Calif. Retroactive WC Tax Appealed
By Caroline McDonald
NU Online News Service, April 10, 4:45 p.m. EST?Two insurers and an insurance company organization have filed a joint appeal with the California Board of Equalization challenging the state's decision to impose a retroactive tax on workers' compensation carriers.
The appeal to the state's highest tax policy entity was taken by the American Insurance Association, American International Companies, and Liberty Mutual Insurance Company. Their appeal challenges a Feb. 25 notice by the California Department of Insurance imposing retroactive taxes on deductible payments made by employers under their workers' comp policies.
The appeal requests that the Equalization Board quickly withdraw the department's notice and any requests for assessments sent to insurers, the Washington-based AIA said.
"We strongly disagree with the department's assertion that reimbursements under deductible policies are 'premium' subject to gross premium taxation," said Mark Webb, vice president for AIA's Western region. "Statutory language, legislative history, an opinion by the California attorney general's office, and the department's own actions and correspondence provide the basis of our legal challenge to this new tax."
Nicole Mahrt, director of public affairs for the AIA in Sacramento, said the organization has taken "the next step," and is still waiting to hear back from the Office of Administrative Law, which the AIA asked in March to review the state's decision.
The action before the Office of Administrative Law asserted that the interpretation of the taxable nature of the payments should have been subject to the California Administrative Procedures Act. This would have provided an opportunity for affected insurers and businesses to raise the issues now also being argued before the Equalization Board.
"We have sent our legal justification as to why we don't think the deductibles are premium," said Ms. Mahrt. "We're citing the actual language of the law that was passed eight years ago, as well as the very nature of the deductibles."
The deductible, she explained, is essentially "a credit risk for the insurer, and it's a shifting of the credit risk to the insurer, but it is not premium. Premiums are, in fact, reduced for employers based on these deductibles."
The intent and legislative history of the law, she said, was "to lower workers' compensation premiums for employers, and also to provide an incentive for employers to practice workplace safety."
The Downers Grove, Ill.-based Alliance of American Insurers announced last month that it was drafting a letter to California Insurance Commissioner Harry Low asking that more direction be given to insurers that were facing a filing deadline of April 1.
Insurers that did not comply with the April 1 deadline have been issued deficiency notices from the Equalization Board, the AIA said.
Deductible workers' comp policies were established in the Insurance Code in 1994, according to the AIA.
The department's notice represents the first time it has tried to collect taxes in the seven years these programs have been in place, the AIA said. The group estimated liability for taxes on these payments would be in excess of $100 million, should the tax be upheld.
"We are hopeful that the BOE will carefully review our legal analysis and find that the department exceeded its authority and misinterpreted the statute which created this cost-saving program for employers," concluded Mr. Webb.
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