Washington state undertakes study of captives to capture premium taxes amid COVID-19


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The Washington State Office of the Insurance Commissioner ("OIC") recently announced a study in connection with the Washington Department of Revenue ("DOR") to understand the use of captive insurance in insuring risks of entities located in Washington .  While the state’s laws do not authorize captives, it is understood that captives formed in other jurisdictions are being used to insure risks of Washington entities.  Accordingly, the OIC and the DOR seek to better understand these captive insurance arrangements where insurers largely fail to pay taxes to Washington.

Once the study is complete, the state may seek to create a regulatory framework for insurance procured through captives and/or require payment of taxes with respect to such arrangements.  It is anticipated that the Washington legislature will be interested in authorizing greater enforcement in this area, given the increased need to meet state and local tax budgets during the coronavirus disease 2019 ("COVID-19") pandemic.

Interaction of Washington premium tax and B&O tax

The state government imposes a business and occupation (“B&O”) tax on every person who or which has a substantial nexus with Washington for the act or privilege of engaging in business activities within the state. The B&O tax is a gross receipts tax and is computed by applying various tax rates against the value of products, gross proceeds of sales or gross income of the business, as the case may be, that are apportioned to Washington.[1] The B&O tax rate varies according to the classification of the business activities.

The state’s B&O tax does not apply “to any person in respect to insurance business upon which a tax based on gross premiums is paid to the state.”[2]  Thus, an insurance company that issues insurance contracts[3] and pays premium tax on its insurance business and any services incidental to its insurance is exempt from Washington B&O tax.[4]

Revised Code of Washington (“RCW”) § 48.14.020 imposes the insurance premium tax, mandating that each authorized insurer, except title insurers, must pay a tax on premiums. The tax is imposed at the rate of two percent of all premiums (excluding amounts returned to or the amount of reductions in premiums allowed to holders of industrial life policies) after deducting premiums paid to policyholders as returned premiums, upon risks or property resident, situated or to be performed in this state.[5]

Except for title insurers and taxpayers subject to the health care services tax, the premium tax is imposed in lieu of all other taxes except (1) taxes on real and tangible personal property, (2) excise taxes on the sale, purchase, use or possession of real property, tangible personal property, extended warranties, services (including digital automated services) and digital goods and digital codes; and (3) the B&O tax imposed on certain hospitals.[6]

Unauthorized insurers required to pay Washington premium tax

In addition to authorized insurers, Washington imposes premium taxes on premiums received for coverage of risks resident or located in Washington state by unauthorized insurers.  For example, a risk retention group – a narrow subset of insurers – is liable for the payment of premium taxes and taxes on premiums of direct business for risks resident or located within the state.[7]

Likewise, for certain coverages that cannot be obtained from authorized insurers, the state allows an insured located in Washington to procure insurance from unauthorized insurers (called “surplus line brokers”) in certain circumstances.[8] Due to the federal Nonadmitted and Reinsurance Reform Act of 2010 (the NRRA), only an insured’s home state can require that the surplus line broker pay premium tax for premiums received from the insured located in that home state.  Accordingly, Washington premium tax is due from a surplus line broker for premiums received from an insured based in Washington subject to certain rules.[9]

Finally, a purchasing group or any of its members must pay premium tax at the same rate and subject to the same interest, fines and penalties as those applicable to premium taxes and taxes on premiums paid for similar coverage from authorized insurers or unauthorized insurers, by other insurers.[10]

Thus, it is clear that Washington imposes its premium tax on various forms of unauthorized insurers.  Alternatively, if an unauthorized insurer does not pay premium tax, it will be liable for B&O tax.

Notice regarding captive insurance companies

Historically, Washington has not created any special provisions concerning use of an insurance company established as a subsidiary or affiliate of an entity that has insurable risks (a so-called captive insurance company).  Nor has the state authorized any captive insurance companies to engage in an insurance business in Washington.

However, the landscape in Washington is now changing. On August 25, 2020, Washington Insurance Commissioner, Mike Kreidler, sent out a notice and survey[11] to approximately 5,000 businesses and other organizations in Washington that may be using captive insurance companies.[12]  The document notified them of the suspension of enforcement activity relating to the use of captives while a framework for their regulation is being developed.  Seeking to confirm whether the recipient has paid premiums to such a company,[13] the survey states that a response is mandatory and that failure to respond will result in further investigation and enforcement.  According to the notice, the information collected from the survey is needed to help understand the captive insurance market in Washington and for further consideration and legislative action in the state.

In particular, the OIC and the DOR are concerned that entities that are located in Washington have established out-of-state captive insurance companies to insure risks of those insureds based in their home state – and that such arrangements should give rise to liability for premium taxes due to Washington and that have heretofore gone unpaid. Therefore, the OIC and the DOR have hired Milliman, Inc., a Washington state-headquartered independent consulting firm, to conduct the survey and to collect information. Millman will summarize the data and provide unredacted information to the DOR and redacted information to the OIC. We have received informal guidance from the DOR that, because a third-party is conducting the survey and the survey does not constitute an enforcement activity, it does not constitute a “contact” by or from the DOR for purposes of preventing VDP eligibility, as discussed below.

Voluntary Disclosure Program in Washington state

The DOR has created a Voluntary Disclosure Program (“VDP”) to encourage unregistered businesses to comply with the state’s tax laws and to voluntarily register and pay prior tax obligations. If eligible, the benefits of a business applying for the VDP include (i) limiting the tax liability lookback period to four years plus the current year and (ii) partially or fully waiving penalties. The applicant must either be identified in the VDP application or within 15 days of having submitted the VDP application to the DOR.

To be eligible for full VDP benefits, a business must have (1) never registered with or reported taxes to the DOR, (2) never been contacted by the DOR for enforcement purposes (eg, audit or compliance contacts regarding registration or reporting requirements) and (3) not engaged in any evasion or misrepresentation in reporting tax liabilities.

While the VDP is certainly available for entities that have captive insurance companies but have not received the survey, we have received informal guidance from the DOR that the VDP is still available for entities that have captive insurance companies and that have received the survey from Millman.  Therefore, even if that inquiry from Millman focuses on the recipient entity’s and its affiliates’ tax compliance, we have been told that the survey itself does notconstitute contact by the DOR that can preclude the recipient entity and its affiliates from qualifying for the VDP if the taxpayer meets the other requirements for acceptance into the VDP.

Recently, the DOR announced that it will relax eligibility requirements for participation in the VDP, effective July 15, 2020 through November 30, 2020. Under these temporarily relaxed rules, businesses are eligible for the VDP if they (1) closed their tax registration prior to January 1, 2020 (this includes businesses that previously filed tax returns), (2) were placed on active non-reporting status prior to January 1, 2020, (3) have not had contact from the DOR for enforcement purposes since July 1, 2019 and (4) have not been named as an affiliate of another business through an enforcement contact from the DOR.   Thus, if a business believes that it may have potential liability for premium taxes not paid by its captive insurance company, it should consider having its captive insurance company file for the VDP if it qualifies and thereby benefit from the limited lookback period and reduced penalty amounts on any past due premium tax liabilities.


The Washington survey is likely to form the basis for a new regulatory scheme governing, and imposing premium tax on, insurance on Washington risks placed in captives, especially given the state and local budget shortfalls arising from the COVID-19 pandemic.  This is an opportune time for those businesses currently using or contemplating the use of captive insurance arrangement to consider the current risks associated with using such arrangements and to consider whether active participation in the discussion of a new regulatory framework in the state may be fruitful.  We note that while this survey is specifically related to Washington’s interest in captive arrangements, other states with and without existing laws relating to captive insurance may similarly seek to regulate and/or impose premium taxes on such arrangements, especially given the need to meet budget shortfalls during the COVID-19 pandemic.

If you have any questions regarding this development, please contact the authors or your DLA Piper relationship attorney.

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This information does not, and is not intended to, constitute legal advice.  All information, content, and materials are for general informational purposes only.  No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.  

[1] RCW § 82.04.220(1).

[2] RCW § 82.04.320.  But an insurance company can be subject to Washington B&O tax on service income that is not incidental to its insurance business.  See WAC § 458-20-163(2)(a) (“The exemption [from B&O tax] does not apply to any business engaged in by an insurance company other than its insurance business.”); WA DOR, Determination No. 15-0297, 35 WTD 443 (Sept. 30, 2016).

[3] RCW § 48.01.050 (defining “insurer” as “every person engaged in the business of making contracts of insurance” with certain limitations.

[4] This includes insurance companies that are authorized to do business in Washington and are subject to regulation by the Washington Department of Insurance (an “authorized insurer”), as well as insurance companies that are not so authorized to do business in Washington (an “unauthorized insurer”).  Thus, even an unauthorized insurer that pays the state’s premium tax is typically not subject to the regular corporate income tax or gross receipts tax in the states. See, e.g., Leadville Insurance Company vs. Comptroller of the Treasury, Appeal No. 13-IN-OO-0035 (MD Tax Ct. July 13, 2020) (rejecting the Maryland Revenue Department’s argument that both premium tax and corporate income tax should be imposed on an out-of-state, unauthorized insurer and holding that payment of premium taxes by the unauthorized insurer precludes corporate income taxation).

[5] RCW § 48.14.020(1).

[6] RCW § 48.14.080. 

[7] The risk retention group is subject to taxation on the same basis as a foreign admitted insurer. RCW § 48.92.040(3)(a).

[8] RCW § 48.15.040.

[9] RCW § 48.15.120.

[10] RCW § 48.92.095(1).  A “purchasing group” means any group which: (a) has as one of its purposes the purchase of liability insurance on a group basis, (b) purchases the insurance only for its group members and only to cover their similar or related liability exposure, (c) is composed of members whose businesses or activities are similar or related with respect to the liability to which members are exposed by virtue of any related, similar, or common business, trade, product, services, premises, or operations and (d) is domiciled in any state. RCW § 48.92.020(10).

[11] https://www.insurance.wa.gov/sites/default/files/documents/captive-insurance-study-fact-sheet.pdf

[12] This survey is not the first effort by the Washington insurance regulators to crack down and collect premium tax from captive insurance arrangements. Last year, Insurance Commissioner Kreidler ordered ASA Assurance Inc., a captive insurer for Alaska Air Group, to pay more than $2.5 million in unpaid premium tax and penalties owed to Washington for the unauthorized sale of insurance. See Office of the Washington Insurance Commissioner, “Kreidler orders Alaska Air captive insurer to pay $2.5 million in taxes, penalties” (Sept. 24, 2019) available at https://www.insurance.wa.gov/news/kreidler-orders-alaska-air-captive-insurer-pay-25-million-taxes-penalties

[13] See, e.g., Minnesota Department of Revenue, “Direct Procured Premiums Tax” (last updated Aug. 24, 2020), available at https://www.revenue.state.mn.us/direct-procured-insurance-tax. While the law was not previously clear in Minnesota whether insurance obtained from a captive was subject to premium tax, that notice provides:

The department is proposing changes to Form IG255, Nonadmitted Insurance Premium Tax Return for Direct Procured Insurance. The proposed updates in this draft form define more clearly what "nonadmitted insurance" means and further clarify the types of direct procured insurance policies that must be reported to the department for insurance premium tax.  In addition to surplus lines policies purchased directly from nonadmitted insurance companies (purchased without the assistance of a surplus lines broker), premiums paid to a captive insurance company must also be reported on Form IG255.”).