Insurers Challenge New Calif. Comp Tax

The retroactive tax has created something of an industry furor. Last week the head of a large workers' compensation insurer denounced it as a physical shakedown for dollars.

The tax is like carnival rides "that turns you upside down in the hopes that maybe your change and wallet will fall out," complained Donald Mosier, chief executive officer of Kemper Alternative Risks at a Captive Insurance Companies Association seminar.

Mr. Mosier's comment came at the group's annual meeting in Tucson, Ariz. last week. California, Mr. Mosier said, "is attempting to retroactively impose premium taxes on workers' comp deductibles in California. And that's on premiums that basically were never charged, in fact."

Mark Webb, AIA vice president, western region in Sacramento said that, "We disagree with the Department's interpretation of the taxable nature of these reimbursements and strongly oppose how the department notified insurers of its interpretation. It is self-evident that when an agency of state government changes its interpretation of a statute, that decision should be subject to the due process protections of rule-making proceedings."

The California Department of Insurance's notified workers' comp insurers on Feb. 25 of the tax on loss reimbursements received by insurers from employers under deductible policies of insurance .

AIA said the decision reverses the industry's understanding of the nature of these reimbursements since the inception of the law in 1995. The department is seeking premium taxes exceeding $100M going back to 1997, the AIA calculated.

Upon receiving notice of the department's action, AIA submitted a Request for Determination with the Office of Administrative Law, seeking its opinion regarding whether the department's notice violated the provisions of the Administrative Procedures Act. A decision on that request is pending. AIA's request was filed Feb. 28.

In addition, late last week AIA said it joined with other insurance industry partners to pursue this matter before the State Board of Equalization, which has ultimate authority over tax matters. Several business and tax organizations share AIA's concerns over this issue.

"The business community is justifiably concerned over the department's actions. We appreciate the support the business community is providing, which shines light on this abuse of the rule-making process," Mr. Webb said.

He continued that, "Now is not the time to further burden the business community with more than $100 million in costs when the basis of that decision is a regulatory interpretation made behind closed doors."