Indiana Supreme Court holds that captive reinsurers failed to prove that they were “doing business” in Indiana and thus “subject to” premiums tax

My colleague Benjamin Blair co-authored this post.

Ordinarily, when a court rules in a tax appeal that the taxpayer was not doing business in the state, the taxpayer celebrates a hard-fought victory.  But “ordinary” was not on the docket today with the Indiana Supreme Court’s ruling in Indiana Department of Revenue v. United Parcel Service, Inc., Cause No. 49S10-1107-TA-417 (June 21, 2012). See

In Indiana and many other states, insurance companies are required to pay tax on earned premiums in lieu of state corporate income tax.  Slip op. at 2.  In Indiana, “there shall be no tax on the adjusted gross income of… [i]nsurance companies subject to tax under Ind. Code § 27-1-18-2 [the “gross premium privilege tax” or “premiums tax”].”  Ind. Code § 6-3-2-2.8(4).  The premiums tax applies to all foreign insurance companies doing business in Indiana, and is calculated by taking all premiums received on policies covering risks within the state, less (among other items) income received for reinsurance of risks within the state.  Ind. Code § 27-1-18-2(a).

UPS established insurance subsidiaries to insure its risks, but such corporate structures have federal tax disadvantages.  Slip op. at 4.  To avoid those disadvantages, UPS contracted with unrelated primary insurers, which in turn entered into reinsurance agreements with UPS’s affiliates.   Id.  This had the effect of avoiding the federal tax disadvantages while still allowing UPS to essentially self-insure.  Id.  On its Indiana consolidated corporate income tax return, UPS excluded the income of the affiliates, reasoning that the affiliates were “subject to” the premiums tax.  Id.  Because the premiums that the affiliates received were entirely for reinsurance, UPS argued that the premiums tax resulted in no taxable premiums.  Slip op. at 6.  UPS argued that its subsidiaries were “subject to” the premiums tax, but were never required to pay it.  Id.

The Indiana Tax Court, ruling on UPS’s motion for summary judgment in an unpublished decision (see determined that UPS had properly excluded the affiliates’ income, because the affiliates were “subject to” the premiums tax.  Slip op. at 7.  The Tax Court held that “to be ‘subject to’ the premiums tax … does not mean that one must ‘pay’ the premiums tax; rather, it simply means that one is ‘placed under the authority, dominion, control, or influence’ of the premiums tax.”  Id. (citing United Parcel Service v. Indiana Dept. of Revenue, Cause No. 49T10-0704-TA-24 (December 29, 2010)).

The Supreme Court, rather than focusing on the phrase “subject to” as the Tax Court and the parties had done, focused on language that requires insurance companies to be “doing business within Indiana” to be “subject to” the premiums tax.  The mere fact that the affiliates collected premiums for reinsurance of risks in Indiana does not ipso facto establish they were “doing business within” Indiana.

Citing an Indiana Court of Appeals case from 1917, the Court found that reinsurance transactions occurring outside of Indiana, even if they involved primary risks located in Indiana, do not amount to business done in the state.  Slip op. at 8-10 (citing State ex rel. Crittenberger v. Continental Insurance Co. of New York, 116 N.E. 929 (Ind. Ct. App. 1917)).  Because the affiliated reinsurers were located in Bermuda and the Virgin Islands, and the primary insurers were located in Boston and New York, the transactions occurred entirely outside of Indiana.  Id. at 10-11.  Nothing before the Court established that the affiliates were “doing business within” Indiana; therefore, because that was a necessary condition to being “subject to” the premiums tax, the Court reversed the Tax Court.  Id. at 11.

“Big Brown” may be feeling down.  But the case is not over.  It was simply remanded for “further proceedings” (which presumably are not scheduled for “next day” delivery).  This decision was issued in the context of UPS’s refund claim for and protest of adjusted gross income tax for 2000 and 2001.  Whether the final decision also goes beyond the “ordinary” is a question that will be answered another day.