National Trends Impacting State and Local Taxation of Insurance Companies

1. 37th Annual Insurance Tax Conference National Trends Impacting State and Local Taxation of Insurance Companies Chicago, Illinois November 1, 2012 Jim Williams Mass Mutual Financial Group Carl Erdmann Skadden, Arps, Slate, Meagher & Flom LLP

2. National SALT Trends • Multi-State Tax Commission (“MTC”) and Taxation of Insurance Companies • Other State combination issues • Mobile Workforce State Income Tax Simplification Act • Federal legislation impacting Nexus issues • Sales and use tax collection • Business activity tax legislation • Allstate Pennsylvania Guaranty Fund Litigation • Trends in state tax credits and incentives 37th Annual Insurance Tax Conference

3. MTC Activities Affecting Insurers • Background • Combined reporting • Taxation of insurance owned pass-through entities 37th Annual Insurance Tax Conference

4. MTC Project – Combined Reporting 37th Annual Insurance Tax Conference

5. MTC Project – Combined Reporting • Inclusion of insurance companies with their non-insurance affiliates • Trade involvement • No DOI or NAIC involvement • Model statute drafted and approved by MTC in 2006 • Insurer included in a combined report where “avoidance or evasion” was present or where permitted by regulation 37th Annual Insurance Tax Conference

6. MTC Project – Pass Through Entities • Taxation of LLCs/partnerships owned by entities not subject to income tax • Request made by Massachusetts DOR in 2008 • Trade involvement • Model statute approved by Uniformity Committee in March 2011 • Executive Committee referred statute back to Uniformity Committee, with input of the NAIC, in July 2011 37th Annual Insurance Tax Conference

7. MTC Project – Recent Events • Multiple meetings by industry and NAIC held with MTC • Uniformity Committee approved essentially the same Model Statute in July 2012 • Industry has reached out to NCSL in an effort to persuade MTC that project is beyond the scope of intended activity 37th Annual Insurance Tax Conference

8. Other State Combination Issues Oregon - Costco • Costco Wholesale Corp. v. Oregon Department of Revenue (OR Tax Ct. # TC 4956 7/16/12) • Costco filed Unitary Combined Return excluding income of unitary insurance subsidiary. Oregon rules provide: (1) companies required to use different apportionment methods cannot be in combined return; and (2) foreign insurance companies must file separate Oregon income tax returns 37th Annual Insurance Tax Conference

9. Oregon - Costco • Insurance subsidiary itself was not subject to Oregon tax – no nexus. • Court held that both combination exception rules (differing apportionment methods and foreign insurance companies) applied only if the insurance company was an Oregon taxpayer – inapplicable to Company without nexus 37th Annual Insurance Tax Conference

10. Oregon – Standard Financial Group • Standard Financial Group Inc. & Submission v. DOR, (OR Tax Ct. # TC 5039 8/2/2012) • Parent SFG conducts unitary business with its subsidiary SIC (insurance company doing business in Oregon) • SIC files separate Oregon return and not included in SFG unitary combined return • Issue – Are dividends paid by SIC to SFG wholly eliminated or subject to 80% DRD? • Starting point for SFG taxable income is federal consolidated taxable income • 80% DRD would generally apply if parent and subsidiary not in combined group because parent and subsidiary were not conducting a unitary business 37th Annual Insurance Tax Conference

11. Oregon – Standard Financial Group • Held – Dividend fully eliminated as SFG and SIC conducted a unitary business even though SIC filed a separate return • Result different if SIC was not part of the unitary business or not conducting business in the State • If non-unitary but doing business in State, 80% DRD would apply • If non-unitary and not doing business in State, 80% DRD would apply • If unitary but not doing business in State, would be included in unitary combined return (Costco) 37th Annual Insurance Tax Conference

12. Oregon – Costco & Standard Financial Corp. Open Issues • Violation of Commerce Clause? • What apportionment method should apply if insurance company included in combined return? 37th Annual Insurance Tax Conference

13. Texas – Policy Ruling 201109204L (9/30/11) • Under the Texas Franchise Tax on gross margins, affiliated entities conducting a unitary business must file a combined return • Section 171.052 “Insurance organization that is required to pay a gross premium tax during a tax year is exempt from the franchise tax . . .” • Texas Rule 3.583(d)(1) “All insurance . . . companies . . . that are subject to the annual gross premiums tax levied by [Texas Insurance Code], are exempt from payment of the franchise tax, regardless of whether any gross premiums taxes are actually paid . . .” • Is insurance company licensed in Texas but not paying Texas premiums tax excluded from the unitary combined group? • Comptroller determined that an insurance company not paying Texas premium tax must be included in unitary combined return, even though “exempt” from the franchise tax. 37th Annual Insurance Tax Conference

14. Mobile Workforce State Income Tax Simplification Act – What’s the Issue? • Current State law • Aggressive State enforcement • New York and Connecticut • Banks and financial institutions were early targets 37th Annual Insurance Tax Conference

15. Payroll and Withholding TaxWhat’s the Solution? • H.R. 1864 – Mobile Workforce State Income Tax Simplification Act • Passed House by voice vote on suspension calendar on May 15, 2012 • Referred to Senate Finance Committee on May 16, 2012 • S. 3485 introduced by Sherwood Brown (D-OH) and Kay Bailey Hutchison (R-TX) is identical to HB 1864 37th Annual Insurance Tax Conference

16. Payroll and Withholding TaxWhat’s the Solution? • H.R. 1864 Mobile Workforce State Income Tax Simplification Act • “Limits state taxation of the wages and other remuneration of any employee who performs duties in more than one State to: • the State of the employee’s residence; and • the State in which the employee is present and performing employment duties for more than 30 days.” (Congressional Research Summary) • Excludes professional athletes and entertainers • Employer can rely on employee’s certification as to number of days so long as no actual knowledge of fraud or collusion between employer and employee • Limits power to tax and to require withholding 37th Annual Insurance Tax Conference

17. Sales and Use Tax Collection Background • National Bellas Hess v. Illinois (1967) • Quill Corp. v. North Dakota (1992) Proposed Federal Legislation • Marketplace Fairness Act (S. 1832) • Marketplace Equity Act (H.R. 3179) • Main Street Fairness Act (H.R. 2701 and S. 1452) • Each of the proposals would enable States to impose use tax collection obligations on remote sellers • Differences • Nexus threshold • Uniform bases and sourcing • Follows SST? • State/local uniformity & centralized administration 37th Annual Insurance Tax Conference

18. Sales and Use Tax Collection State Legislation – “Amazon Laws” Why should insurance companies care? 37th Annual Insurance Tax Conference

19. Federal Legislation:Business Activity Taxes • Business Activity Tax Simplification Act (“BATSA”) (H.R. 1439) • Introduced by Rep. Goodlatte in April 2011 (out of Committee, on House calendar) • Preempts State’s ability to impose income or other business activity tax on an out of State company • “Reestablishes” physical presence test 37th Annual Insurance Tax Conference

20. Pennsylvania Guaranty Fund Litigation • Allstate Life Insurance Company V. Commonwealth of PA • By a 3 to 3 decision the PA Supreme Court ruled on August 2, 2012 that the Commonwealth Courts decision to allow the offset would not be overturned • State appealed for a rehearing • Decision on rehearing expected any day 37th Annual Insurance Tax Conference

21. State Tax Credits and Incentives • Economic development opportunities • Tax expenditure studies and reviews of existing credit programs 37th Annual Insurance Tax Conference

22. QUESTIONS? 37th Annual Insurance Tax Conference