New York State Insurance Department (“Department”) may, but is not required to, grant a cash refund of any amounts not consumed by such offsets through tax year 2005.

Facts:

The inquirer reports that counsel for Insurance Company has contacted the Taxes and Accounts Bureau of the Insurance Department with respect to a requested refund of retaliatory taxes. This request was prompted by Insurance Company’s settlement of its franchise tax liability under Article 33 of the New York Tax Law for the years 1992 through 1994. Insurance Company paid the New York State Department oaf Taxation and Finance (“DTF”) Amount A of additional franchise taxes in 2001 as part of its obligations under the settlement.

Insurance Company owed the additional franchise taxes to DTF because of underpayments in tax years 1992 through 1994 arising from its erroneous interpretation of New York franchise tax rules regarding net operating losses (“NOL”). Insurance Company filed both its federal income and New York State franchise tax returns using certain NOL carryforwards as deductions. The NOLs were carried forward from pre-merger years of a company that subsequently merged into Insurance Company. The subsidiary company with the NOL carryforwards did not have a nexus to New York during the pre-merger years. Accordingly, DTF disallowed the NOLs for franchise tax calculation purposes, which had the direct consequence of increasing Insurance Company’s franchise tax liability by the amount paid in 2001 under the settlement.

Insurance Company contends that its payment of additional franchise taxes to DTF – due because it erred in interpreting New York law – should be credited against retaliatory taxes paid to the Department for 2001 (the year in which the additional franchise taxes were paid), and tax years 1998-2000 and 2002-2004.4 Because Insurance Company already has paid some of the retaliatory taxes due for those years, and does not expect for the indefinite future to owe enough retaliatory taxes to benefit from the entire amount of the credit, Insurance Company claims that it is entitled to a cash refund for the amount of the credit that cannot currently be offset against presently owing but unpaid retaliatory taxes.

Analysis:

A. Statutory Framework

Analysis of Insurance Company’s requests for credit and refund requires consideration of three statutes: N.Y. Insurance Law §§ 1112 and 9109 (McKinney 2006), and N.Y. Tax Law § 1511(b) (McKinney Supp. 2007), which, respectively, define retaliatory taxes; specify the prerequisites for a refund of amounts paid to the Department; and describe the manner in which taxpayer payments of franchise tax are to be credited against assessments of retaliatory tax. A discussion of each of these provisions follows.

Insurance Law § 1112 sets forth the obligation of foreign insurers to pay retaliatory taxes. The statute imposes a retaliatory tax upon a foreign insurer in the event that the foreign insurer’s state of domicile imposes more onerous taxes upon New York domiciled insurers than New York imposes upon insurers of that foreign domicile. Insurance Law § 1112 reads, in pertinent part, as follows:

§ 1112. Reciprocal provisions as to taxes, license fees, deposits and other requirements. (a)(1) If, by the laws, or the action of any public official, of any other state, any insurer organized or domiciled in this state, or its duly authorized agents, shall be required to deposit securities in such other state to protect policyholders or for any other purpose, or shall be required to pay taxes, fines, penalties, fees for licenses or certificates of authority or any other sum for the privilege of doing business in such other state, or shall be subjected to any restrictions, obligations, conditions or penalties, imposed for such privilege, and such requirements are greater than those required of similar insurers organized or domiciled in such other state by the laws of this state for the privilege of doing business herein, then all similar insurers organized or domiciled in such other state and their duly authorized agents in this state shall make like deposits for like purposes with the superintendent, and pay him for taxes, fines, penalties, fees for licenses or certificates of authority or for any other requirement for the privilege of doing business in this state, an amount determined in the manner prescribed by such other state, and shall be subjected to such greater requirements imposed by such other state upon similar insurers of this state and their duly authorized agents.

Unlike most other taxes imposed by New York State, the purpose of the retaliatory tax imposed pursuant to Insurance Law § 1112 is not to raise revenue. Rather, the tax is imposed as a means of equalizing tax burdens among the several states by encouraging sister states to keep taxes on New York-domiciled insurers as low as possible.

Under Tax Law § 1511(b), credit is allowed against retaliatory taxes imposed by the Department for franchise taxes paid by insurers to DTF pursuant to Article 33 of the Tax Law. The subsection provides:

(b) Credit against reciprocal taxes imposed by this state. In assessing taxes under the reciprocal provisions of section one thousand one hundred twelve of the insurance law, credit shall be allowed for any taxes paid under this article [i.e., Article 33 of the Tax Law, which deals with franchise taxes].

Lastly, Insurance Law § 9109 sets forth the rules for refunds of taxes, fees or other charges that are erroneously paid to the Department:

§ 9109. Refunds and penalties. (a)(1) Whenever the superintendent is satisfied that because of cancellations, some mistake of fact, error in calculation, or erroneous interpretation of a statute of this or any other state, any authorized insurer or excess line broker has paid to him pursuant to any provision of law, taxes, fees or other charges in excess of the amount legally chargeable against it during the three year period immediately preceding the cancellations or the discovery of such overpayment, he shall refund to such insurer or excess line broker the amount of such excess by applying the amount toward the payment of taxes, fees or other charges already due or which may become due from such insurer until such excess has been fully refunded or at his discretion make a cash refund. The excess line broker shall pay the insured any refund of premium tax returned to such excess line broker if such taxes were originally collected from the insured. Such cash refund may be paid from any moneys not turned over to the department of taxation and finance pursuant to the provisions of the state finance law. (Emphasis added.)

Insurance Law § 9109 addresses the mechanics of obtaining a refund of retaliatory taxes paid, if the excess payment is due to certain specified causes, all of which relate either to the computation process or to an error in interpreting the law of New York or another state that affects the amount of the retaliatory tax obligation.

B. Discussion

As noted above, the goal of charging foreign insurers the New York retaliatory tax is to equalize, on a year-to-year basis, the tax burden on the foreign insurer with the tax burden imposed on a New York insurer doing business in the foreign insurer’s home state. To that end, the Department calculates a foreign insurer’s retaliatory tax liability by taking into account two factors: (1) what a New York insurer operating in the foreign insurer’s domicile would have to pay to that foreign domicile in a particular year; and (2) the foreign insurer’s overall New York tax obligations – including franchise tax – for the same year. A change in a foreign insurer’s New York tax obligations for any particular year will invariably affect the amount of the retaliatory tax obligation for that year (and can reduce it to, but not below, zero).5

Insurance Company’s refund request presents the issue of whether the assessment and payment, in a later year, of additional franchise taxes attributable to an earlier year has any effect on the taxpayer’s retaliatory tax obligations in either the year the additional taxes are paid or any other year. Insurance Company aims, first, to use its payment of additional franchise tax as a credit against retaliatory taxes for the year of payment, then the three years preceding payment, and finally, the three years following. Insurance Company requests a cash refund for any franchise taxes not consumed in that process.

The Department’s Office of General Counsel (OGC) agrees with the assertion that the payment of additional franchise taxes for an earlier year may be used as a credit against retaliatory taxes assessed in the year of the franchise tax payment. Further, if the additional franchise tax payment was occasioned by an erroneous interpretation of a law, the Insurance Law provides for a credit against retaliatory taxes assessed for the three years prior to the additional payment and in the years following payment. However, OGC disagrees with Insurance Company’s claim of a right to a cash refund to the extent that the additional franchise tax amounts exceed the retaliatory taxes assessed in the three years before and the three years after the year of payment, under the plain terms of Insurance Law § 9109(a)(1), the Department may exercise its discretion in deciding whether to make such a refund.

1. Credit Against Retaliatory Taxes Assessed in the Year in Which the Additional Franchise Taxes Paid

The issue of a credit against retaliatory taxes for payments made in the year of assessment was addressed in Matter of Phoenix Home Life Mutual Insurance Company v. Curiale, 162 Misc. 2d 142, 615 N.Y.S. 2d 967 (Sup. Ct. N.Y. Co. 1994). The petitioner in that case, Phoenix Home, was a foreign insurer subject to retaliatory tax under Insurance Law § 1112. In November 1990, petitioner paid the Department $569,272 toward its 1990 retaliatory tax obligation. In January 1992, the petitioner (following the settlement of a federal Tax Court case involving its 1980 tax year) paid DTF $157,064 in additional franchise tax with respect to the 1980 tax year.

In addition, in April 1992, the Department assessed Phoenix Home $1,347,784 in retaliatory tax for 1990. That amount was net of a credit for the November 1990 payment of retaliatory tax, but did not give credit for the additional franchise tax paid to DTF in 1992 with respect to the 1980 tax year. Petitioner paid what it viewed as the unpaid balance of the retaliatory tax owed for 1990, i.e., $1,347,784 less $157,064. Petitioner claimed that the additional franchise tax of $157,064 paid in 1992 for 1980 should be applied as a credit to satisfy the remaining 1990 retaliatory tax liability.

The Department disagreed with petitioner, maintaining that any additional payment of franchise tax for the 1980 tax year could only be applied against the retaliatory tax obligation for the 1980 tax year. The Department argued that requiring year-to-year matching was the most logical result of reading Tax Law § 1511(b) and Insurance Law § 1112 together. The Department also argued that the three-year limit on refunds set forth in Insurance Law § 9109(a)(1) acted as a bar on the credit sought by petitioner.

The court did not accept the year-to-year matching concept, under which an additional franchise tax payment could be applied only as a credit against the retaliatory tax for the year to which the payment was allocable. In holding for the petitioner, Supreme Court opined that the text of Tax Law § 1511(b) requires that credit be allowed for any taxes paid in the taxable year in which retaliatory taxes are assessed, and that the Legislature, had it desired the imposition of a year-to-year matching requirement, could have expressly included one in the statute. Effectively, the court adopted a different matching concept, whereby additional franchise taxes are matched against amounts assessed in the year in which the additional payments are made rather than the year with respect to which they are paid.

The court also disagreed with the view that Insurance Law § 9109 barred application of the credit, because Phoenix Home was not attempting to claim a refund or credit of an overpayment of retaliatory tax in 1980. Rather, petitioner was requesting a credit against retaliatory tax for an additional franchise tax payment made in 1992 (albeit paid with respect to the 1980 year). The court observed that the claimed credit related to Phoenix Home’s 1990 retaliatory tax liability, which was not discovered until 1991, nor assessed and paid until 1992. Since, according to the court, the date the additional franchise tax is ultimately paid is what triggers the three-year limitation in Insurance Law § 9109, and not the tax year for which the franchise tax is assessed, the court concluded that the provision’s time limit did not preclude use of the credit.

In this instance, Insurance Company made a payment of additional franchise tax to DTF in 2001 that, under the express terms of Tax Law § 1511(b) and pursuant to the holding in Phoenix Home, should have been offset against its retaliatory tax obligation for that same year. The analysis of Phoenix Home and application of Tax Law § 1511(b) do not, however, answer the question of whether amounts not consumed by an offset in the year of payment are to be credited for other years or to be refunded.

2. Phoenix Home Does Not Address Any Year Other Than the Year of Payment

In Phoenix Home, the taxpayer sought to apply a payment of additional franchise tax in 1992 as a credit toward a retaliatory tax bill for 1990 that was then in the process of being assessed. In ruling for the taxpayer, the court simply allowed a then-currently paid franchise tax to be credited against a then-currently assessed retaliatory tax, with both events occurring concurrently, albeit with respect to different tax years. The court was not – as Insurance Company contends − presented with (and thus did not consider) the issue of whether “excess” currently paid additional franchise taxes could be offset against retaliatory tax assessments, paid or unpaid, for prior or subsequent years.

The Department accepts the principle set forth in Phoenix Home that an assessment of retaliatory tax in any year should include credits for additional franchise taxes paid in the year of assessment. However, the Department does not agree with Insurance Company’s conclusion that Phoenix Home addresses the application of the additional franchise taxes that Insurance Company correctly paid in 2001 as a credit against retaliatory taxes assessed for the three years before the payment, as well as for all subsequent years for which Insurance Company has been assessed retaliatory tax.6 As the taxpayer in Phoenix Home did not pay any amounts “excess” to the retaliatory tax assessed in the year in which the payment was made, the question of carrying an excess tax payment back or forward simply never arose.

Furthermore, the issue of cash refunds present here was not considered in Phoenix Home, because there was no remaining amount to be refunded after credit against the retaliatory tax assessed in the year of the disputed payment.

3. Insurance Law § 9109 Provides Certain Credits for Overpayments Due to Mistake in Law

While Phoenix Home supports a credit against the retaliatory tax assessed in the year of additional franchise tax payment, the case is silent as to the remaining questions. The plain language of Insurance Law § 9109 supports the proposition that (1) Insurance Company’s 2001 payment of additional franchise tax creates a tax credit in the amount of the payment; (2) the credit is first to be applied against retaliatory taxes assessed in the year of payment; (3) the credit is next to be applied against retaliatory taxes paid in the three years immediately preceding the year in which Insurance Company paid the additional franchise taxes (1998-2000); and (4) any leftover credit may be carried forward indefinitely to be applied to retaliatory taxes due in the future until fully offset. OGC, however, rejects Insurance Company’s argument that the Insurance Law and Tax Law, as read together and/or as interpreted by Phoenix Home, require the Department to issue Insurance Company any cash refund, as opposed to simply authorizing such refund.

By its terms, Tax Law § 1511(b) requires that “credit shall be allowed” against a taxpayer’s retaliatory taxes in the amount of any franchise taxes paid. But the provision does not explain how the credit should be administered, and does not address whether the credit is subject to any time limitations.

Insurance Law § 9109(a)(1), on the other hand, expressly addresses these matters. That provision applies “whenever … [there has been any] cancellation[s], some mistake of fact, error in calculation, or erroneous interpretation of a statute” that causes an overpayment. The payment of additional franchise taxes for a prior year, as occurred here, triggers the application of Insurance Law § 9109 because, by definition, there would have been no delay in the payment of such franchise tax had there not been an error of either fact or law by either the taxpayer or DTF.

Insurance Law § 9109 then provides the Superintendent with express instructions as to how to handle an insurer’s overpayment: “he shall refund to such insurer … the amount of such excess by applying the amount toward the payment of taxes, fees or other charges already due or which may become due from such insurer.” Id. (emphasis added). In other words, the Department must afford the insurer a credit in the amount of the overpayment.

How is the credit to be applied? Under Insurance Law § 9109, the credit first is to be applied “toward the payment of taxes, fees or other charges already due” i.e., to taxes due but not yet paid. The credit is applied retrospectively only as far back as “the three year period immediately preceding the … discovery of such overpayment.”

In the event that there are no unpaid mature tax obligations in the past three years, or there is credit left over after applying the credit retrospectively, Insurance Law § 9109 states that the credit should be applied to taxes “which may become due from such insurer.” That is, the Department must apply the credit for overpayment going forward “until such excess has been fully refunded.” In the alternative, the Superintendent may, “at his discretion[,] make a cash refund” in the remaining amount of the credit. Id. (emphasis added).

Applying Insurance Law § 9109 to the facts that Insurance Company has presented indicates that, while Insurance Company is entitled to a credit in the amount of Amount A (the additional franchise tax payment), it is not entitled to a cash refund for any portion of that amount. Insurance Law § 9109 expressly places the payment of cash refunds within the discretion of the Superintendent.

In this instance, the step-by-step application of the credit created by the additional payment of franchise tax resulting from a mistake in law leaves an unapplied amount even after offsetting the retaliatory taxes paid in the years 1998-2005. Insurance Company has submitted that its future business mix will not produce a retaliatory tax liability in years after 2005 and into the foreseeable future. Based on those facts, the Superintendent may exercise his discretion to authorize a cash refund for any amount of credit that is not applied to the 1998-2005 retaliatory taxes paid.

For further information, you may contact Associate Tax Counsel Ann H. Logan at the New York City office.

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1  Franchise tax is the chief tax imposed on insurance companies by New York State pursuant to Article 33 of the New York Tax Law.  The tax is imposed as a percentage of an insurer’s “entire net income,” which includes investment and premium income.

2  A “retaliatory tax” is a tax imposed by one state (“State A”) upon the foreign insurers from another state (“State B”) that are conducting business in State A.  The purpose of the tax is to try to ensure that State B does not impose overly burdensome taxes or fees upon insurers domiciled in State A that are conducting business in State B.  The tax operates as follows:  State A determines the tax rate and fees imposed upon the insurers domiciled in State A that are operating in State B.  If the tax rate or fees imposed by State B are higher than those imposed by State A upon foreign insurers operating in State A, then State A, pursuant to its retaliatory tax statute, will impose an additional tax upon the licensees of State B such that the rate of taxes and fees imposed on the foreign insurers from State B operating in State A is equivalent to that imposed on insurers domiciled in State A that are operating in State B.  New York State’s retaliatory tax is imposed pursuant to Articles 11 and 91 of the New York Insurance Law

3  In practice, the retaliatory tax obligation for any given year is generally finalized two years after the fact, because the computation of the amount due requires confirming the quantum of  all other taxes and fees paid by the foreign insurer in that year.  For example, an insurer whose New York corporate tax return is nominally due on March 15 of the year after the tax year can easily extend the due date of the return for an additional year.  Thus, it was routine in Matter of Phoenix Home Life Mutual Insurance Company v. Curiale, 162 Misc. 2d 142,615 N.Y.S. 2d 967 (Sup. Ct. N.Y. Co. 1994), for the retaliatory amount for 1990 to have been finally determined and assessed in 1992.

4  Tax year 2004 was the last year for which a retaliatory tax had been assessed as of the date of Insurance Company’s request for credit and refund.

5  Retaliatory tax is similar to the federal alternative minimum tax (which is due only if it exceeds the normal income tax otherwise computed), in that the computed amount is compared to the total other taxes and fees paid by the foreign insurer.  Only if the retaliatory tax is more than those combined items will any retaliatory tax be due.

6 Retaliatory tax has been assessed for all of the years for which Insurance Company requests a refund.