Washington State Bill Seeks To Clarify Captive Premium Tax Obligations

A senate bill introduced in the state of Washington is seeking to formalize and clarify the position of captive insurers covering risks in the state.

Captive.com understands Senate Bill 5315 has been drafted as a compromise between Washington's captive owner community and Insurance Commissioner Mike Kreidler. It puts a number of requirements on captives that are writing Washington-based risks and owned by Washington-headquartered companies.

Captives will need to register with Mr. Kreidler's office, incurring a $2,500 fee, and demonstrate that captive assets exceed liabilities by $1 million. Once registered, a 2 percent premium tax will be imposed on all Washington risks, and the methodology for calculating the Washington allocation will need to be made available to the commissioner.

New captive insurers will have to register with the commissioner 120 days after commencing business or, for existing captives, within 120 days of the legislation being enacted.

The 2 percent premium tax will also be backdated to 2011. The bill states, "Taxes on premiums are due under this section from an eligible captive insurer for any period after January 1, 2011, if not previously remitted to the commissioner, and further provided that all such taxes must be limited to an eligible captive insurer's Washington risks."

Once registered with the commissioner, captives will only be permitted to write property and casualty insurance direct in the state. Due to the definition of "property and casualty" in Washington State, it appears employers' medical stop loss would not be permitted to be written direct by a captive in Washington. Other risks, including medical stop loss and employee benefits, could be written by a front and reinsured by the captive.

Background

Captive owners based in Washington have found themselves in an ongoing tussle with Mr. Kreidler since he took on Microsoft and its Arizona-domiciled captive Cypress Insurance Company in 2018.

Mr. Kreidler issued a cease-and-desist order against Cypress in May 2018, accusing the captive of operating without a license. Cypress ultimately settled in August 2018, paying $573,905 in unpaid premium taxes and $302,915 in interest and penalties.

In December 2018, the commissioner established a self-reporting plan for captives who thought they might have been unlawfully insuring risk in Washington in the past 15 years. The self-reporting period lasted from January 1, 2019, to June 30, 2020, and promised reduced fines and premium tax penalties to those captive insurers who cooperated.

In 2019, Mr. Kreidler ordered captives owned by Alaska Air, Starbucks, and Costco to pay back taxes, interest, and penalties on policies placed in Washington.

Response

A detailed report, commissioned by the state, is expected to be published this week that will further outline the commissioner's analysis of captive insurers operating in Washington.

Gary Osborne, vice president at Risk Partners, has witnessed numerous self-procurement disputes between states and captives through the years and told Captive.com he believes this legislation would be unconstitutional.

"I would hope Washington State is taken to court over this," Mr. Osborne said. "Yes, a self-procurement tax can be charged, but this is trying to regulate another state's business. That is unconstitutional.

"I think this needs to be fought against because otherwise Texas, New York, California, and Illinois will be looking at this and thinking they can replicate it," he said.

Mr. Osborne said that while the additional requirements may not be a big obstacle for large corporations such as Microsoft, Starbucks, and Costco, smaller Washington businesses may see a captive insurance company as unsuitable if they are now required to hold $1 million in surplus and file additional reporting.

Senate Bill 5315, sponsored by Senator Perry Dozier (R) and Senator Mark Mullet (D), will be heard before the Senate Committee on Business, Financial Services & Trade on Tuesday, January 26.