Must a tax-exempt school district pay the Article 33 insurance tax that its insurer lists as a separately stated charge in the health insurance premium?

Plain-English summary

The Clarkstown Central School District, a tax-exempt governmental unit, buys health insurance from an insurer taxed under Article 33. The premium includes a separately stated "state tax" amount. The district asked whether, as a tax-exempt organization, it must pay that amount.

The Department held it must -- because the tax is not on the district. The separately stated amount reflects the section 1502-a additional franchise tax imposed on the insurance corporation. The incidence of that tax is on the insurer, not the insured. Recovering the tax through the premium is not the equivalent of directly taxing the school district (following New York Telephone Co. v. County of Nassau). So the district's exempt status does not excuse the portion of the premium the insurer charges to recover its own Article 33 tax.

What this means for you

Tax-exempt does not mean exempt from a supplier's passed-through tax

A school district's (or other exempt entity's) exemption shields it from taxes imposed on it. It does not shield it from a supplier's tax that the supplier recovers through its price -- here, an insurer's Article 33 tax built into the premium.

Incidence is what matters

The section 1502-a tax's legal incidence is on the insurance corporation. A separately stated "state tax" line on your premium is the insurer recovering its cost, not New York taxing you. The label on the bill does not change who owes the tax.

Budget for it

Exempt buyers of insurance should expect the insurer's Article 33 tax to appear in the premium and should not assume their exemption removes it. The same incidence logic applies to other pass-through taxes recovered through price (compare the utility gross receipts tax in TSB-A-05(1)C).

Common questions

Q: Does a tax-exempt school district have to pay the insurer's separately stated state tax? A: Yes. The Article 33 section 1502-a tax is imposed on the insurer; the district indirectly bears the cost through the premium but is not being directly taxed.

Q: Whose tax is the "state tax" line on the premium?
A: The insurance corporation's. It is the insurer recovering its own Article 33 tax through the premium price.

Q: Does separately stating the tax change anything?
A: No. Separately stating it does not shift the incidence to the insured; the tax remains the insurer's burden recovered through price.

Citations and references

Statutes, regulations, and authorities:

• Tax Law section 1502-a (additional franchise tax on non-life insurance corporations)
• Tax Law Article 33 (franchise tax on insurance corporations)
• New York Telephone Company v. County of Nassau, 122 AD2d 124
• Clarkstown Central School District, TSB-A-04(18)C (Dec. 13, 2004)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a04_18c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(18)C
Corporation Tax
December 13, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C040722B

On July 22, 2004, a Petition for Advisory Opinion was received from Clarkstown Central School District, 62 Old Middletown Road, New City, New York 10956. The issue raised by Petitioner, Clarkstown Central School District, is whether, as a tax­ exempt organization, it is required to pay state taxes to an insurance carrier that is taxed under Article 33 of the Tax Law, as part of Petitioner’s health insurance premium. Petitioner submits the following facts as the basis for this Advisory Opinion. Petitioner is a governmental unit and is a tax-exempt organization. Petitioner states that in the calculation of its health insurance premiums by its insurer, an insurance corporation subject to Article 33 of the Tax Law, the premium includes a separately stated amount listed as “state tax.” Applicable law Section 1502-a of Article 33 of the Tax Law imposes a tax on non-life insurance corporations, and provides, in part: In lieu of the tax imposed by section fifteen hundred one of this article, every domestic insurance corporation, every foreign insurance corporation and every alien insurance corporation, other than such corporations transacting the business of life insurance, (1) authorized to transact business in this state under a certificate of authority from the superintendent of insurance ... shall, for the privilege of exercising corporate franchises or for carrying on business in a corporate or organized capacity within this state, and in addition to any other taxes imposed for such privilege, pay a tax on all gross direct premiums, less return premiums thereon, written on risks located or resident in this state. The tax imposed by this section shall be computed in the manner set forth in subdivision (a) of section fifteen hundred ten of this article as such subdivision applied to taxable years beginning before January first, two thousand three ... All the other provisions in section fifteen hundred ten of this article, other than subdivision (b) of such section, shall apply to the tax imposed by this section. In no event shall the tax imposed under this section be less than two hundred fifty dollars. Opinion In New York Telephone Company v County of Nassau, 122 AD2d 124, the defendant, Nassau County, did not pay that portion of its telephone bills attributable to three taxes imposed

TSB-A-04(18)C
Corporation Tax
December 13, 2004

2

upon the plaintiff, New York Telephone Company, by New York State and local governments, asserting that the policy of allowing the plaintiff to recover these tax payments from the consumer as an operating expense was impermissible since New York State municipalities are exempt from taxation unless otherwise stated. The Appellate Division held that the tax imposed under section 186-a of the Tax Law on a utility constitutes a part of the operating costs of the utility, and held that the “imposition of surcharges upon the defendant to recover these additional operating expenses is not the equivalent of directly taxing the municipality.” In Sempra Energy Trading Corp., Adv Op Comm T&F, December 18, 2002, TSB-A-02(23)C, it was held that receipts from the sale of natural gas to the Power Authority for consumption by the Power Authority were taxable receipts of Sempra under section 186-a of the Tax Law. Pursuant to the Public Authorities Law, the tax imposed under section 186-a may not be imposed on the Power Authority. However, it was determined that the tax was imposed on Sempra Energy as a sale for ultimate consumption or use by the Power Authority, and the tax was not directly imposed on the Power Authority even though the amount of tax imposed on Sempra was a separately stated item on the bill rendered to the Power Authority for its purchase of the gas. Following New York Telephone, supra, and Sempra, supra, the tax imposed on an insurance corporation under section 1502-a of the Tax Law is an expense of the insurance corporation that may be included in the price that the insurance corporation charges as a premium for the health insurance coverage provided to its customers. However, the inclusion of such expense in the amount charged as the premium is not the equivalent of directly taxing the purchaser of the insurance. In this case, when the insurance corporation computes the amount of the premium charged to Petitioner for its health insurance coverage, the insurance corporation includes amounts to recover its operating expenses, including an amount for the tax imposed on the insurer under section 1502-a of the Tax Law. However, the inclusion of an amount for franchise tax imposed on the insurer in the amount of the premium paid by Petitioner is not the equivalent of directly taxing Petitioner. The incidence of the tax imposed under section 1502-a of the Tax Law is on the insurance corporation, not the insured. The tax imposed under such section 1502-a is not being imposed on Petitioner through the insurance corporation.

DATED: December 13, 2004

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.