AIA Files Appeal with Calif. Board of Equalization on Retroactive Workers’ Comp Tax

The American Insurance Association (AIA), American International Companies and Liberty Mutual Insurance Company have filed an appeal with the California Board of Equalization (BOE), the state’s highest tax policy entity, challenging recent efforts by the California Department of Insurance (Department) to impose retroactive taxes on payments made by employers under workers’ compensation deductible policies. The April 5 appeal requests that the BOE quickly withdraw the Department’s notice and any requests for assessments sent to insurers.

“We strongly disagree with the Department’s assertion that reimbursements under deductible policies are ‘premium’ subject to gross premium taxation. Statutory language, legislative history, an opinion by the California Attorney General’s Office and the Department’s own actions and correspondence provide the basis of our legal challenge to this new tax,” Mark Webb, AIA vice president, western region, commented.

April 1 was the deadline for insurers to begin paying the taxes on reimbursements paid by employers in 1997, as requested in the Department’s Feb. 25 notice. Insurers that did not comply with this request have been issued deficiency notices from the BOE. Deductible workers’ compensation polices were established in the Insurance Code by AB 3075 (Costa), sponsored by the Independent Insurance Agents and Brokers Legislative Council (now IBA West), in 1994.

The Department’s Feb. 25 notice represents the first time the Department has tried to collect taxes in the seven years these programs have been in place. The estimated liability for taxes on these payments would be in excess of $100 million should the tax be upheld.

“We are hopeful that the BOE will carefully review our legal analysis and find that the Department exceeded its authority and misinterpreted the statute which created this cost-saving program for employers,” Webb concluded.

AIA is continuing to pursue a separate action before the Office of Administrative Law asserting that the interpretation of the taxable nature of these payments should have been subject to the California Administrative Procedures Act, which would have provided an opportunity for affected insurers and businesses to raise the issues now also being argued before the BOE.