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The California Office of Administrative Law (OAL) has agreed to review the Department of Insurance’s (CDI) recent move to collect back taxes on workers’ compensation deductibles. CDI notified companies Feb. 28 that deductibles collected since 1997 would be subject to premium taxation.

The American Insurance Association (AIA), a trade organization representing more than 410 property and casualty insurers, spoke out against the new taxes and asked OAL to review the notice. Mark Webb, AIA’s western region vice president for state affairs, told adjustercom.com, “Since deductibles have been written since 1995, this is an interpretation of statute that requires administrative procedure.”

OAL will examine whether or not CDI violated California’s Administrative Procedures Act by not asking for public input on the action before sending out the notice. “We are very pleased that the OAL accepted our request,” said Webb. “OAL’s decision demonstrates that CDI’s notice warrants further examination.”

CDI’s 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 had to provide a signed, notarized letter of declaration stating so. Either letter had to be received by March 7. CDI did not respond to phone calls or E-mails concerning the number of companies owing money or the amounts owed.

Despite OAL’s review, the companies will still receive a bill from CDI by the end of this month. Insurers must pay their annual taxes by April 1, 2002. The deductibles will be taxed as if they were premium payments. California’s premium tax rate is set statutorily at 2.35 percent.

The bill is a non-final liability that does not necessarily have to be paid immediately, Bill Kimsey, senior auditor of the Board of Equalization 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 and 12 percent.

“The acceptance of AIA’s request for determination is the first step in a potentially lengthy process of challenging the Department’s actions before the OAL,” said Webb.