Surplus line insurers should not be subject to California Constitution Section 28 taxes to the state, according to a California Court of Appeal decision that notes that these nonadmitted insurers already pay surplus line premium taxes.
The conflict arose when Stephen Silvers and Steven Gold (S&G) filed a complaint, alleging that surplus line insurer Lexington Insurance Co. had failed to pay Section 28 taxes, and sought the court’s declaration that the State Board of Equalization “was obligated to collect those taxes,” court documents indicate.
Although Lexington was not licensed in California, it was permitted to issue policies in the Golden State under state surplus line insurer laws. The company was not allowed to have offices, agents or employees in California, and was required to conduct all of its activity outside the state. The company did not pay Section 28 premium taxes for 10 years, and neither the SBE nor the Department of Insurance tried to collect taxes because the agencies reasoned that taxes were already covered by surplus line laws that impose a 3 percent premium tax on brokers responsible for the insurance contracts, or on the policyholders if no brokers were used, court documents state.
S&G believed that Lexington should have paid both the 3 percent tax and the 2.35 percent section 28 tax. But the trial court ruled that the Section 28 tax only applied to admitted insurers, which Lexington was not.
“Lexington did not have an office, employees or bank accounts in California. It did not directly receive premiums in California from its insureds, or physically issue or deliver policies in California,” the Court of Appeal said in its Sept. 30 ruling. “It adhered to the rule that, as an admitted company, it could not ‘transact insurance business in [California].’ Accordingly, the premiums on Lexington’s surplus line policies were not subject to a Section 28 tax. To conclude otherwise would imply that Lexington was acting unlawfully in California, even though it was in compliance with surplus line regulations.”
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