A CDI Taxation Oversight Draws Fire from Insurance Industry
By Michelle Logsdon - March 1, 2002As the month of April quickly approaches, a painful chill creeps up the collective taxpayer spine. But the air is especially nippy for California insurers after the Feb. 28 release of a California Department of Insurance (CDI) “Notice” advising them that deductibles collected during 2001 are subject to premium taxation.
“The California Board of Equalization [BOE] has never defined these deductibles as taxable,” said Mark Webb, American Insurance Association (AIA), western region. “This decision is an abuse of the process because the Department has acted without any public input or oversight by the Administrative Procedures Act.”
A 1995 law created an open rating marketplace allowing insurers to use deductibles. They weren’t popular at first because rates dropped significantly after the law was passed according to Scott Edelen, CDI’s deputy insurance commissioner, communications. Edelen told adjustercom.com, “As the market has hardened and rates risen, deductibles have become more popular. Large employers that choose not to be self-insured are typical policyholders.”
Deductibles can make insurance policies more affordable for some employers and might be attractive to insurers in cases where no claims are filed above the deductible amount. The California Insurance Code Section 11735(e)(2) requires insurers to pay compensation claims in full even if the employer never pays the deductible, but that risk is rather small according to Edelen and does not deter insurers from offering policies with deductibles.
When asked why the CDI made this decision so many years after the law was passed, Edelen said it was a pretermission. “The Legal and Financial Surveillance Divisions of CDI brought the issue forward on February 4, 2002. We have notified companies of this oversight and have corrected the oversight. The Premium Tax Audit Unit of CDI will now be incorporating the assessment into its audits.”
The deductibles will be taxed as if they were premium payments. California’s premium tax rate is set statutorily, said Edelen, at 2.35 percent. “CDI believes it is fairly enforcing the revenue laws of the State and it is our responsibility to do so.”
“This decision is incomprehensible,” said Webb. “Until yesterday no one thought these deductibles were subject to taxation.”
Webb is not only objecting to the taxation of last year’s deductibles, CDI is also calculating the deductible amounts for the years 1997-2000 with the intent of assessing those charges in the near future.
CDI Financial Surveillance Branch issued a letter Feb. 27 asking California workers’ compensation insurers to submit the exact amount of work comp deductibles received during tax year 1997. Those companies with a zero deductible balance that year must provide a signed, notarized letter of declaration stating so. Either letter must be received by March 7.
Even though deductibles were allowed as early as 1995, CDI can only collect the taxes back to 1997 because of a four-year statute of limitations. Insurers must pay their annual taxes by April 1, 2002; therefore, the State has to bill them for the 1997 deductible taxes before that date. “If we don’t bill them by that date we can’t collect the taxes for 1997 at all,” Todd Keefe, senior tax auditor of BOE’s Excise Taxes Division, told adjustercom.com.
The bill is a non-final liability that does not necessarily have to be paid immediately, Bill Kimsey, principal auditor of BOE’s Excise Taxes Division, told adjustercom.com. The insurer has 30 days to file a petition for re-determination but interest will accrue. The interest rate is tied to the treasury market each year, but in general it ranges between 10 to 12 percent. “We encourage the taxpayers to pay the bill now to stop that interest accrual,” said Keefe.
“The timing of this decision is profound,” said Webb. “Seeking taxes retroactively to 1997 will further burden insurers and employers who are already struggling to deal with the permanent benefit increases contained in AB 749-Calderon.”
The workers’ compensation marketplace has been shaky for years but the events of Sept. 11 did not help matters. This taxation oversight could affect the financial solvency of some companies. Edelen said the CDI would monitor the marketplace as these taxes are assessed, but the Department must abide by its responsibility to “enforce the revenue laws of the State.” | 
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