Is an insurance company exempt from Colorado corporate income tax because it is 'subject to' the gross premium tax, even though all of its premiums are exempt from that tax?

Plain-English summary

An out-of-state insurance company exists for one purpose: offering Medicare Part D prescription-drug plans (administered by the federal Centers for Medicare & Medicaid Services). It's licensed as an insurer in dozens of states, files zero-liability gross premium tax returns in Colorado, and — because federal Medicare law (42 C.F.R. § 423.440(b)) bars states from taxing Part D premiums — owes no Colorado gross premium tax at all. The question: is it nonetheless exempt from Colorado corporate income tax because Colorado exempts insurers that are "subject to" the gross premium tax? The Department concluded yes — it is exempt.

Colorado imposes corporate income tax on C corporations' Colorado-source income (§ 39-22-301(1)(d)(I)), but exempts insurance companies that are "subject to" the gross premium tax (§ 10-3-209). The whole case turns on what "subject to" means. The Department held it means the company is the object of the gross-premium-tax statute — an insurance company the statute reaches — not that it must actually owe and pay the tax. Two reasons:

1. The legislature already exempts insurers from income tax even when they pay no premium tax. Fraternal associations (§ 10-3-109(1)(d)) and crop-insurance mutual-protective-association loss-fund premiums (§ 10-3-209(1)(d)(2)) are exempt from the gross premium tax yet still escape corporate income tax. If a company is exempt from income tax whether 1%, 99%, or 100% of its premiums are exempt, then 100%-exempt premiums (as here) are just "a matter of degree."

2. The "silo" framework. The legislature walled off insurance premium income (and investment income on it) into its own tax regime, separate from income tax. § 10-3-209(1)(c) makes the gross premium tax the only tax on that insurance income; the legislature didn't re-assert income tax where premiums are exempted. Had it wanted to tax the income in that gap, it would have said so.

The Department also rejected an analogy to "throwback"/"nowhere income" under the multistate compact (where income not "subject to" tax elsewhere — e.g., P.L. 86-272-protected income — gets thrown back). That framework exists to avoid untaxed "nowhere" income; the insurance silos are different, and the income-tax exemption applies even though the premium is also exempt. Here the exemption comes from federal law and the Supremacy Clause, not a state exemption, but the Department found that immaterial.

Important condition: the ruling depends on the company actually holding a Colorado Division of Insurance license and operating within the statute's jurisdiction. Without that license/jurisdiction, the company would not be exempt from Colorado income tax.

What this means for you

Insurance companies operating in Colorado

If you're an insurance company that the gross premium tax statute reaches, you're generally exempt from Colorado corporate income tax — even if you owe no premium tax because your premiums are exempt (by state carve-out or federal preemption). The key is being the subject of § 10-3-209 (a licensed insurer within its jurisdiction), not whether you write a premium-tax check. Keep your Colorado insurance license current; the exemption hangs on it.

Medicare/Medicaid and other federally regulated plans

Federal preemption of premium taxes (like Medicare Part D under 42 C.F.R. § 423.440(b)) does not drop you into Colorado income tax. The silo structure keeps insurance income out of the income-tax base whether the premium exemption is state or federal in origin.

Accountants and tax professionals

The holding is a statutory-interpretation point: "subject to the gross premium tax" = object of § 10-3-209, not actually liable. Support it with the fraternal-association and crop-insurance analogies and the § 10-3-209(1)(c) exclusivity ("silo") clause. Confirm the insurance license and jurisdiction — the Department made the exemption expressly contingent on them and disclaimed verifying the company's factual/legal representations.

Common questions

Q: Our insurer pays no Colorado gross premium tax. Do we owe corporate income tax instead?
A: Generally no. If you're an insurance company the gross premium tax statute reaches, you're "subject to" it and exempt from Colorado corporate income tax — even if your premiums are entirely exempt from the premium tax.

Q: Does it matter that the exemption comes from federal Medicare law rather than a Colorado statute?
A: No. The Department found the source of the premium-tax exemption immaterial; the income-tax exemption still applies because the company is the object of the gross premium tax statute.

Q: What does 'subject to' the gross premium tax actually require?
A: Being an insurance company within the statute's scope — not actually owing or paying the tax. The ruling is conditioned on holding a Colorado Division of Insurance license and operating within the statute's jurisdiction.

Q: Can other insurers rely on this ruling?
A: No. A private letter ruling binds the Department only as to the specific taxpayer and facts, and this one is expressly conditioned on the company's license and representations.

Citations and references

Statutes and rules:
- § 39-22-301(1)(d)(I), C.R.S. (corporate income tax on Colorado-source income)
- § 10-3-209, C.R.S. (gross premium tax on insurance companies); § 10-3-209(1)(c) (premium tax is the only tax on insurance income)
- § 10-3-109(1)(d), C.R.S. (fraternal associations exempt from gross premium tax)
- § 10-3-209(1)(d)(2), C.R.S. (crop-insurance loss-fund premiums exempt)
- 42 C.F.R. § 423.440(b) (federal Medicare Part D premium-tax preemption)

Source

• Landing page: Colorado All Letter Rulings
• Original PDF: PLR-08-001.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

PLR-08-001
November 23, 2008

XXXXXXXXXXXXXXX
Attn: XXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Re: XXXXXXXXX
Dear XXXXXXXX,
XXXXXXXXXXXXXXXXXXXXXX (“[Company]”) submitted a request, dated August 25,
2008,1for a private letter ruling pursuant to Department Regulation 24-35-103.5. This
letter is the Department’s private letter ruling.
Issue
Is the Company exempt from Colorado’s corporate income tax because the Company is
“subject to” Colorado’s gross premium tax, even though the Company is also exempt
from the gross premium tax?
Conclusion
The Company is exempt from Colorado’s corporate income tax.
Background
The Company asserts the following facts, which the department accepts as complete
and accurate only for purposes of this ruling. The Company is a [another state]
domiciled insurance company and a wholly owned indirect subsidiary of
XXXXXXXXXXXX [another company]. The Company was formed in 2005 for the sole
purpose of providing benefits as a prescription drug plan under the federal government’s

1 On August 25, 2008, the Company submitted a request for a “ruling.” By letter dated September
16, 2008, the department informed the Company that it had not submitted the base fee with the
request as required by Department Regulation 24-35-103.5. The Company submitted that
payment by letter dated October 9, 2008.

Medicare Part D program, which is administered by the Centers for Medicare and
Medicaid Services (CMS).
From its inception, the Company has offered only Medicare Part D plans and these plans
are made available to eligible participants in all 50 states and its territories. The
Company is licensed as an insurer in 36 states and has filed expansion applications to
become a licensed insurer in states where it is require to do so, and will file applications
in the remaining state upon satisfaction of seasoning requirements. The Company
operates under a waiver from CMS in states where it is not licensed. In addition to filing
license applications, the Company files zero liability gross premiums tax returns in all
applicable states, including Colorado.2
Discussion
Colorado imposes corporate income tax on domestic and foreign corporations doing
business in Colorado in an amount equal to four and sixty-three one-hundredths percent
of the net income of such C corporation derived from sources within Colorado. §39-22301(1)(d)(I), C.R.S. However, Colorado exempts from such tax insurance companies
that are “subject to” Colorado’s gross premium tax. Colorado’s gross premium tax is
imposed on insurance companies writing business in this state. The tax is measured by
the amount of premiums collected or contracted for on policies or contracts of insurance
covering risks in this state during the previous calendar year. §10-3-209, C.R.S.
The Company asserts that federal law prohibits states from imposing a premium tax for
the payment CMS makes on behalf of Part D plan or enrollees; or for any payment made
to Part D plans by beneficiary or by a third party on behalf of a beneficiary. 42 C.F.R.
§423.440(b) (“Medicare exemption”).3
The resolution of the issue in this case turns on the proper interpretation of the term,
“subject to,” in the income tax exemption statute. One interpretation would deny the
income tax exemption if an insurance company is exempt from the gross premium tax.
The Company, on the other hand, asserts that it is “subject to” the gross premium tax
because it is an insurance company that falls squarely within the gross premium tax
statute,4 and that it does not matter, for purpose of the income tax exemption, whether
some or all of the company’s gross premium revenues are exempt from that tax.
We conclude that the income tax exemption applies to an insurance company which is
the subject of the gross premium tax statute, regardless of whether the premiums of the
insurance company are otherwise exempt from the gross premium tax. We reach this
2 Our ruling is dependent on the Company holding a license from the Colorado Division of Insurance.

If the
Company does not have a license or if the Company does not operate in Colorado so as to come within the
jurisdiction of the statute and division, we would not conclude that the Company is exempt from Colorado
income tax.
3 The department accepts as complete and accurate the Company’s representation that federal law prohibits
Colorado from imposing the gross premium tax on the payments described here. However, the department
does not administer the gross premium tax and does not offer an opinion regarding the completeness or
accuracy of the Company’s representation. This ruling does not constitute a determination that any
representation of fact or law by the Company is complete and accurate.
4 As is true of other the Company representations, the department has not independently verified that the
company is an insurance company or that it is subject to the gross premium tax. These factual and legal
representations are presumed complete and accurate only for purposes of resolving the proper interplay
between the income tax exemption and a company exempted from the gross premium tax by reason of the
federal prohibition.

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conclusion for two reasons. First, and broadly speaking, it is clear that the legislature
intended to exclude insurance companies from income taxation even if they are exempt
from the gross premium tax. For example, fraternal associations are exempt from the
state’s income tax because they are specifically referenced in, and are subject to, the
gross premium tax statute. These fraternal associations also enjoy a complete
exemption from the gross premium tax pursuant to a specific exemption. §10-3109(1)(d), C.R.S. (fraternal associations are exempt from the gross premium tax).
Similarly, premiums generated by a mutual protective association writing only crop
insurance are exempt from the gross premium tax to the extent that revenues are
designated for a loss fund. §10-3-209(1)(d)(2), C.R.S. Such companies remain exempt
from Colorado’s corporate income tax notwithstanding the fact that only a portion of their
gross premiums are actually liable for the gross premium tax. Given that the income tax
exemption applies regardless of whether one percent or ninety-nine percent of the
company’s gross premiums are exempt, it is only a matter of degree that, as in this
particular case, one-hundred percent of the company’s gross premium revenues are
exempt from the gross premium tax. 5
Second, the legislative framework in which these taxes are placed also indicates the
legislature intended to “silo” income from premiums, and investment income from those
premiums, into its own tax matrix, separate and apart from Colorado income tax, and,
importantly, it intended not to reassert Colorado’s income tax in cases where the
premiums are exempted from the gross premium tax. The gross premium tax statute
states that the gross premium tax is the only tax (with certain exceptions not relevant
here) that applies to this insurance income. §10-3-209(1)(c), C.R.S. This prohibition
applies even though the statute then specifically excludes certain premium revenues
(noted above) from the gross premium tax, effectively leaving such premiums exempt
from all state taxes. Had the legislature intended to reassert the income tax in situations
where the premium tax is exempted from the gross premium tax, it would have included
a reference to income tax in §10-3-209(1). This “silo” view of insurance company
taxation is consistent with the legislature’s general treatment of insurance companies vis
a vis corporations.6
Thus, we have a statutory framework in which insurance companies are excluded from
income taxation regardless of whether they actually pay the gross premium tax. In the
present case, the exemption from the gross premium tax comes not from state statute,
but by virtue of federal legislation and the Supremacy Clause of the United States
Constitution. We do not believe, however, that this is a material difference in terms of
the interplay between these two statutes. The Company is an insurance company that is
the object of §10-3-209, C.R.S. and, therefore, exempt from the income tax statute. The
statutory framework makes it clear that an insurance company, which is the object of the

5 Compare, L.L.F. Realty Co. v. Fuchs, 273 A.D. 111, 75 N.Y.S. 2d 356 (N.Y. 1947) (property that was

removed from the property that is subject to assessment was nevertheless “subject to” tax and, therefore,
properly included in the calculation of budget limitations; there is no requirement that the property actually be
taxed).
6 Compare, Greiger v. Salzer, 165 P 240 (Colo 1914), in which the court held that the legislature created a
formation process for insurance statutes that is distinct from that process which normally governs
corporations.

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insurance statute, does not lose the income tax exemption if some or all of its premiums
are also exempt from the gross premium tax.
We note, however, that the contrary argument is not without substance. On first blush,
one could conclude that the Company is not subject to the gross premium tax because it
does not actually owe the tax. However, and for the reasons noted above, the statutory
framework indicates that “subject to” does not mean that the company must actually owe
the tax.
Similarly, in the area of income tax apportionment under Colorado’s multi-state tax
compact, income apportioned to another state is “thrown back” to Colorado if the income
is not “subject to” taxation in the other state. States, including Colorado for tax years
prior to January 1, 2009, have concluded that income is not “subject to” taxation of
another state if the income is protected under P.L. 86-272 (a federal prohibition against
states taxing income derived solely from solicitation of business in another state). See,
e.g., Colorado Regulation IV.3.(c), 1 CCR 201-3. We conclude, however, that the
analogy is inapplicable. The multi-state income tax framework is generally interpreted to
avoid “nowhere” income – that is, allowing one state, which would otherwise apportion
the company’s income to another state, to tax the income if the other state is prohibited
from taxing the apportioned income. In contrast, the gross premium tax statute and the
income tax statute are akin to silos; the income tax exemption applies even though the
premium is also exempted under the gross premium statute.
In sum, we conclude that the Company is exempt from Colorado’s income tax because it
is an insurance company “subject to” the gross premium tax, and this exemption applies
regardless of whether the company’s premiums are exempt from the gross premium tax
by virtue of federal law. A contrary conclusion is inconsistent with the express terms of
§10-3-209, C.R.S. and the general statutory framework governing insurance companies.
This ruling is premised on the assumption that the Company has completely and
accurately disclosed all material facts. This ruling is further premised on the Company’s
representation that it is an insurance company within the meaning of §10-3-209, C.R.S.
and that, based on the facts set forth in its letter, federal law prohibits the state from
applying the gross premium tax. The department reserves the right, among others, to
independently evaluate the Company's representations. This ruling is null and void if
any such representation is incorrect and has a material bearing on the conclusions
reached in this ruling.
Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this
redacted version of the ruling will be made public within 60 days of the date of this letter.
Please let me know in writing within that 60 day period whether you have any
suggestions or concerns about this redacted version of the ruling.
Sincerely,
Office of Tax Policy
Colorado Department of Revenue

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