Tax on Insurers: Premiums, Retaliatory Tax, and Apportionment
Core Concepts
California taxes insurers under Article XIII, Section 28 of the state constitution and the Insurance Code. The primary levy is the gross premiums tax, imposed in lieu of most other state and local taxes on insurers. The rate is 2.35% on gross premiums (with a reduced rate for certain ocean marine insurance). Insurers also face a retaliatory tax: if another state imposes higher taxes on California insurers than California imposes on that state's insurers, California imposes the higher amount to retaliate.
Key Mechanics
- Gross premiums include premiums received on policies covering California risks; apportionment may apply for multistate insurers.
- Ocean marine insurance is taxed at a reduced rate (historically 5% of gross premiums, subject to change) - candidates should verify current statutory rates.
- Title insurers and life insurers may have distinct treatment; know which premiums are included or excluded.
- The retaliatory tax compares the burden imposed by the insurer's home state on California insurers versus California's burden on that state's insurers.
Traps
- Assuming the gross premiums tax is a sales tax or a franchise tax; it is a separate, in-lieu levy.
- Forgetting that the retaliatory tax can increase, not decrease, the amount owed.
- Misapplying the ocean marine reduced rate to all marine insurance.
- Overlooking apportionment for multistate insurers.
Rule of Thumb
If a question mentions an out-of-state insurer and a comparison of tax burdens, it is testing the retaliatory tax. If it mentions premiums on California risks, it is testing the gross premiums tax and apportionment.
Exam Strategy
Identify the type of insurance and the insurer's domicile first; these determine which rate and which tax apply.