The Maryland Court of Special Appeals (“CSA”) affirmed the Circuit Court for Anne Arundel County’s determination that a captive insurance company subject to the state’s premium tax as an unauthorized insurer was exempt from the corporate income tax on its non-premium-related income.1
Taxation of insurance companies in Maryland
Maryland generally imposes an income tax on the taxable income of each corporation doing business in the state.2 Consistent with constitutional limits, Maryland taxes all foreign corporations based on the portion of their income derived from or reasonably attributable to their in-state trade or business.3
Like most states, however, Maryland treats insurance companies differently than general businesses. Pursuant to Title 6 of the Insurance Article of the Maryland Code, authorized insurance companies pay a 2% tax on all new and renewed premiums that are allocable to Maryland and written during the preceding tax year.4 For such insurance companies, the premium tax is the only tax they pay, as insurance companies subject to taxation under this provision are exempt from the Maryland corporate income tax.5 For insurance companies that are unauthorized6 under Title 6 of the Insurance Article, a 3% tax is imposed on premiums under Title 4 of the Insurance Article, instead of the 2% tax on authorized insurance companies.7
The taxpayer, a captive insurance company8 licensed and incorporated in Vermont, provides insurance for its parent company retailer, its subsidiaries and affiliates in situations where they cannot obtain market coverage for excess earthquake risks. The taxpayer wrote all of its insurance policies in Vermont, but insured some risks in Maryland arising from its parent’s retail department stores based in Maryland.
During a 2010 audit of the corporate parent, the Maryland Comptroller discovered that an affiliate had claimed roughly $2 billion in deductions for interest payments made to the taxpayer. Historically, the taxpayer paid premium tax in Vermont but did not pay premium or corporate income taxes in Maryland. The taxpayer did not earn Maryland premiums during its 1997-2003 tax years, but had substantial interest income related to non-premium-related investment income.9 Following the audit, the amount claimed as deductions by the affiliate was added back to the affiliate’s taxable income and assessed against the taxpayer. The Comptroller ultimately assessed the taxpayer approximately $24 million in tax, penalties and interest for the 1996-2003 tax years based on this interest income.
The taxpayer appealed the Comptroller’s assessment to the Maryland Tax Court, which held that the taxpayer was subject to tax as an authorized insurance company under Title 6 of the Insurance Article and qualified for a corporate income tax exemption. The Comptroller appealed, arguing that the taxpayer was not subject to taxation under Title 6 because it was an unauthorized insurer subject to taxation instead under Title 4 of the Insurance Article. On appeal, the Circuit Court for Anne Arundel County held that the taxpayer was exempt from the corporate income tax, either as an authorized insurer under Title 6 or as an unauthorized insurer under Title 4.
Following a further appeal in 2019 by the Comptroller, the CSA held that the taxpayer did not qualify as an authorized insurer because it did not have, and was not required to have, a certificate of authority from the Maryland Insurance Commissioner.10 However, the CSA declined to consider whether Title 4 provided a corporate tax exemption for unauthorized insurers, even though a provision in Title 4 states that the premium tax on unauthorized insurers applies “instead of all other State taxes.”11 The CSA remanded the case to the Tax Court to determine whether the taxpayer was exempt from corporate income tax because it was subject to a premium tax as an unauthorized insurer under Title 4.
Tax Court’s decision
At the CSA’s direction, the Tax Court concentrated on the issue of whether Title 4 of the Insurance Article provides a corporate tax exemption to captive insurance companies like the taxpayer.12 The Tax Court granted summary judgment in favor of the taxpayer and held that the taxpayer was not subject to corporate income tax. The Comptroller unsuccessfully argued that the taxpayer, as an unauthorized insurance company, is subject to Maryland corporate income tax because Title 4 levies a tax on insurance premiums rather than insurance companies. Further, the taxpayer did not earn any Maryland premiums from 1997-2003, but had substantial non-premium-related investment income. According to the Comptroller, the exemption provided by Title 4 applies only to insurance-related income.
The Tax Court explicitly rejected the Comptroller’s argument that the exemption language included in Md. Code Ann., Ins. Sec. 4-209(c) is meant only to exempt unauthorized insurers from sales and use tax, citing a previous decision in support of its conclusion that the Maryland legislature intended that unauthorized insurance companies are exempt from all other Maryland taxes.13 Further, the Tax Court found no basis in the Comptroller’s position that the income of any unauthorized insurer is subject to Maryland corporate income tax. Finally, the Tax Court disposed of the Comptroller’s argument that “it defies logic or common sense” to conclude that the legislature intended the exemption to shelter the taxpayer from all tax on approximately $2 billion of income from non-premium receipts. Instead, it reasoned, the legislature was fully aware that corporate income tax was included in the meaning of “all other State taxes” set out in the exemption. Accordingly, the Tax Court reversed the Comptroller’s assessment of corporate income tax. The Comptroller appealed this decision to the Circuit Court for Anne Arundel County.
Circuit Court’s decision
On June 14, 2021, the Circuit Court for Anne Arundel County affirmed the Tax Court’s decision and held that the plain meaning of the exemption language provided in Md. Code Ann., Ins. Sec. 4-209(c) is unambiguous.14 In its decision, the circuit court found that the plain meaning of the statute is a reasonable interpretation of legislative intent and any unintended consequences would be for the legislature to remediate. The Comptroller appealed this decision to the CSA a second time.
Appellate Court’s decision
On appeal, the CSA considered whether the Tax Court erred as a matter of law in concluding that Md. Code Ann., Ins. Sec. 4-209(c) provides a total exemption on income taxes for the taxpayer’s non-insurance-related income. The Comptroller continued to argue that Md. Code Ann., Ins. Sec. 4-209(c) is ambiguous and because it relates to an exemption from the corporate income tax, any ambiguity should be construed against the taxpayer. Also, the Comptroller argued that the Tax Court mistakenly interpreted the phrase “instead of all other State taxes” to create an exemption of all other state taxes imposed on unauthorized insurers and “fail[ed] to view the provision as part of the larger statutory scheme.” The taxpayer successfully argued that Title 4 of the Insurance Article is unambiguous. Furthermore, the taxpayer contended that unauthorized insurers are exempt from Maryland corporate income tax regardless of whether they paid the premium tax.
Ultimately, the CSA considered the natural and ordinary meaning of the language in Md. Code Ann., Ins. Sec. 4-209(c) providing that the premium tax shall be “instead of all other state taxes.”15 After concluding that the statutory language is clear and unambiguous, the CSA held that “according to the statute, as written, the premium tax is instead of all other Maryland state taxes.” Finally, the CSA held that the Tax Court reached a sound conclusion that was consistent with applying the correct legal standard of giving the statute its plain meaning.
The CSA’s latest decision appears to be the final word on this matter, as the Maryland Supreme Court recently declined to review this case.16 This is a positive decision for business enterprises with captive insurance companies similarly situated to the taxpayer because the court interpreted the statutory language to exempt the taxpayer’s substantial interest income from corporate income tax. The exemption in the insurance statute prevented the taxation of this income even though it was considered to be non-insurance-related income. Furthermore, the exemption applies if the captive insurance company is subject to the premium tax even if it does not actually pay the tax.
The Maryland Comptroller tried to argue that the relatively clear statutory language providing that the premium tax on unauthorized insurers applies “instead of all other State taxes” was ambiguous. In rejecting this argument, the Maryland courts consistently considered the plain meaning of the statutory language, disagreeing with the Comptroller’s efforts to interpret this statute in a manner that would require taxation of the interest income. This decision has significance beyond the tax context because it reinforces the judicial doctrine that the plain meaning of statutory language should be applied by courts unless the language truly is ambiguous. It should be noted that the case also highlights the Comptroller’s continuing persistence in challenging intercompany transactions that have the effect of minimizing tax revenue in a separate reporting environment.
1 City of Maple Heights, Ohio v. Netflix Inc. & Hulu Inc., No. 2021-0864, Ohio Supreme Court, Nov. 30, 2022; City of Knoxville, Tenn. v. Netflix, Inc. et al., No. M2021-07701-SC-R23-CV, Tennessee Supreme Court, Nov. 22, 2022; City of Ashdown, Ark. et al. v Netflix Inc. & Hulu LLC, No. 21-3435, U.S. Court of Appeals for the Eighth Circuit, Nov. 8, 2022; City of Reno, Nev. v. Netflix, Inc. & Hulu, LLC, 52 F.4th 874 (9th Cir. 2022).
2 Md. Code Ann., Tax-Gen. § 10-102.
3 Md. Code Ann., Tax-Gen. § 10-402(a).
4 See Md. Code Ann., Ins. § 6-102.
5 Md. Code Ann., Tax-Gen. § 10-104(4).
6 An unauthorized insurer is defined as an insurer which does not hold a certificate of authority in Maryland. Md. Code Ann., Ins. § 1-101(rr).
7 Md. Code Ann., Ins. § 4-209(b).
8 Captive insurance companies operate like typical commercial insurance companies but are usually wholly-owned subsidiaries that provide insurance to their non-insurance parent company and affiliates. A captive structure often provides state income tax advantages, such as providing deductions for a parent company on premiums paid to the captive, allocating earnings to the captive in a lower tax jurisdiction, and potentially excluding the captive and its income in jurisdictions that require combined reporting.
9 The taxpayer received more than $2 billion in interest payments from 1996-2003, but only received $52 million of insurance premium revenue during this period.
10 Maryland Court of Special Appeals, No. 2184, Sept. Term, 2017, March 26, 2019 (unreported opinion).
11 Md. Code Ann., Ins. § 4-209(c) (emphasis added).
12 Maryland Tax Court, No. 13-IN-OO-0035, July 13, 2020. For a discussion of the Tax Court’s decision, see GT SALT Alert: “Maryland ruling exempts insurer from corporate income tax.”
13 See MEDCO v. Montgomery County, 64 A.3d 478 (Md. 2013). In that case, Montgomery County, Maryland attempted to restrict similar exemption language by interpreting a statute to exempt only direct taxes and not excise taxes. The Court interpreted “all or any” taxation to mean that the Maryland legislature intended a broad and expansive meaning of the exemption.
14 Circuit Court of Anne Arundel County (Maryland), No. C-02-CV-17-001285, June 14, 2021.
15 Emphasis added by court.
16 Maryland Supreme Court, Pet. Dkt. No. 249, Sept. Term, 2022, cert. denied, Dec. 19, 2022.
Jamie C. Yesnowitz
Principal, SALT Services
National Tax Office Leader
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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