For the section 1505(b) test of whether more than 95% of an insurer's premiums are for annuity contracts, does premiums include reinsurance premiums and all direct premiums received both inside and outside New York?

Plain-English summary

Royal Life Insurance Company of New York asked how to apply the section 1505(b) "more than 95% annuity" test. Section 1505 caps an insurer's Article 33 tax by reference to what it would owe under the premiums tax (section 1510). Section 1505(b) adds a special rule: where more than 95% of an insurer's premiums are received as consideration for annuity contracts (or for section 1510(c)(2) policies -- group insurance for the elderly and ocean marine), annuity premiums get folded into the capped premiums-tax computation. But section 1505(b) does not define "premiums" for the 95% test.

Royal Life asked three things: (1) does "premiums" include reinsurance premiums; (2) if so, does it matter whether the reinsurance is paid by an unlicensed, licensed, or affiliated insurer; and (3) does "premiums" include all direct premiums, both on New York risks and outside New York?

The answers are yes, no (it doesn't matter), and yes. Because the section 1505 cap is built on the premiums tax, the Department uses the definition in the first sentence of section 1510(c)(1) -- modified (as section 1505(b) requires) to include amounts received for annuity contracts. That definition covers all amounts received as consideration for insurance or reinsurance contracts, plus deposits, assessments, policy and membership fees, and every other compensation. So for the 95% test:

• Reinsurance premiums are included.
• It does not matter whether the reinsuring insurer is licensed in New York, unlicensed, or an affiliate.
• All direct premiums count, whether the risk is in or outside New York.

The 1978 legislative history (Chapter 480) confirms the purpose: companies primarily writing annuity or ocean marine business had been nearly exempt from the income tax, and section 1505(b) requires those premiums to be counted in the cap.

What this means for you

The 95% test borrows the premiums-tax definition, plus annuities

There is no separate "premiums" definition in section 1505(b); you use the first sentence of section 1510(c)(1), modified to include annuity consideration.

Reinsurance counts -- from anyone

Reinsurance premiums are included in the test regardless of whether the ceding/assuming insurer is licensed in New York or is an affiliate.

Direct premiums everywhere count

All direct premiums an insurer receives are in the test, on both New York and out-of-state risks. This is the foundation later opinions (e.g., John Alden, TSB-A-95(21)C) build on.

Common questions

Q: Do I count reinsurance premiums when testing the 95%-annuity threshold?
A: Yes. "Premiums" includes amounts received for reinsurance contracts as well as direct and annuity contracts.

Q: Does it matter if the reinsurance comes from an out-of-state or affiliated insurer?
A: No. The reinsurance premiums are included regardless of the payer's licensing status or affiliation.

Q: Only New York premiums, or all of them?
A: All direct premiums count -- on risks both resident in New York and outside New York.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1505 (limitation on Article 33 insurance franchise tax based on the premiums tax)
- Tax Law section 1505(b) (special cap rule where more than 95% of premiums are for annuity contracts or section 1510(c)(2) policies)
- Tax Law section 1510(c)(1) (definition of premiums -- all consideration for insurance or reinsurance contracts, with deposits, fees, and other compensation)
- Laws of 1978, Chapter 480 (added section 1505(b))

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a94_15c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (15) C
Corporation Tax
November 1, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C940517D

On May 17, 1994, a Petition for Advisory 0pinion was received from Royal Life Insurance
Company of New York, 18 Corporate Woods Boulevard, Albany, New York 12211.
The issues raised by Petitioner, Royal Life Insurance Company of New York, are:
1. Whether reinsurance premiums received by an insurance company are included within
the term "premiums" as used in section 1505(b) of the Tax Law for purposes of computing whether
more than 95 percent of the "premiums" received by an insurance company are received as
consideration for annuity contracts.
2. If the answer to issue "1" is yes, whether it matters if the reinsurance premiums are paid
to an insurance company by an insurer not licensed to transact business in New York, an insurer
licensed to transact business in New York or an affiliated insurer.
3. Whether the term "Premiums" as used in section 1505(b) of the Tax Law, for purposes
of computing whether more than 95 percent of the "premiums" received by an insurance company
are received as consideration for annuity contracts, includes all direct premiums received by an
insurance company, both on risks resident in New York and outside of New York.
Section 1505 of the Tax Law provides as follows:
(a) Notwithstanding the provisions of sections [1501 and 1510], the amount of taxes
imposed under such sections ... computed without regard to any credits allowable
against such tax other than those credits provided under [section 1511(g) and (h)],
shall not exceed an amount computed as if such taxes were determined solely under
section [1510], except that for purposes of the limitation provided herein, the rate of
tax under such section shall be deemed to be [2.6] percent.
(b) For purposes of the limitation set forth in subdivision (a) of this section, in the case of an
insurance corporation more than [95] percent of whose premiums are received as
consideration for annuity contracts or are for policies and insurance described in [section
1510(c)(2)], in determining the amount of tax computed solely under section [1510], gross
direct premiums subject to tax under such section shall include all amounts received as
consideration for annuity contracts and premiums for policies and insurance, including any
separate costs assessed by such insurance corporation upon its policyholders, described in
[section 1510(c)(2)].
TP-9 (9/88)

-2­
TSB-A-94 (15) C
Corporation Tax
November 1, 1994
Section 1510(c)(1) of the Tax Law provides, in part, as follows:
The term "premiums" includes all amounts received as consideration for insurance
contracts or reinsurance contracts, other than for annuity contracts, and shall include
premium deposits, assessments, policy fees, membership fees, any separate costs by
carriers assessed upon their policyholders and every other compensation for such
contract ....
For purposes of the limitation set forth in section 1505(a) of the Tax Law, the amount of
taxes imposed by sections 1501 and 1510 of the Tax Law, computed without regard to any credits
allowable against such taxes other than those credits provided under section 1511(g) and (h), shall
not exceed the amount determined as if such taxes were computed solely under section 1510 of the
Tax Law with the rate of tax deemed to be 2.6 percent. Section 1505(b) of the Tax Law provides that
if more than 95 percent of an insurance corporation's premiums are received as consideration for
annuity contracts or are for policies and insurance described in section 1510(c)(2) of the Tax Law
[i.e. group insurance for the elderly and ocean marine insurance], premiums for annuity contracts and
insurance described in section 1510(c)(2) are to be included in the computation of gross direct
premiums for purposes of the limitation set forth in section 1505(a). However, section 1505(b) of
the Tax Law does not define the term "premiums" for purposes of the 95 percent determination.
The memorandum in support of the Laws of 1978, Chapter 480, which added section 1505(b)
of the Tax Law states, in part, that:
...the current statute exempts both annuity business and ocean marine insurance from
the premiums tax. Consequently, companies primarily engaged in these lines of
business are virtually, if not totally, exempted from the net income tax. To cure this
defect the bill amends Article 33 so that for purposes of the income tax, a company
with more than 95% of its business annuity contracts or ocean marine insurance
or both must include those premiums in determining the "cap" on its income tax.
(emphasis added) (NY Legis Ann, 1978, p 284, 287)
Since the limitation contained in section 1505 of the Tax Law is based on the amount of tax
that would be computed under the premiums tax imposed under section 1510, it is appropriate to use
the definition contained in the first sentence of section 1510(c)(1), modified as required by section
1505(b) of the Tax Law, for purposes of computing the limitation under section 1505 of the Tax
Law.
Therefore, in accordance with the memorandum in support of the Laws of 1978, Chapter 480,
and section 1510 of the Tax Law, when determining whether more than 95 percent of an insurance
corporation's premiums are received as consideration for annuity contracts or are for policies and
insurance described in section 1510(c)(2) of the Tax Law, the term "premiums" means premiums
as used in the first sentence of section 1510(c)(1) of the Tax Law modified to include amounts
received as consideration for annuity contracts. That is, the term "premiums" includes all amounts
received as consideration for insurance contracts or reinsurance contracts, including annuity
contracts, and shall include premium deposits, assessments, policy fees, membership fees, any
separate costs by carriers assessed upon their policyholders and every other compensation for such
contract.

-3­
TSB-A-94 (15) C
Corporation Tax
November 1, 1994
Herein, with respect to issues "1", "2" and "3", for purposes of computing whether more than
95 percent of the premiums received by an insurance company are received as consideration for
annuity contracts under section 1505(b) of the Tax Law, the term "premiums" has the same meaning
as used in the first sentence of section 1510(c)(1) of the Tax Law modified to include amounts
received as consideration for annuity contracts. Such term includes all amounts received as
consideration for reinsurance contracts, regardless of whether the insurer paying the reinsurance
premiums is licensed to transact business in New York or is an affiliated insurer. Such term also
includes all direct premiums received by an insurance company, both on risks resident in New York
and outside of New York.
It should be noted that, where an insurance company determines that more than 95 percent
of its premiums are received as consideration for annuity contracts or are for policies and insurance
described in section 1510(c)(2) of the Tax Law, such insurance company computes the limitation
under section 1505 of the Tax Law by using the method set forth in section 1510(c) of the Tax Law
for determining gross direct premiums, modified as required by section 1505(b) of the Tax Law.
That is, gross direct premiums are modified by including all amounts received as consideration for
annuity contracts for policies and insurance, including any separate costs assessed by such insurance
corporation upon its policyholders, described in section 1510(c)(2) of the Tax Law.

DATED: November 1, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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