Florida Commences Self-Procurement Tax Audits for Businesses with Captives

For businesses that utilize captive insurance, Florida's self-procurement tax has received relatively little fanfare over the years, typically relegated to a footnote or boilerplate disclosure in captive feasibility studies. In Florida, this state-level tax has taken a back seat to the media attention surrounding the federal government's aggressive campaign to root out abusive programs and seek penalties against promoters. For a state like Florida, one of the largest states by Gross Domestic Product (GDP), and with the nationwide growth of captive insurance as a potentially efficient risk management tool, the stage was set for a potential boon to the state treasury if Florida ever decided to enforce its relatively high self-procurement tax of 5.3 percent on premiums paid to a captive that is characterized as a nonadmitted insurance company. Apparently, that decision has been made as Florida has confirmed it is currently auditing companies utilizing captive insurance for self-procurement tax compliance.

Florida Statute Section 626.938, titled "Report and tax of independently procured coverages," imposes a 5.3 percent tax on every insured who procures insurance from another state or country with an "unauthorized foreign or alien insurer" (independently procured coverage, or IPC, tax). The person who procures such coverage must file a report with the Florida Surplus Lines Service Office. Alternatively, insureds who utilize a surplus lines agent may avoid such reporting and collecting an IPC tax, as this requirement (surplus lines tax) is borne by the surplus lines agent. The 5 percent IPC tax is payable to the Florida Department of Financial Services, with most of this tax to be deposited in the state General Revenue Fund and a small percentage deposited with the Insurance Regulatory Trust Fund. The remaining .3 percent of the IPC tax (sometimes referred to as a "stamping fee") is payable to the Surplus Lines Service Office.

Section 626.938 was enacted about 4 years after the adoption of the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA), which has been discussed in great detail in prior IRMI articles. If Florida is the "home state" as defined in NRRA, then a policy that covers risks or exposures only partially in Florida will require the tax to be computed based on the gross premium. However, the premium assigned to other states (excluding non-US premium) will be subject to the maximum tax in the other states, meaning the calculation must consider applicable rates in the respective states wherever the premium is allocated.

The IPC tax is due on the 45th day following each calendar quarter after the insurance is procured. Delinquent taxes bear interest at 6 percent per year, compounded annually. Section 626.901 prohibits representing or aiding unlicensed insurers, and Section 626.902 characterizes certain actions as a third-degree felony. The IPC may be enforced by a civil action brought by the Department of Financial Services.

Consequently, Florida businesses that utilize a captive insurance company should review their program to determine whether Florida's IPC tax applies. This includes not only an analysis of initial premium payments to admitted or nonadmitted insurers but also lifetime transactions with a captive that might indirectly trigger application of the IPC tax. Obviously, the compliance issue might force itself upon a business if the state conducts an audit, but given Florida's growing interest in IPC tax enforcement, business owners might encounter the issue in a subsequent merger or acquisition, where due diligence would identify a potential exposure that must be addressed.

Business owners may consider numerous options to address potential IPC tax exposure, such as redesigning their captive insurance program and policies to limit the premium subject to Florida's IPC tax. Although currently there is only one Florida-domiciled captive, payments to a Florida-domiciled captive would escape the IPC tax. Any decision-making would need to include, inter alia, the IPC tax savings with Florida's captive premium tax, which is relatively high at 1.75 percent in comparison to more established state captive domiciles. Some may consider formal or informal rulings to provide guidance as to the application of the IPC tax based on the business owner's particular facts and circumstances, including whether any exemptions apply. Still others may choose to limit their exposure by entering into Florida's voluntary disclosure program. Any proposed course of action should consider potential federal tax consequences.