Is a construction subcontractor on a project for a foreign government's UN mission exempt from New York's tax on independently procured insurance from an unauthorized insurer?

Plain-English summary

New York imposes a 3.6% tax on independently procured insurance — insurance a person buys from an insurer not authorized to do business in New York (Tax Law § 1551, Article 33-A). A construction company (CCA Construction International, a subcontractor on a project to build a residence in New York for the Chinese Mission to the United Nations) had U.S. State Department authorization to buy goods and services tax-free for the project. It asked whether that authorization also exempts the insurance premiums it would incur from this special tax.

No. Article 33-A's exemptions (§ 1553) do not include this contractor, and — importantly — the State Department authorization covers goods and services, while insurance is neither. Under New York Insurance Law § 1101(a), an insurance contract is an agreement to confer a benefit on the happening of a fortuitous event — a contractual right, not a good or a service. So buying insurance is outside the tax-free authorization, and the contractor owes the Article 33-A tax on the premiums.

The Department flagged one exception: § 1553(d) exempts any foreign government. If the contractor could establish that it is an agency or instrumentality so closely connected to the foreign government that the two cannot realistically be viewed as separate entities (citing United States v. New Mexico and Arizona Dept. of Revenue v. Blaze Construction), it would be treated as the foreign government and would not owe the tax. The Department did not decide whether the subcontractor met that instrumentality test; it stated the exemption that would apply if the relationship were established.

What this means for you

Contractors and businesses buying coverage from non-admitted insurers

If you buy insurance from an insurer not authorized in New York, you — the buyer — generally owe the Article 33-A independently-procured-insurance tax. Authorizations or exemptions that cover purchases of goods and services do not automatically cover insurance, because insurance is a contractual right rather than a good or service.

Parties working on foreign-government or diplomatic projects

A foreign government itself is exempt (§ 1553(d)), and an entity that is genuinely an instrumentality of the foreign government may share that exemption. But a private contractor or subcontractor — even one authorized to make tax-free project purchases — is a separate taxpayer unless it can show it is essentially indistinguishable from the foreign government.

Accountants and tax professionals

Separate the buyer's status from the project's. The decisive points are (1) the policy came from an unauthorized insurer, triggering § 1551; (2) insurance is not "goods or services," so a goods/services authorization is irrelevant; and (3) the only realistic exemption here, § 1553(d), requires near-identity with a foreign government under the New Mexico/Blaze instrumentality standard.

Common questions

Q: Who pays the tax on independently procured insurance? A: The person who buys or renews a taxable insurance contract from an insurer not authorized in New York pays the 3.6% Article 33-A tax on the premiums.

Q: Does authorization to buy goods and services tax-free cover insurance? A: No. Insurance is a contractual right under Insurance Law § 1101(a), not a good or service, so a goods-and-services authorization does not exempt the premiums.

Q: Could the contractor ever be exempt?
A: Only if it could establish that it is an instrumentality so closely connected to the foreign government that the two cannot be viewed as separate entities, in which case § 1553(d)'s foreign-government exemption would apply.

Citations and references

Statutes, regulations, and authorities:

• Tax Law § 1551 (tax on independently procured insurance from an unauthorized insurer)
• Tax Law § 1553 (exemptions, including § 1553(d) for any foreign government)
• New York Insurance Law § 1101(a) (definition of insurance contract)
• United States v. New Mexico, 455 U.S. 720; Arizona Dept. of Rev. v. Blaze Construction, 526 U.S. 32
• CCA Construction International, Inc., TSB-A-07(4)C (Aug. 27, 2007)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a07_4c.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-07(4)C
Corporation Tax
August 27, 2007

Office of Tax Policy Analysis
Taxpayer Guidance Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C061127D

On November 27, 2006, a Petition for Advisory Opinion was received from CCA Construction International, Inc., 525 Washington Boulevard., Suite 2688, Jersey City, NJ 07310. Petitioner, CCA Construction International, Inc., provided additional information pertaining to the Petition on April 12, 2007. The issue raised by Petitioner is whether it is exempt from the tax imposed on independently procured insurance from an unauthorized insurance company under Article 33-A of the Tax Law. Petitioner submitted the following facts as the basis for this Advisory Opinion. China Construction America Construction International Inc. (CCACI) and its subcontractors have received authorization from the United States Department of State to purchase goods and services tax-free for the sole purpose of constructing a residential building in New York for the Chinese Mission to the United Nations. Petitioner is a wholly owned subsidiary and, in relation to this construction project, a subcontractor of CCACI. Petitioner will incur premiums for the purchase of insurance related to this construction project. Applicable law and regulations Section 1551 of Article 33-A of the Tax Law provides: Imposition of tax. There is hereby imposed on any person who purchases or renews a taxable insurance contract from an insurer not authorized to transact business in this state under a certificate of authority from the superintendent of insurance a tax at the rate of three and six-tenths percent of the premiums paid or to be paid, less returns thereon, for such insurance. Nothing in this article modifies or abrogates any provision of the insurance law. Section 1553 of the Tax Law provides, in part: Exemptions. This article shall not apply to:
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TSB-A-07(4)C
Corporation Tax
August 27, 2007

(d) any foreign government;
Section 1101(a) of the New York State Insurance Law provides: In this article: (1) "Insurance contract" means any agreement or other transaction whereby one party, the "insurer", is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event. Opinion The tax under Article 33-A of the Tax Law is imposed on any person who purchases or renews a taxable insurance contract from an insurer not authorized to transact business in New York State under a certificate of authority from the Superintendent of Insurance. The tax is on the premiums paid or to be paid, less returns thereon, for such insurance. In this case, it is assumed that Petitioner will purchase such an insurance contract. Petitioner is a wholly owned subsidiary and, in relation to constructing a residential building in New York for the Chinese Mission to the United Nations, a subcontractor of China Construction America Construction International Inc. (CCACI). Petitioner, as a subcontractor of CCACI, has authorization from the United States Department of State to purchase goods and services tax-free for use solely in this construction project. Section 1553 of Article 33-A of the Tax Law does not contain a specific exemption applicable to Petitioner’s premiums. Although Petitioner has received authorization from the United States Department of State to purchase goods and services tax-free for use in this construction project, Petitioner is not purchasing goods and services. It is purchasing insurance which, pursuant to section 1101(a) of the Insurance Law, is a contractual right. A contractual right to insurance coverage is not a good or service. Accordingly, Petitioner is subject to the tax imposed on independently procured insurance under Article 33-A of the Tax Law for premiums incurred for the purchase of insurance for the sole purpose of constructing a residential building in New York for the Chinese Mission to the United Nations. However, if it is established that Petitioner is an agency or instrumentality so closely connected to a foreign government that the two cannot realistically be viewed as separate entities, Petitioner would be considered to be a foreign government. See United States v

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TSB-A-07(4)C
Corporation Tax
August 27, 2007

New Mexico, 455 US 720,735 and Arizona Dept. of Rev. v Blaze Const., 526 US 32, 35. In that case, Petitioner would not be subject to the tax imposed under Article 33-A of the Tax Law.

DATED: August 27, 2007

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Taxpayer Guidance Division

An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts set forth therein and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity fully and accurately describes all relevant facts. An Advisory Opinion is based on the law, regulations, and Department policies in effect as of the date the Opinion is issued or for the specific time period at issue in the Opinion.