Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2013
Tax on Insurers Law
CALIFORNIA CONSTITUTION ARTICLE XIII, SECTION 28
Sec. 28. Taxation of insurance companies. (a) "Insurer," as used in this section, includes insurance companies or associations and reciprocal or interinsurance exchanges together with their corporate or other attorneys in fact considered as a single unit, and the State Compensation Insurance Fund. As used in this paragraph, "companies" includes persons, partnerships, joint stock associations, companies and corporations.
(b) An annual tax is hereby imposed on each insurer doing business in this state on the base, at the rates, and subject to the deductions from the tax hereinafter specified.
(c) In the case of an insurer not transacting title insurance in this state, the "Basis of the annual tax" is, in respect to each year, the amount of gross premiums, less return premiums, received in such year by such insurer upon its business done in this state, other than premiums received for reinsurance and for ocean marine insurance.
In the case of an insurer transacting title insurance in this state, the "basis of the annual tax" is, in respect to each year, all income upon business done in this state, except:
(1) Interest and dividends.
(2) Rents from real property.
(3) Profits from the sale or other disposition of investments.
(4) Income from investments.
"Investments" as used in this subdivision includes property acquired by such insurer in the settlement or adjustment of claims against it but excludes investments in title plants and title records. Income derived directly or indirectly from the use of title plants and title records is included in the basis of the annual tax.
In the case of an insurer transacting title insurance in this state which has a trust department and does a trust business under the banking laws of this state, there shall be excluded from the basis of the annual tax imposed by this section, the income of, and from the assets of, such trust department and such trust business, if such income is taxed by this state or included in the measure of any tax imposed by this state.
(d) The rate of the tax to be applied to the basis of the annual tax in respect to each year is 2.35 percent.
(f) The tax imposed on insurers by this section is in lieu of all other taxes and licenses, state, county, and municipal, upon such insurers and their property, except:
(1) Taxes upon their real estate.
(2) That an insurer transacting title insurance in this state which has a trust department or does a trust business under the banking laws of this state is subject to taxation with respect to such trust department or trust business to the same extent and in the same manner as trust companies and the trust departments of banks doing business in this state.
(3) When by or pursuant to the laws of any other state or foreign country any taxes, licenses and other fees, in the aggregate, and any fines, penalties, deposit requirements or other material obligations, prohibitions or restrictions are or would be imposed upon California insurers, or upon the agents or representatives of such insurers, which are in excess of such taxes, licenses and other fees, in the aggregate, or which are in excess of the fines, penalties, deposit requirements or other obligations, prohibitions, or restrictions directly imposed upon similar insurers, or upon the agents or representatives of such insurers, of such other state or country under the statutes of this state; so long as such laws of such other state or county continue in force or are so applied, the same taxes, licenses and other fees, in the aggregate, or fines, penalties or deposit requirements or other material obligations, prohibitions, or restrictions, of whatever kind shall be imposed upon the insurers, or upon the agents or representatives of such insurers, of such other state or country doing business or seeking to do business in California. Any tax, license or other fee or other obligation imposed by any city, county, or other political subdivision or agency of such other state or country on California insurers or their agents or representatives shall be deemed to be imposed by such state or country within the meaning of this paragraph (3) of subdivision (f).
The provisions of this paragraph (3) of subdivision (f) shall not apply as to personal income taxes, nor as to ad valorem taxes on real or personal property nor as to special purpose obligations or assessments heretofore imposed by another state or foreign country in connection with particular kinds of insurance, other than property insurance; except that deductions, from premium taxes or other taxes otherwise payable, allowed on account of real estate or personal property taxes paid shall be taken into consideration in determining the propriety and extent of retaliatory action under this paragraph (3) of subdivision (f).
For the purposes of this paragraph (3) of subdivision (f) the domicile of an alien insurer, other than insurers formed under the laws of Canada, shall be that state in which is located its principal place of business in the United States.
In the case of an insurer formed under the laws of Canada or a province thereof, its domicile shall be deemed to be that province in which its head office is situated.
The provisions of this paragraph (3) of subdivision (f) shall also be applicable to reciprocals or interinsurance exchanges and fraternal benefit societies.
(4) The tax on ocean marine insurance.
(5) Motor vehicle and other vehicle registration license fees and any other tax or license fee imposed by the state upon vehicles, motor vehicles or the operation thereof.
(6) That each corporate or other attorney in fact of a reciprocal or interinsurance exchange shall be subject to all taxes imposed upon corporations or others doing business in the state, other than taxes on income derived from its principal business as attorney in fact.
A corporate or other attorney in fact of each exchange shall annually compute the amount of tax that would be payable by it under prevailing law except for the provisions of this section, and any management fee due from each exchange to its corporate or other attorney in fact shall be reduced pro tanto by a sum equivalent to the amount so computed.
(g) Every insurer transacting the business of ocean marine insurance in this state shall annually pay to the state a tax measured by that proportion of the underwriting profit of such insurer from such insurance written in the United States, which the gross premiums of the insurer from such insurance written in this state bear to the gross premiums of the insurer from such insurance written within the United States, at the rate of 5 per centum, which tax shall be in lieu of all other taxes and licenses, state, county and municipal, upon such insurer, except taxes upon real estate, and such other taxes as may be assessed or levied against such insurer on account of any other class of insurance written by it. The Legislature shall define the terms "ocean marine insurance" and "underwriting profit," and shall provide for the assessment, levy, collection and enforcement of the ocean marine tax.
(h) The taxes provided for by this section shall be assessed by the State Board of Equalization.
(i) The Legislature, a majority of all the members elected to each of the two houses voting in favor thereof, may by law change the rate or rates of taxes herein imposed upon insurers.
(j) This section is not intended to and does not change the law as it has previously existed with respect to the meaning of the words "gross premiums, less return premiums, received" as used in this article.
History.—New Section 28 adopted without substantive change from former Section 144/5, effective November 6, 1974. Amended effective June 8, 1976, by deleting subdivision (e), revising subdivision (g) to omit reference to subdivision (e), and revising subdivision (i) changing "two-thirds" to "a majority".
Note.—Prior Section 144/5 adopted November 3, 1942. Amendment adopted in 1949 deleted former (a) relating to effective date of section; renumbered former (e) as (d) and substituted 2.35 percent tax rate for tax rate which decreased each year from 2.55 percent in 1943 to 2.35 percent in 1947; deleted former (f) relating to deductions from tax; deleted former (h) relating to real estate deduction; and renumbered former (b) as (a), (c) as (b), (d) as (c), (g) as (e), (i) as (f), (j) as (g), (k) as (h), (l) as (i), and (m) as (j). The 1952 amendment added "and the State Compensation Insurance Fund" to the first sentence of (a); added "the" following "rate of" in (d); and added (f)(5). The amendment of 1962 repealed the second paragraph of subdivision (e), which had become obsolete. The 1964 amendment revised the first sentence in (f)(3) and added all after the first sentence in (f)(3). The amendment of 1966 amended the first sentence of (a) by adding the words "together with their corporate or other attorneys in fact considered as a single unit,"; numbered the subdivision of (e) adding subdivisions (2) and (3); and added subdivision (6) to (f). Section 144/5 repealed effective November 6, 1974.
Construction.—The gross premiums tax applies to all insurance companies and associations, whether fire or life, and whether doing business as stock concerns or mutual concerns. Northwestern Mutual Life Insurance Co. v. Roberts (1918) 177 Cal. 540.
Although in lieu of taxes on personal property, it is not, like the public utility gross receipts tax (prior to the amendment of Section 14 in 1933), a direct tax on property, but is a franchise tax exacted for the privilege of doing business in the State. Thus, ownership by the insurance company, and not the use to which the property is being put, is the factor determining freedom of personal property from local taxation. Consolidated Title Security Co. v. Hopkins (1934) 1 Cal.2d 414.
The tax imposed upon insurance companies is not a property tax but an excise tax for the privilege of doing business in the year preceding that in which the tax is assessed. Consequently, an insurance company is liable for a tax based upon its gross premiums received during a calendar year, notwithstanding the fact that on the first Monday of March of the following year the company was not doing business. Penalties accruing after the appointment of a liquidator are properly charged to the company. Carpenter v. Peoples Mutual Life Insurance Co. (1937) 10 Cal.2d 299.
Even prior to the enactment in 1937 of the provision of the Revenue and Taxation Code expressly authorizing such procedure, an assessment could be made in any year subsequent to that in which the company ceased doing business. The tax is an obligation of the taxpayer irrespective of its assessment by the State Board of Equalization, at least in a case in which the failure to levy the assessment at the proper time was due to the taxpayer's violation of its statutory duty to file the statements required of it and there is no showing that the delay in assessment has operated to its prejudice. Carpenter v. Pacific Coast Insurance Assn. (1937) 10 Cal.2d 304.
Deduction of real property taxes (prior law).—The provision for the deduction of the amount of taxes paid by an insurance company on real property owned by it in this State does not create an exemption but permits an offset or deduction. The offset or deduction is authorized where the insurance company owned the property at the time of payment of such taxes, although the property was not owned by such company at the time the taxes became a lien. Northwestern Mutual Life Insurance Co. v. Johnson (1936) 8 Cal.2d 42.
Flood control levies on real estate owned by an insurance company in this State that are special assessments conferring particular benefits on the land assessed, are not deductible from the gross premiums tax. Northwestern Mutual Life Insurance Co. v. State Board of Equalization (1946) 73 Cal.App.2d 548.
Where an insurance company moved its principal office in December 1952, it was entitled to deduct the real estate taxes paid by it on both the old office and the new office, even though such taxes were for the same tax year. California-Western States Life Insurance Co. v. State Board of Equalization (1959) 171 Cal.App.2d 801.
An insurer's occupation of two small rooms in a huge office complex entitled the insurer to claim the complex as its principal office because the complex was the insurer's only office in California. J.C. Penney Insurance Company v. State Board of Equalization (1979) 94 Cal.App.3d 685.
Effective date of repeal of principal office deduction was January 1, 1977. California Comp. & Fire Co. v. State Board of Equalization (1982) 132 Cal.App.3d 25.
Dividends.—A mutual life insurance company is not subject to taxation on that portion of a premium which is satisfied by the application of a dividend representing the excess of the previous year's premium over the actual cost of the insurance furnished. Mutual Benefit Life Insurance Co. v. Richardson (1923) 192 Cal. 369. [Cf. Northwestern Mutual Life Insurance Co. v. Roberts (1918) 177 Cal. 540.]
Doing business.—An insurance association organized in California to take over the business of a Nebraska association was, in accepting in this State the applications of the members of the foreign association to continue their insurance, doing business in this State. Assuming, however, that the contracts of insurance were made in their entirety outside the State, all amounts received on such contracts were subject to the tax, the association having withdrawn from the other State and thereafter conducted its business under its California license, and all payments being sent by mail to its office in California. Western Travelers Accident Assn. v. Johnson (1936) 14 Cal.App.2d 306.
A foreign insurance company is not subject to tax on premiums remitted directly to its home office by mail after it had actually ceased to do business in California and its certificate of authority had expired. People v. Alliance Life Insurance Co. (1944) 65 Cal.App.2d 808.
Renewal premiums collected at the Nevada office of a life insurance company which was incorporated in California and has its principal place of business in this State from policyholders residing in states in which the company is not licensed to do business are "premiums received * * * upon its business done in this State" within the meaning of this section, where all of the company's services to these policyholders, other than the collection of premiums, are rendered to them at its home office in California. Occidental Life Insurance Co. v. State Board of Equalization (1956) 139 Cal.App.2d 468.
Foreign insurers who solicited business by mail from outside the state were "doing business" in California. The insurers' resident agents, even though designated as independent contractors, performed functions in this state on behalf of the insurers sufficient to form the "definite link" and "minimum connection" required to justify imposition of the tax on the insurers. Illinois Com. Mens Assn. v. State Board of Equalization (1983) 34 Cal.3d 839, appeal dismissed (1984) 466 U.S. 933.
Estoppel.—The State is not estopped to collect from insurance companies taxes for past years (1947 in this case) on the amounts paid to and retained by the companies' agents who solicited and obtained takers of bail bonds where this section levies taxes on the entire amount paid by the applicant to the bail agent, and where all insurance companies, prior to 1951, reported to the Insurance Commissioner as gross premiums only the amount actually received by them from the agents which practice was known by the Commissioner and the Attorney General and no objection was made by the Commissioner and the Attorney General and no objection was made by the Commissioner to any company for failure to report the whole bail bond premiums, there being no clear representation by a responsible agent of government as to what constitutes taxable premiums such as would satisfy an estoppel in connection with tax cases. United States Fidelity and Guaranty Co. v. State Board of Equalization (1956) 47 Cal.2d 384.
Gross premiums.—The term "gross premiums" includes the following: assessments (Bankers Life Co. v. Richardson (1923) 192 Cal. 113; Western Travelers Accident Association v. Johnson (1936) 14 Cal.App.2d 306); the consideration paid for annuity contracts (Equitable Life Assur. Society v. Johnson (1942) 53 Cal.App.2d 49); the full sums received by bail bond agents from those desiring bail bonds (Groves v. City of Los Angeles (1953) 40 Cal.2d 751).
Fees which are charged all applicants for membership in a mutual company do not constitute gross premiums within the meaning of this section, since they are not a part of the consideration paid for insurance, when the membership entitles the holder only to apply for insurance and not to receive it and the fees are not returnable if insurance is rejected or the member elects not to apply for it. State Farm Mutual Automobile Insurance Co. v. Carpenter (1939) 31 Cal.App.2d 178.
Amounts retained by an insurance company from wages due its employees participating in a voluntary retirement plan are not insurance premiums under this section where the company has no profit motive in establishing the plan. California-Western States Life Insurance Co. v. State Board of Equalization (1957) 151 Cal.App.2d 559.
Gross premiums include amounts paid as reimbursement for additional expense incurred in selling insurance on an installment basis such as additional bookkeeping expense and collection expense. Allstate Insurance Co. v. State Board of Equalization (1959) 169 Cal.App.2d 165.
Insurer developed "mini-met" plan pursuant to which existing group health insurance policyholders assumed the obligation to pay claims of the insured employees up to a certain "trigger-point" amount. Insurer was liable for claims above the trigger-point amount. Taxable gross premiums includes net premiums (calculated with reference to amounts paid out of policyholders' funds) as well as loading (amounts paid directly to the insurer). Metropolitan Life Insurance Co. v. State Board of Equalization (1982) 32 Cal.3d 649.
Although a service charge in connection with a premium financing plan is part of taxable gross premiums, the interest charged in connection with the plan is nontaxable investment income. Mercury Casualty Co. v. State Board of Equalization (1983) 141 Cal.App.3d 43.
Auto club members paying for insurance obtained through the club on an installment basis paid the club a $1 service fee along with each payment. The club retained the fee and forwarded the balance to the insurer. The service fee was part of the insurer's taxable gross premiums. Interinsurance Exchange v. State Board of Equalization (1984) 156 Cal.App.3d 606.
ERISA does not preempt California's method of taxation pursuant to Metropolitan Life Insurance Co. v. State Board of Equalization (1982) 32 Cal.3d 649. General Motors Corp. v. California State Board of Equalization (9th Cir. 1987) 815 F.2d 1305, cert. denied (1988) 485 U.S. 941.
The "true economic substance" of the insurer's SFGP policy was that the employer bears the bulk of the insurance risk in acting as an independent insurer for all claims below the liability limit; that the employer in performing its independent obligations under the SFGP is not acting as "a mere agent" of the insurer for the collection of premiums; and the obligations of the insurer are not "inextricably intertwined" with those of the employers. Accordingly tax applies only to the amounts actually paid as premiums to the insurer and not to the amount of claims paid from employer funds. Aetna Life Ins. Co. v. State Board of Equalization (1992) 11 Cal.App.4th 1207.
An insurer issuing minimum premium policies taxable under Metropolitan Life Ins. Co. v. State Board of Equalization (1982) 32 Cal.3d 649 was not denied equal protection even though the same policies issued to policyholders who are Taft-Hartley Trusts would be taxed differently. Great-West Life Assurance v. State Board of Equalization (1993) 19 Cal.App.4th 1553.
Where only one factor in Metropolitan Life Ins. Co. v. State Board of Equalization (1982) 32 Cal.3d 649 was present (regarding claims administration by an insurance company) and the other three factors were absent and the trigger point was well above 100 percent of expected claims thereby shifting the insurance risk to the employer, the employer, and not the insurance company, was the insurer as to the pretrigger point claims paid from employer funds, and the insurance company was therefore not liable for gross premiums tax on that aspect of the contracts. Prudential Ins. Co. v. State Board of Equalization (1993) 21 Cal.App.4th 458.
The amount of an insurer's taxable gross premiums does not include the amount of claims paid out of contractholder's funds when the insurer is fulfilling an administrative services contract and not providing insurance. Lincoln National Life Insurance Co. v. State Board of Equalization (1994) 30 Cal.App.4th 1411.
In lieu.—The "in lieu" provision of Article XIII Section 144/5 (now Article XIII Section 28) does not prevent the application of the state franchise tax to the net income of a corporate insurance agent. The franchise tax is exacted for the privilege of doing business in a corporate capacity. Edward Brown & Sons v. McColgan (1942) 53 Cal.App.2d 504.
A revenue ordinance imposing a tax on a person engaged in the business of soliciting, effecting and negotiating undertakings of bail as agent of an insurance company is invalid under this section. Groves v. City of Los Angeles (1949) 93 Cal.App.2d 17; Groves v. City of Los Angeles (1953) 40 Cal.2d 751.
The city business license tax applies to commissions received by an insurance broker. Marsh & McClennan of California, Inc. v. City of Los Angeles (1976) 62 Cal.App.3d 108.
The legal incidence of the sales tax is on the retailer even if the retailer passes the amount of the tax through to its customers. The in lieu provisions therefore do not prevent the imposition of sales tax on a retailer with respect to sales to insurance companies. Occidental Life Ins. Co. v. State Board of Equalization (1982) 135 Cal.App.3d 845.
An insurer doing insurance business in California subject to California's gross premiums tax is exempt from all other state and local taxes except those listed in the "in lieu" provision. Mutual Life Ins. Co. v. City of Los Angeles (1990) 50 Cal.3d 402 (disapproving Massachusetts Mutual Life Ins. Co. v. City and County of San Francisco (1982) 129 Cal.App.3d 876).
Reciprocal or inter-insurance exchanges.—Amounts designated by an inter-insurance exchange as savings to its subscribers but which amounts were actually paid by the exchange to attorney-in-fact were part of taxable gross premiums and should not be considered part of savings within the words "returned to subscribers and/or credited to their accounts as savings" as used in Ins. Code section 1530. Industrial Indem. Exch. v. State Board of Equalization (1945) 26 Cal.2d 772.
In computing its gross premiums tax liability for the business year 1964, the taxpayer, a reciprocal inter-insurance exchange, was not entitled to deduct savings dividends which it declared to subscribers (policyholders) in 1964 on policies expiring in 1965, to the extent that those dividends remained on the taxpayer's books on December 31, 1964, as declared and unpaid. Such amounts were not "credited" to the accounts of subscribers, within the meaning of Section 1530 of the Insurance Code, until such time as the policies in question expired and the formerly unpaid dividends were either paid to the subscribers or applied by them against renewal premiums. California State Auto. Assn. Inter-Insurance Bureau v. State Board of Equalization (1974) 44 Cal.App.3d 13.
Reduced rate.—Premiums qualify for the .50 percent reduced rate under section 12202 only if: 1) they are from policies or contracts issued to a pension plan or profit sharing plan; and 2) the plan is exempt or qualified under section 401(a), 403(b), 404, 408(b), or 501(a) of the Internal Revenue Code. Transamerica Occidental Life Insurance Co. v. State Board of Equalization (1991) 232 Cal.App.3d 1048.
Retaliatory tax.—If an insurance company when taxed here at the usual rate, pays an amount actually greater than a California company would have been required to pay on the same basis in the home state of the foreign company, no retaliatory tax is to be exacted, notwithstanding the fact that the California rate may be less than the corresponding rate in the other state. Retaliatory laws are to be strictly construed, and the ultimate effect of the tax is determinative. Bankers Life Co. v. Richardson (1923) 192 Cal. 113.
Sections 685–685.3 of the Insurance Code may be carried out as to an insurer from a state which discriminates against California insurers. The sections are not unconstitutional under Article XIII, Section 144/5, subdivision (f) as it read prior to amendment in 1964. Franklin Life Insurance Company v. State Board of Equalization (1965) 63 Cal.2d 222; Atlantic Insurance Co. v. State Board of Equalization (1967) 255 Cal.App.2d 1, appeal dismissed (1968) 390 U.S. 529.
The 1964 amendment to subdivision (f)(3) applies to all foreign insurers regardless of when they were certified to transact business in California, but applies prospectively beginning with year 1965. Western and Southern Life Insurance Co. v. State Board of Equalization (1970) 4 Cal.App.3d 21.
Section 685 of the Insurance Code violates neither the Commerce nor Equal Protection Clauses of the United States Constitution Western and Southern Life Insurance Company v. State Board of Equalization of California (1981) 451 U.S. 648.
Arizona's tax on the business of workers' compensation insurance must be included in an Arizona insurer's calculation of California retaliatory tax. Although the Arizona tax was earmarked for a specific purpose, it was not a charge for benefits conferred on the insurer and it was therefore not a "special purpose obligation or assessment." American Alliance Ins. Co. v. State Board of Equalization (1982) 134 Cal.App.3d 601.
Return premiums.—The term "return premiums" refers to that portion of the gross premiums received by an insurance company which has been unearned and which the company is lawfully bound to return. It does not include dividends paid to members of a mutual company. Northwestern Mutual Life Insurance Co. v. Roberts (1918) 177 Cal. 540.
The cash or surrender values paid upon the cancellation of life policies are not "return premiums," but values paid on the cancellation of pure annuity contracts prior to the starting of payments to the annuitant are by contract "return premiums" within the constitutional meaning. Equitable Life Assur. Society v. Johnson (1942) 53 Cal.App.2d 49.
Trust business of title companies.—The levy of a franchise tax on the trust business of a title insurance company for 1943 measured by the income of its trust business in 1942 is not a tax upon its 1942 trust business in violation of the effective date, December 31, 1942, of this section. Title Insurance and Trust Co. v. Franchise Tax Board (1956) 145 Cal.App.2d 60.
Surplus line insurers not required to pay premium taxes.—Taxpayers brought a declaratory relief action to require the State Board of Equalization to collect taxes on premiums sold by a surplus line insurer. The issue presented was whether surplus line insurance premiums were subject to being taxed twice: first, with a statutorily-based 3 percent surplus line premium tax to be paid by brokers or the insured (if the policy is obtained without the assistance of a broker) under the Surplus Line Brokers Act (Ins. Code, § 1760 et. seq.); and, second, with a 2.35 percent premium tax imposed on the nonadmitted insurance company for doing business in California under article XIII, section 28 of the California Constitution. Both the State Board of Equalization and the Department of Insurance took the position that the tax obligations related to the premiums were covered by existing laws that imposed a 3 percent tax on the brokers responsible for the insurance contracts or on the policy holders if no brokers were used, and the 2.35 percent premium tax did not apply. Silvers v. State Board of Equalization (2010) 188 Cal.App.4th 1215.