At a premium: How Wayfair impacts insurers

US map With its landmark ruling last year in South Dakota v. Wayfair, Inc., the U.S. Supreme Court expanded the traditional consequences of nexus in the area of commerce from physical presence to economic presence. While this economic nexus change has obvious and more immediate consequences for online retailers, who will now be required to collect sales and use taxes on every transaction regardless of where it occurs, the repercussions will radiate across all industries and affect other state taxes.

For insurers, the impact could quickly extend well beyond the obvious. The Wayfair ruling has the potential to introduce multiple layers of taxes that previously had not been a factor for the industry while challenging the validity of some business strategies.

Casting a wider tax net For insurance companies, the immediate impact of the Wayfair ruling is the same as it is for any other company.

“Currently, the effect is agnostic to insurance companies,” explains John Forni, managing director, Tax Reporting and Advisory at Grant Thornton. “They are being presented with the same challenges every other company is faced with, the responsibility for the collection of applicable sales and use taxes.”

The specifics of that responsibility differ state to state. With many states in need of increased revenue sources, those specifics, however, are also likely to be revisited by the tax authorities. As they do, the cost of doing business across state lines is expected to rise.

“It may be a gradual process, but ultimately we believe the states are going to see where they have the opportunity and ability to levy additional taxes on insurers,” says Art Burkard, managing director, State and Local Tax.

After initially focusing on the implementation of sales and use tax collection requirements, the broader interpretation of nexus is likely to trigger the re-examination of other state taxes. We believe direct and premium taxes will be among them.

Though insurance companies generally pay premium taxes, a few jurisdictions currently subject them to direct taxes as well. However, more states may be encouraged to assess both post-Wayfair. Whether they do or don’t, a move to expand the taxes on premiums is very likely. Insurers that have already moved to launch or partner with fintech platforms will be the most vulnerable if this occurs. Conceivably, the impact could affect their underlying business strategies.

A change in how premium taxes are handled also would be particularly burdensome to insurers in the mobile risk area. For example, if a trucking company has a home base in Maine and regularly delivers goods to Boston, a premium tax may now be levied in both places.

“The question is going to be under Wayfair how aggressive the states are going to get,” adds Forni. “If the truck passes through three states, might that third state also assess a tax?”

How we got hereWayfair, Inc. an online home goods retailer contented its lack of a physical presence in South Dakota, among other states, exempted it from having to collect and remit sales tax due to its lack of nexus. The argument was supported by previous Supreme Court rulings. Though, those rulings, which exempted sellers without an in-state presence from collecting sales or use taxes on their transactions, predated the rise of e-commerce. With the Court’s ruling in favor of South Dakota, the old rules no longer apply. Similarly, health insurers could face an increased premium tax liability if a Wayfair economic nexus approach is adopted since their coverage applies wherever the insured is when a covered event occurs. Any domestic insurance company writing into a state on a non-admitted basis could also be subject to premium tax in that state.

Even off-shore companies writing insurance on U.S. risk could be subject to premium taxes at some point. Multinationals, in particular, could end up being taxed by multiple authorities on the same revenue stream.

What to do despite all the unknowns While many unknowns remain as the states begin revisiting their tax codes, a wait-and-see strategy is not advised.

“We think the era of just being reactive to change is over. We are telling our clients to be more proactive about developing a playbook with the understanding that adjustments will be needed as more becomes known,” says Burkard.

Here are some of the actions Burkard and Forni suggest insurers take now to ensure they are ready to address the operating and financial consequences once the specifics are known.

  • Understand the current tax requirements in jurisdictions where you conduct business given the new expansive definition of economic nexus.
  • Monitor the states where you now have nexus for tax law changes.
  • Start evaluating your internal infrastructure and processes. Technology and systems upgrades may be needed to ensure they can support the increased specificity in accounting for transactions, on a state-by-state and tax-by-tax basis.
  • Know when tax reserves need to be established and start accruing accordingly.
  • Analyze the probable consequences of increased taxes on each business line. Newer products may represent combinations of different types of services, eventually subjecting them to hybrid tax calculations.
  • Anticipate where pricing may need to be adjusted and whether the cost of doing business in some states versus others could warrant a re-evaluation.
  • Factor in potential premium, sales and use, and income taxes under the new scenario before proceeding with any new initiatives such as an expansion of mobile operations or online partnerships.

While uncertainty regarding how and when the Wayfair ruling will impact insurers abounds, your future tax obligations, compliance, and accounting processes will need to change.


John Forni
Managing Director, Tax Reporting and Advisory
T +1 212 542 9865

Art Burkard
Managing Director, State and Local Tax
T +1 212 542 9600