David J. Slenn, former Chair of the American Bar Association’s Committee on Captive Insurance, recently highlighted a significant risk for captive insurance arrangements in Florida. The Sunshine State has begun auditing businesses paying captive premiums to assess its 5.3% Independently Procured Tax (IPT). This tax is imposed on individuals purchasing out-of-state insurance without an in-state agent or broker. Captive insurance companies, which are created by parent companies to insure subsidiary risks, often operate in states other than where the business is located, bypassing local insurance companies and brokers.
To discourage businesses from bypassing in-state insurance providers, many states, including Florida, have an IPT in place. The 5.3% tax is applied to premiums paid to out-of-state insurance companies without an in-state agent or broker involved. While there is a workaround involving the use of an in-state surplus lines broker, captive insurance companies often do not utilize this method as their nature eliminates the need for a broker. As a result, many businesses with captive insurance arrangements have historically ignored paying the IPT, as it has rarely been enforced.
In the past, states like Texas and Washington have been aggressive in collecting the IPT, but with the adoption of captive-enabling legislation, businesses were able to domicile their captives in those states to avoid the tax. Florida also has captive enabling legislation, but the state has not seen a significant uptake in captives domiciled there. This poses a problem for Florida businesses with captives domiciled elsewhere, as they may now face audits to determine if the 5.3% IPT is being paid on premiums to their captives.
David Slenn’s article suggests that there may be ways to reduce the tax burden, potentially by re-domiciling a captive to Florida. However, navigating these technical tax matters can be complex, and it is advisable for businesses with captive arrangements to consult with professional advisors. The 5.3% IPT tax rate in Florida is one of the highest in the country, and non-payment could result in penalties or even felony charges. Therefore, it is crucial for Florida businesses with captive insurance arrangements to address this issue and ensure compliance with IPT payment requirements.
Overall, Florida’s decision to start auditing businesses with captive arrangements highlights the importance of understanding and addressing tax obligations related to insurance premiums. Businesses should be proactive in consulting with experts in captive insurance and tax matters to navigate these complexities effectively and avoid potential penalties for non-compliance. It is essential for Florida businesses with captive arrangements to take this issue seriously and take necessary steps to meet IPT payment requirements to avoid legal repercussions and financial consequences.
