December 30, 2022
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the corporate income tax assessment issued to ***** (the “Taxpayer”) for the taxable year ended December 31, 2016.
FACTS
The Taxpayer and its affiliates filed 2015 and 2016 combined Virginia corporate income tax returns and consolidated federal income tax returns. The Department’s auditor removed ***** (Subsidiary A) from the combined returns because it filed a Virginia Insurance Premiums License Tax Surplus Lines Broker’s Annual Reconciliation Tax Report (Form 802) with the Department, resulting in an assessment of corporate income tax for the taxable year ended December 31, 2016. The Taxpayer appealed, contending that it was not an insurance company, or in the alternative, that its income came from intercompany sales.
DETERMINATION
For corporate income tax purposes, Virginia Code § 58.1-401 provides an exemption for “[i]nsurance companies to the extent such company is subject to the license tax on gross premiums under Chapter 25 (§ 58.1-2500 et seq.) of this title and reciprocal or interinsurance exchanges which pay a premium tax to the Commonwealth as provided by law.” The language “to the extent such company” serves to clarify that an insurance company would be subject to corporate taxation on income earned in a business separate from its insurance business. See Public Document (P.D.) 84-32 (3/12/1984) and P.D. 08-191 (12/01/2008).
Virginia Code § 58.1-2501 A imposes the tax on the gross premium income of “every insurance company . . . which issues policies or contracts, for any kind of insurance . . . and on every corporation which issues subscription contracts for any kind of plan . . . .” The authority to determine whether Subsidiary A was subject to the license tax on insurance premiums rests with the Bureau of Insurance (VBOI), a division of the Virginia State Corporation Commission (SCC).
Pursuant to Virginia Code § 58.1-2500, an insurance company is “any company engaged in the business of making contracts of insurance.” Reciprocal insurance and interinsurance are treated as the same and are defined as “insurance resulting from the mutual exchange of insurance contracts among persons in an unincorporated association under a common name through an attorney-in-fact having authority to obligate each person both as insured and insurer.” See Virginia Code § 38.2-1201.
The Taxpayer explains that it was required to file Form 802 as a result of it being licensed as a producer and surplus lines broker by the SCC, even though it reported no gross premium income and had no tax due. As such, the Taxpayer asserts that it was subject to Virginia corporate income tax and was properly included in the Taxpayer’s combined returns.
A surplus lines broker is “an individual or business entity licensed . . . to sell, solicit, or negotiate insurance on properties, risks, or exposures located or to be performed in the Commonwealth with eligible nonadmitted insurers.” See Virginia Code § 38.2-4805.2. Under Virginia Code § 38.2-4809 A, every licensed surplus lines broker or any person required to be licensed as a surplus lines broker is subject to the license tax on gross premiums under Chapter 25 (§ 58.1-2500 et seq.) on each policy of insurance procured by it during the preceding calendar year with an eligible nonadmitted insurer.
Although Subsidiary A could have been subject to license tax on gross premiums as a surplus lines broker pursuant to Virginia Code § 38.2-4809 A, it does not necessarily follow that Subsidiary A would be considered an insurance company for the purposes of the corporate income tax exemption under Virginia Code § 58.1-401. Surplus line brokers are separately defined in Title 38.2 of the Code of Virginia, which governs insurance generally, and they file different forms than insurance companies to report any premiums license tax liability. To the extent a corporation licensed as a surplus lines broker has income that is not subject to the premiums license tax, such income would be subject to corporate income tax.
In this case, Subsidiary A provided financial, accounting, tax, regulatory and compliance, information systems and technology, and actuarial claims and underwriting support systems not subject to the insurance premiums tax. In addition, Subsidiary A had Virginia payroll as well as property located in Virginia. As such, it appears that the Taxpayer was conducting activities that created nexus for Virginia corporate income tax purposes and that it had positive Virginia apportionment factors.
Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-120-323 B 1, members of an affiliated group are eligible to file a combined return if they are: (i) subject to Virginia income tax if a separate return were to be filed, (ii) affiliated as defined by Virginia Code § 58.1-302, and (iii) filing using the same taxable year. In this case, Subsidiary A was affiliated, had positive apportionment factors and the same year-end as the Taxpayer. Therefore, Subsidiary A was eligible to be included in the Taxpayer’s combined Virginia corporate income tax returns for the 2015 and 2016 taxable years. The case, therefore, will be returned to the audit staff to include Subsidiary A in the combined returns and adjust the assessment accordingly. After the audit is revised, an updated bill will be issued if a balance remains due.
The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3918.B