Was a Medicare Part D plan administrator exempt from Virginia corporate income tax when its premiums were federally exempt from gross-premiums tax?

Subject

Corporate income-tax status depended on insurance-premiums-tax classification

Plain-English summary

Virginia could not decide the company's corporate-income-tax exemption until the Bureau of Insurance determined whether it was subject to the insurance gross-premiums tax. The company administered federally subsidized Medicare Part D prescription-drug plans, and its Part D premiums were exempt from Virginia's insurance-premiums tax under federal regulation.

The Department said authority over the company's gross-premiums-tax status belonged to the Bureau of Insurance. If that regulator determined the company was subject to the gross-premiums tax, Va. Code § 58.1-401 would exempt its insurance business from Virginia corporate income tax even though the particular Part D premiums were not taxed.

If the company was not subject to the insurance-premiums tax, Virginia corporate income tax could apply if its Virginia activities exceeded P.L. 86-272 protection. In that event, the ruling said the multistate company would apportion income using Virginia's standard three-factor formula then in effect.

What this means for you

• Exempt premiums do not by themselves answer whether an insurance company is "subject to" the gross-premiums tax.
• The Bureau of Insurance, not the Department of Taxation, controlled that classification question.
• Virginia corporate-income-tax exemption followed only if the company was subject to the gross-premiums tax.
• Without that status, nexus protection and apportionment rules became relevant.

Common questions

Did Virginia rule that the company owed gross-premiums tax?

No. The Department said the Bureau of Insurance had to make that determination.

Were federally exempt Medicare Part D premiums enough to preserve the corporate-income-tax exemption?

Not by themselves. The exemption depended on whether the company was subject to the gross-premiums tax regime.

What if the company was not subject to gross-premiums tax?

Corporate income tax could apply if its Virginia activities exceeded P.L. 86-272 protection.

Citations and references

• Va. Code §§ 58.1-401 and 58.1-2501(A).
• 42 C.F.R. § 423.440.
• 15 U.S.C. §§ 381-384.
• Va. Code §§ 58.1-409 through 58.1-416.
• P.D. 84-32.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-191

Original ruling text

December 1, 2008

Re: Ruling Request: Corporate Income Tax

Dear *:

This will respond to your letter in which you request a ruling on behalf of your client, * (the "Taxpayer"), regarding the Virginia corporate income tax.

FACTS

The Taxpayer, a corporation headquartered outside Virginia, is in the business of providing and administering prescription drug plans under the Medicare Part D program to eligible participants in all states and several territories of the United States. Medicare Part D premiums are federally subsidized premiums received for prescription drug benefits provided to Medicare beneficiaries.

The premiums are exempt from Virginia's license tax on insurance companies pursuant to federal regulation. The Taxpayer requests a ruling as to whether it is subject to the gross premiums tax even though its premiums are exempt. Further, if it is considered to be subject to the license tax, the Taxpayer asks if it would be exempt from Virginia's corporate income tax.

RULING

Premiums Tax on Insurance Companies

Virginia Code § 58.1-2501 A imposes the tax on the gross premium income of "every insurance company . . . which issues policies or contracts, for any kind of insurance . . . and on every, corporation which issues subscription contracts for any kind of plan . . . ." Based on this statute, the Taxpayer believes that it is subject to Virginia's license tax on insurance companies even though its premiums are not subject to the tax. The Taxpayer argues that because it is not exempt under Virginia law, it must be considered to be subject to the gross premiums tax.

The authority to determine whether the Taxpayer is subject to the license tax on insurance premiums rests with the Bureau of Insurance (VBOI), a division of the Virginia State Corporation Commission. Accordingly, the Department cannot conclude that the Taxpayer is subject to the gross premiums tax even though its premiums are exempt pursuant to 42 C.F.R. § 423.440.

Income Tax Exemption for Insurance Companies

For corporate income tax purposes, Va. Code § 58.1-401 provides an exemption for "[I]nsurance companies to the extent such company is subject to the license tax on gross premiums under Chapter 25 (§ 58.1-2500 et seq. ) of this title and reciprocal or interinsurance exchanges which pay a premium tax to the Commonwealth as provided by law." The language "to the extent such company" serves to clarify that an insurance company would be subject to corporate taxation on income earned in a business separate from its insurance business. See Public Document (P.D.) 84-32 (3/12/1984). Accordingly, if the VBOI determines that it is subject to the gross premiums tax, the Taxpayer would be exempt from Virginia income tax.

If the Taxpayer is not subject to the license tax on insurance companies, its income would be subject to Virginia tax if sufficient activities were conducted in Virginia to exceed the protection afforded under Public Law (P.L.) 86-272, as codified at 15 U.S.C. § 381 though § 384. Further, because the Taxpayer files in multiple states, it would apportion income to Virginia using the standard three-factor formula pursuant to Va. Code § 58.1-409 through § 58.1-416.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this ruling, you may contact * in the Department's

Office of Tax Policy, Appeals and Rulings, at *.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2696060796.o