Laws, Regulations & Annotations
Property Taxes Law Guide – Revision 2011
California Constitutional Provisions
ARTICLE XIII Revenue and Taxation
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 s 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 the 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 s 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 s 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 s of such other state or country 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 s 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 s 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 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 change the rate or rates of taxes herein imposed upon insurers.
(j) This section is not intended to and does not change the 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.—The amendments of June 8, 1976, deleted the former subdivision (e), deleted the former second sentence of subdivision (g), and substituted "a majority" for "two-thirds" in the first sentence of subdivision (i).
Construction.—The intent of the framers of the June 8, 1976, amendment repealing former subdivision (e), which provided for the principal office deduction for real estate taxes, was that, if adopted, the amendment should be effective as of January 1, 1977. As the provisions on taxation in the Constitution are a limitation on the Legislature's authority to impose taxes or to grant tax deductions, not a grant of authority, the adoption of the amendment did not affect the Legislature's power to grant the deduction for the remainder of 1976. California Compensation And Fire Co. v. State Board of Equalization, 132 Cal.App.3d 25.
Construction.—Tax imposed on workers' compensation carriers by State of Arizona is not a special purpose obligation or assessment within the meaning of this article in that such tax is not a charge for benefits conferred upon the taxpayer, which is the distinction between assessments and taxes. American Alliance Insurance Co. v. State Board of Equalization, 134 Cal.App.3d 601.
Gross premiums.—The imposition of taxes on two foreign mail order insurers on the basis of total premiums collected from California insureds was proper where insurers' resident agents conducted a substantial number of investigations of claims and where such conduct was critical to the business conducted by the insurers in the State. The importance of foreign insurers' activities in the taxing state to the realization and continuance of their businesses therein is a significant factor in evaluating the contacts between the insurers and the state, and the insurers did not meet their burden of showing that the unapportioned tax was out of all proportion to the conduct of their businesses in the state, so as to lead to grossly disproportionate results. Illinois Commercial Men's Association v. State Board of Equalization, 34 Cal.3d 839.
Gross premium insurance taxes imposed on an insurer's "minimum premium plan," which allowed the policyholder to pay claims up to a certain point, thereby reducing the amount of actual premiums paid, did not violate the insurer's equal protection rights, even though other insurers' similar plans under "Taft-Hartley trusts," which are funded by employer contributions but are operated for the "sole and exclusive benefit" of the employees, were not taxed. At most, the Board made an erroneous application of its , arising from the fact that federal governed Taft-Hartley trusts. Thus, there was not the type of invidious discrimination against which the equal protection guaranty is meant to protect. Great-West Life Assurance Company v. State Board of Equalization, 19 Cal.App.4th 1553.
Gross premiums do not include amounts of health care claims paid by an employer to its employees under a "split funded group plan", since the insurer was not obligated to pay the claims if the employers failed to do so, there was no reversion to standard coverage if employers failed to pay, and employers never owed or paid conventional premiums. Absent such factors, the obligations of the insurer and employers were not inextricably intertwined, and employers did not act as "mere agents" of insurer for collecting premiums. Aetna Life Insurance Co. v. State Board of Equalization, 11 Cal.App.4th 1207.
Gross premiums do not include amounts of health care claims paid by employers who assumed the obligation to pay their employees' claims up to an annual "trigger-point" amount. As to those claims, the employers were acting as separate insurers and were not agents of the insurer, even though the insurer retained control over administration of the plans. The insurer assumed no primary or secondary liability for payment of claims below the annual trigger point, and, in the event of default by an employer, the contracts did not automatically revert to conventional policies. In addition, the trigger point exceeded the actuarially expected level of claims, which shifted an insurance risk to the employers. Prudential Insurance Co. v. State Board of Equalization, 21 Cal.App.4th 458. An insurer was entitled to a refund of taxes it paid on claims for which the insured employer was liable under a plan by which the insurer provided administrative services, but was only liable for claims to the extent they exceeded a trigger point of 125 percent of the actuarially predicted level. The fact that the insurer provided administrative services did not mean the employer was funding below trigger point claims as an agent of the insurer rather than a separate insurer. Under the plan, the insurer's risk was minimal, while the employer assumed the risk claims would exceed the actuarially expected level. And, the obligations of the insurer and employer were not "inextricably intertwined" so as to make the employer a mere agent of the insurer. Lincoln National Life Insurance Co. v. State Board of Equalization, 30 Cal.App.4th 1411.
Insurance premiums tax.—The legislative power to change this tax can be exercised through an initiative. Therefore, Revenue and Taxation Code Section 12202.1, enacted as part of Proposition 103 and delegating the power to raise the rate of the tax to the State Board of Equalization, is valid. The Legislature need not prescribe the exact method by which a tax is to be fixed, but may delegate to its taxing officers the power to adopt a suitable method. The essential requirement is the Legislature's specification of a standard to which the Board is directed to conform; but it may leave to the Board to determine how to implement the standard. State Compensation Insurance Fund v. State Board of Equalization, 14 Cal.App.4th 1295.
Income.—Subdivision (c), which provides that title insurers are taxed on the basis of all income upon business done in the state, does not define the term "all income," nor do related statutes. In light of Revenue and Taxation Code Section 17071, defining "gross income" in terms of federal , it is appropriate for courts to look to state and federal definitions of "income." So doing, payments of title insurance claims made by underwritten title companies, pursuant to underwriting contracts between title insurers and the companies, were not income for purposes of calculating the insurers' tax liability. When a company fulfilled its obligation to the insurer by paying its portion of the claim, the insurer did not realize any additional gain. Since there was no gain, there was no income. Title Insurance Co. of Minnesota v. State Board of Equalization, 4 Cal.4th 715.
Doing business.—Two foreign insurers who solicited business by mail from outside the state were doing business in the State where they employed agents within the State to perform important functions, such as investigation of and settlement of claims, in connection with the administration of policies issued. The fact that such agents were independent contractors was of little significance for purposes of determining whether requirements for due process were met where character and extent of insurers' activities in the State were sufficient to form the "definite link" and "minimum connection" required. Illinois Commercial Men's Association v. State Board of Equalization, 34 Cal.3d 839.
Tax in lieu of other taxes.—Doing insurance business that is subject to the gross premiums tax confers upon the insurer a status that entitles it to the broad exemption from paying state and local taxes of any kind except real property and motor vehicle taxes and fees. Thus an insurance company is exempt from taxes imposed by a city on revenues derived from the rental of an office building and operation of a parking lot owned by it and from a tax on use of electric power in the building. Mutual Life Ins. Co. v. City of Los Angeles, Mutual Life Ins. Co. v. State Board of Equalization, 50 Cal.3d 402.
ERISA.—Section of Employee Retirement Income Security Act which prevents states from regulating benefit plans simply because they provide insurance for covered employees did not preclude Board from applying gross premiums tax to benefits fiduciaries paid employees under plans, where tax was imposed on insurance companies, not benefit plans. General Motors Corp. v. State Board of Equalization, 815 Fed.2d 1305, 824 Fed.2d 816.
Estoppel.—The State is not estopped to collect from foreign mail order insurers taxes for past years, despite a letter by a Department of Insurance official which stated an understanding that state could not constitutionally regulate mail order insurers, where the letter did not refer to taxation and could not have been relied upon as referring to it. And the insurers could not have relied on any such representation since the letter was not written by an official of the board authorized to assess the tax, since the insurer never sought a ruling or made any inquiry of the board, and since the letter referred only to an "understanding" and could not be interpreted as a definitive ruling on the question of taxation. A failure to collect a tax authorized by a statute is insufficient to justify estoppel, even if the taxpayer relies on an erroneous construction of a statute by an official. Illinois Commercial Men's Association v. State Board of Equalization, 34 Cal.3d 839.
Sales taxes.—Neither Article XIII, Section 28(f) nor former Article XIII, Section 144/5 forbids the imposition of sales tax on retail sales of personal property to insurance companies. Occidental Life Insurance Co. v. State Board of Equalization, 135 Cal.App.3d 845.
Decisions Under Former Article XIII, Section 144/5.
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, 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, 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., 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., 10 Cal.2d 304.
Sections 685 and 685.3 of the Insurance Code, which impose the retaliatory tax provided in (f)(3), are constitutional. Franklin Life Insurance Co. v. State Board of Equalization, 63 Cal.2d 222.
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 Co. v. State Board of Equalization, 63 Cal.2d 222; Atlantic Insurance Co. v. State Board of Equalization, 255 Cal.App.2d 1, appeal dismissed, 390 U.S. 529.
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 fully bound to return. It does not include dividends paid to members of a mutual company. Northwestern Mutual Life Insurance Co. v. Roberts, 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, 53 Cal.App.2d 49.
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, 192 Cal. 369. Cf. Northwestern Mutual Life Insurance Co. v. Roberts, supra.
Gross premiums.—The term "gross premiums" includes the following: assessments (Bankers Life Co. v. Richardson, 192 Cal. 113; Western Travelers Accident Assn. v. Johnson, 14 Cal.App.2d 306); the consideration paid for annuity contracts (Equitable Life Assur. Society v. Johnson, 53 Cal.App.2d 49); the full sums received by bail bond agents from those desiring bail bonds (Groves v. City of Los Angeles, 40 Cal.2d 751); the entire cost of an employee benefit plan, whether paid from the employer's funds or financed by deductions from the salaries of employees (Metropolitan Life Insurance Co. v. State Board of Equalization, 32 Cal.3d 649).
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, 31 Cal.App.2d 178. Interest charged and collected on installment notes executed by insureds for the payment of premiums was no more than income from an investment (loans to insureds) and did not constitute gross premiums, although service charges therefor, amounts calculated to cover the company's increased overhead for handling and collecting the notes, did, Mercury Casualty Co. v. State Board of Equalization, 141 Cal.App.3d 43.
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, 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, 169 Cal.App.2d 165.
Deduction of real property taxes.—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. The Northwestern Mutual Life Insurance Co. v. Johnson, 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, 73 Cal.App.2d 548.
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, 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., 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, 139 Cal.App.2d 468.
Retaliatory tax.—A retaliatory tax on out-of-state insurers doing business in California, when the insurers' states of incorporation imposed higher taxes on California insurers doing business in their states than California would otherwise impose on those states' insurers doing business in California did not violate the commerce clause, since the McCarran- Ferguson Act removes any commerce clause restriction upon a state's power to tax the insurance business, and it did not violate the equal protection clause, since California's promotion of its domestic insurance industry by deterring barriers to interstate business is a legitimate state purpose. Western And Southern Life Insurance Co. v. State Board of Equalization, 99 Cal.App.3d 410, aff'd 451 U.S. 648.
Other taxes.—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, 93 Cal.App.2d 17; Groves v. City of Los Angeles, 40 Cal.2d 751.
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, 145 Cal.App.2d 60.
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, 47 Cal.2d 384.