If Utah exempts health insurance premiums from its own premium tax, does a foreign insurer still have to include health premium taxes imposed by its home state in Utah's retaliatory tax calculation?

Plain-English summary

A Utah-domiciled insurance company was considering a corporate reorganization that would leave a Texas-domiciled entity as the survivor, still licensed to do business in Utah. The reorganization stalled on one open tax question: Utah exempts health insurance premiums from its own 2.25% premium tax (Utah Code § 59-9-101(5)), but Texas taxes health premiums at 1.75% with no comparable exemption. If Utah's retaliatory tax scheme counted that Texas health-premium tax, the Texas-domiciled survivor would end up paying Utah a 1.75% retaliatory tax on its Utah health premiums — even though Utah never taxes health premiums directly. The company's counsel argued this couldn't be right: § 59-9-101(7) says the retaliatory provisions apply "to the tax or assessment imposed under this chapter," and since Utah imposes no tax on health premiums under that chapter, they argued the retaliatory scheme simply shouldn't reach health premiums at all. They even cited an informal conversation with Commission staff suggesting health premiums were, in practice, excluded from the retaliatory computation.

The Commission rejected that reading and ruled the opposite way: the Texas health premium tax must be included in the retaliatory calculation. Its reasoning had three parts. First, the broader retaliatory scheme lives in the Insurance Code, not the Tax Code — Utah Code § 31A-3-401 requires any tax, fee, or obligation a foreign state imposes on Utah insurers doing business there to be included in the retaliatory comparison, subject only to the specific exceptions listed in § 31A-3-402 (which don't cover health premiums). Second, the Commission read § 59-9-101(7) not as limiting the retaliatory scheme to only chapter-9 taxes, but as adding chapter-9 premium taxes on top of the broader § 31A-3-401 framework — the narrower reading the company proposed would create an unintended conflict between the Tax Code and Insurance Code provisions. Third, on policy, the Commission emphasized that the retaliation scheme exists to keep Utah-based insurers from being disadvantaged when doing business in other states — letting a Texas insurer escape Utah retaliatory tax on health premiums, while Utah insurers remain subject to Texas's health premium tax, would undermine that purpose. Form TC-49 requires computing the retaliatory basis in the aggregate (comparing total Utah taxes against total taxes a hypothetical Utah insurer would face in the foreign state) rather than line-item by line-item, and the Commission confirmed that aggregate computation properly includes foreign health premium taxes.

What this means for you

Insurers considering a change of domicile that involves doing business in Utah

Don't assume that a category of premium exempt from Utah's direct tax (like health insurance) is automatically excluded from Utah's retaliatory tax calculation. The retaliatory scheme is driven by what the other state taxes, not by what Utah itself taxes — a Utah exemption doesn't neutralize a foreign state's tax for retaliatory purposes.

Insurers or counsel relying on informal staff guidance

This ruling shows the Commission will override informal staff statements (here, a staff member's description of "current practice" excluding health premiums) when it conducts a full legal analysis. Get a formal ruling before relying on an informal conversation for a transaction-critical tax question.

Accountants and tax professionals preparing Form TC-49

The retaliatory computation is aggregate, not line-by-line — total Utah tax obligations are compared against the total a hypothetical Utah insurer would owe doing the same business in the foreign domicile state, and that comparison properly sweeps in taxes (like health premium taxes) that Utah itself doesn't impose.

Common questions

Q: Does Utah's health insurance premium exemption protect a foreign insurer from Utah's retaliatory tax on health premiums?
A: No. The Commission held that the retaliatory tax scheme operates independently of Utah's own premium tax exemptions — a foreign state's tax on health premiums still counts in the retaliatory calculation.

Q: Why did the Commission reject the "only taxes under chapter 9" reading of section 59-9-101(7)?
A: Because that narrow reading would conflict with the broader retaliatory framework in Insurance Code §§ 31A-3-401 and -402, which the Commission read as controlling and as requiring inclusion of any foreign tax subject only to specific listed exceptions.

Q: Is the retaliatory tax computed item-by-item or in aggregate?
A: In aggregate — Form TC-49 compares the taxpayer's total Utah tax obligations against the total taxes a hypothetical Utah insurer would owe in the foreign domicile state, not a line-by-line comparison of individual tax types.

Q: Can I rely on this ruling for my own domicile-change or retaliatory tax question?
A: No — it binds the Commission only for the taxpayer and facts described. Confirm current retaliatory tax treatment with the Commission before finalizing a reorganization or licensing decision.

Citations and references

Statutes cited:

• Utah Code Ann. § 59-9-101(5) (health insurance premium tax exemption)
• Utah Code Ann. § 59-9-101(7) (retaliatory provisions applicable to chapter 9 taxes)
• Utah Code Ann. § 31A-3-401 (retaliatory tax on foreign insurers doing business in Utah)
• Utah Code Ann. § 31A-3-402 (exceptions to the retaliatory tax)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-156.pdf

Original ruling text

96-156

Response October 23, 1996

Request

XXXXX

October 2, 1996

Via Telecopy

XXXXX

Policy & Opinion Analyst

Utah State Tax Commission

210 N 1950 W

Salt Lake City UT 84134

RE: Request for Opinion/Declaratory Judgement

Dear XXXXX

Pursuant to our recent phone conversation, we request your review of the following and seek an opportunity to visit with you and the Commissioners to further discuss the issues presented below.

We represent a Utah domiciled insurance company which issues accident, health and related life and disability policies. It is considering a corporate reorganization that may result in the surviving entity being a Texas domiciled company that thereafter would be licenced in Utah. A question more fully discussed below has arisen concerning the applicability of the Utah retaliatory tax on the Texas domiciled survivor of the proposed reorganization. Until this question can be resolved, the proposed transaction has been stalled and cannot move forward.

I. Background

Under UCA �59-9-101, insurance companies are taxed on their premium income in Utah, at a 2.25% rate. However, under subsection (5) of that section, health insurance premiums are exempted from the premium tax for all kinds of insurers, including, as specified in �� 5(a) and 5(g) respectively, domestic insurers and foreign insurers licenced under Title 31A, Chapter 14. Based on these provisions, an insurer doing business in Utah and domiciled in Texas (or any other foreign state) should be exempt from the premium tax on health insurance, and thus no such tax is actually imposed.

UCA � 59-9-101(7), which governs how the retaliatory tax scheme in Utah (UCA � 31A-3-401 et seq.) applies to the admitted insurers taxation provisions, provides as follows:

(7) The retaliatory provisions of Title 31A, Chapter 3, apply to the tax or assessment imposed under this chapter.

UCA � 31A-3-401 purports to out-of-state insurers admitted in Utah if their states of domicile impose on Utah insurers any taxes, licences, other fees, deposit requirements or other material obligations, prohibitions, or restrictions that are in excess of the taxes, etc. imposed on similar insurers of the other state that write business in Utah.

In this case, Texas imposes a premium tax on all domestic and foreign insurers, as we under stand, based on 1.75% of the premiums collected in Texas, and includes health insurance in that assessment. If the Utah retaliatory tax provisions applied, therefore, since Texas taxes health premiums at 1.75% and Utah does not tax such premiums under ordinary circumstances, resulting in a �zero� tax to a Texas health insurer admitted in Utah, such Texas insurer would be subject to the Utah premium tax under the retaliatory tax provisions at the rate of 1.75%.

In a discussion between the undersigned and XXXXX, manager of the miscellaneous (retaliatory tax) unit for the Commission, XXXXX indicated that the Commission staff does not include health premiums imposed by the foreign insurer's state as a component of the retaliatory tax computation. She stated that the computation is made on Form TC-49 and operates essentially as follows: All of the Utah State taxes imposed on the foreign insurer doing business in Utah are computed and listed on the form. This aggregate Utah obligation is then compared with the total of all of the taxes that would be owned by a hypothetical Utah insurer (which has all of the characteristics of the foreign insurer in Utah) doing business in the foreign state.

Under the retaliatory tax computational methodology, there is no line-by-line comparison of any particular tax obligation, whether franchise, premium tax or whatever, between Utah and the foreign state. Rather all of the taxes are aggregated and compared on a wholesales basis within the retaliatory tax formula. Notwithstanding this global comparison, the effect of including in the Utah retaliatory scheme the health premiums imposed by a foreign state, such as Texas, can be calculated. In the instant case, the cost of including the Texas health premiums in the retaliatory tax calculation of the surviving Texas company doing business in Utah is substantial.

XXXXX further specified that there are other types of premiums that are not subject to tax, such as those dealing with annuities and ocean marine that should also be treated for retaliatory tax purposes similar to health premiums.

II. Discussion

After reviewing the factual background and the relevant legal authorities, it is our view that the Utah retaliatory tax computation should not take into consideration health insurance premiums levied by a foreign state. This conclusion, discussed more fully in the following paragraphs, is based on statutory interpretation as well as sound policy considerations.

A. Strict Construction

As a fundamental preliminary matter, you are probably aware that courts in at least 13 states have held that retaliatory taxing statutes are to be strictly construed, since such statutes are penal in nature and involve comity between the states. Thus, although there are sound reasons for states to impose retaliatory taxes, their imposition is contested or close circumstances is carefully construed by the courts.

B. Intent of Legislature

As a secondary matter, the Utah retaliatory statute, like that of most if not all other states, is a creature of statute and has no constitutional underpinning. Thus, the legislature may apply the retaliatory statute as and where it may. For example, UCA �31A-3-402 provides a number of exceptions to the application of the tax, based on findings of the legislature that are certainly not grounded in Constitutional or natural law. Section 402 even provides that the tax does not apply to �particular kinds of insurance,' specifying that the legislature has and will continue to except from the retaliatory tax insurance premiums that in its discretion should not be subject to the tax.

In our view, the legislature has clearly made a policy determination as to the applicability of the retaliatory tax relative to health insurance premiums. As quoted above, UCA � 59-9-101(7) provides that the provisions of the retaliatory taxing scheme apply �to the tax or assessment imposed under this chapter� (emphasis added). Thus, the plain language of the statute provides that the provisions of the retaliatory taxing methodology are not applicable if there are no taxes or assessments imposed under chapter 9 of Title 59. There is no ambiguity in this statement. There are numerous taxes assessed under chapter 9 to which the retaliatory tax does apply, and there can be little question that the legislature has the ability to include those taxes in the retaliatory tax computation and exclude other taxes of its choosing.

On the other hand, if a tax is not imposed under chapter 9, as is the case with health premiums, the Utah retaliatory tax provisions do not apply according to UCA �59-9-101(7). It is hard to imagine statutory wording more clear or understandable.

C. Policy Considerations

The above interpretation is supported by policy considerations as well. For example, UCA � 59-9-101(7) is rendered surplus if the position currently espoused by the Commission staff is correct. If legislature intends that no premiums be levied against health policies and excludes premiums from the tax, as it has done, the legislature is undermining its own intent by turning around and taxing those premiums indirectly through the retaliatory tax mechanism. The exemption statute for health premiums is negated to the extent the retaliatory tax is imposed on those premiums, which in this case is 1.75% of the 2.25% that Utah would otherwise impose on health premiums but for the health premium exemption.

Prudent, longstanding principles of statutory construction provide that every statute has a specific purpose and should be construed to fulfill its intended effect. Inconsistent with these principles and flying in the face of common sense is the position that the legislature would specifically exempt a taxpayer from tax but then impose a retaliatory tax depending on the arbitrary circum stance of where the entity was domiciled. In other words, if an entity is exempted from a particular tax, the exemption should be permanent, and not depend on where the entity happened to be domiciled.

III. Request for Opinion

We request an opinion/declaratory judgement from the Tax Commission that the Utah exemption from tax for health insurance premiums requires exclusion from the retaliatory tax computation of health premium taxes imposed by a foreign state, based on the language of UCA �59-9-101(5) and (7) and underlying policy considerations. Stated differently, we seek your confirmation that the health insurance premiums in Utah of a foreign health insurer, which are exempt from direct Utah taxation are not indirectly taxed through the Utah retaliatory tax computation, despite a tax on health insurance premiums imposed on a Utah insurer doing business in the foreign state.

We look forward to further discussing these matters with you at a meeting scheduled for that purpose and appreciate your review of the foregoing.

Very truly yours,

XXXXX

October 23, 1996

XXXXX

Advisory opinion - Retaliation against foreign insurers.

Dear XXXXX

We have received your request for tax advice pertaining to the application of the retaliation provisions applied to foreign insurers doing business in Utah. We offer the following guidance:

The pertinent provisions of the Utah Code are found in Title 31A, Chapter 3 and Title 59, Chapter 9. Section 31A-3-401 of the Insurance Code provides that to the extent that another state imposes taxes, fees or other obligations on Utah insurers doing business in that state, the Tax Commission will impose � the same taxes, licenses, other fees, deposit requirements, or other material obligations, prohibitions or restrictions� on insurers domiciled in that state and doing business in Utah. (Emphasis added.) The only exceptions to or limitations on the retaliatory action are set out in section 31A-3-402 of the Insurance Code. The apparent purpose of these provisions is to place Utah-based and foreign insurers on equal footing with one another. Therefore, subject to the exceptions stated in section 31A-3-402, any taxes, fees or other obligations imposed by Texas on Utah insurers are to be included in the retaliation calculation.

Section 59-9-101 of the Tax Code imposes premium tax on premiums collected by admitted insurers. As you have indicated, that statute provides an exemption from premium tax on insurers licensed under Title 31A, Chapter 5 and insurers licensed under Title 31A, Chapter 9. However, we do not agree with your interpretation of subsection (7). You seem to read subsection (7) to say that the retaliatory provisions only apply to premiums taxed under this statute. We read it to say that the retaliatory provisions apply to premiums taxed under this statute in addition to the provisions of 31A-3-401. The narrow interpretation that you suggest for subsection (7) creates a conflict between subsection 59-9-101 (7) of the Tax Code and sections 31A-3-401 and -402 of the Insurance Code. The legislature could not have intended such a conflict.

We also respectfully disagree with your policy argument. The legislature intended that Utah-based insurers not be disadvantaged by taxes imposed in other states. To allow a Texas insurer to escape tax on its Utah health insurance premiums while Utah insurers are subject to such taxes in Texas flies in the face of the retaliation scheme. Therefore, to the extent that Texas imposes a tax on health care premiums collected by Utah insurers, that tax must be considered in the retaliation calculation.

Form TC-49 requires that the taxpayer calculate its premium tax on the worksheet provided. (Notice that a deduction is allow for qualifying health care premiums.) The form also requires the taxpayer to separately calculate its retaliatory basis by attaching the return from its state of domicile. A comparison of these two computations shows whether the taxes imposed in the domicile state exceed taxes imposed here. If so, the tax imposed by Title 59, Chapter 9 is applied against the retaliatory basis. We believe this is the correct application of the statutory provisions discussed above.

We note that you asked to meet with us in person to discuss this issue. If you still feel that a meeting is important, please contact my secretary, XXXXX to arrange a time. I will ask XXXXX of the Auditing Division to join us.

For the Commission,

Joe B. Pacheco,

Commissioner