Last month, New York issued two advisory opinions that could alter the tax obligations for surplus lines insurers. Advisory Opinion TSB-A-16(5)(C) (June 10, 2016, available here) and Advisory Opinion TSB-A-16(4)(C) (June 10, 2016, available here) (collectively, the “Opinions”) address how the franchise tax under N.Y. Tax Law § 1502 should be applied to foreign (i.e., out-of-state) surplus lines insurers.

The Opinions take the position that surplus lines insurers must pay a franchise tax calculated on the highest amount of the following four alternative bases: (1) allocated entire net income, (2) allocated business and investment capital, (3) prescribed portion of entire net income plus salaries and other compensation of elected or appointed officers and certain stockholders and (4) $250, as set forth under N.Y. Tax Law § 1502. While the petitioners under the Opinion argue that this structure amounts to double taxation as a premium tax must be paid by surplus lines brokers under N.Y. Ins. Law § 2118, the Opinions note that the tax bases are not explicitly tied to premium generation and therefore no double taxation will occur.

However, in practice, the tax bases will take into account an insurer’s premium, and therefore the Opinions may arguably run afoul of the Nonadmitted Reinsurance and Reform Act of 2010 (the “NRRA”). As we have noted in our Excess and Surplus Lines Manual here, the purpose of the NRRA was to create a more simplified and efficient surplus lines tax payment and regulatory structure which preempts state law and mandates that only the insured’s home state is permitted to collect premium taxes for nonadmitted insurance. As the NRRA views premium tax as any tax “directly or indirectly” based on payments made for the purchase of nonadmitted insurance, there is an argument that New York’s position on the payment of franchise taxes by surplus lines insurers oversteps the framework of the NRRA by taxing eligible New York surplus lines insurers on premiums derived from outside New York.

We expect there will be industry challenges to New York’s position on this matter and will continue to report all future developments.