Progress Being Made On Draft Regulations Governing The Reporting And Filing Of Premium Taxes

On January 19, 2010, the California Department of Insurance ("Department") convened a working group to discuss an initial draft of regulations addressing whether insurers can, should, or must make an election to change reporting and payment of premium taxes from an accrual basis to a cash basis, or vice versa. The general intent of the Department was expressed to permit, but not require, insurers to elect to report and pay taxes on a cash basis, as long as such election did not ultimately result in an underpayment of taxes. The discussion among regulators, insurers, and industry groups were informal and fruitful, with several specific suggestions being made and certain issues being raised for further consideration. Parties interested in submitting comments or suggestions at this point (before the formal Notice of Proposed Action under the Administrative Procedures Act) must submit their comments to the Department very quickly, although a specific cut-off date was not identified. In addition, all interested persons may participate in the formal proceedings and public comment period once initiated.

The draft regulations are intended to address a Memorandum Opinion adopted by the State Board of Equalization ("SBE") on December 12, 2006. The Memorandum Opinion essentially reversed a long-held Department directive that insurers must report and pay taxes on an accrual basis, i.e., during the year in which they are written rather than the year in which they are received. Rather than require insurers to immediately switch from the historic use of the accrual method, the draft is intended to enable insurers to choose when, and whether, to switch to a cash basis.

The discussion first focused on which insurers and transactions would be subject to the regulations, and the Department confirmed that surplus line transactions, surplus line brokers, and insurers placing business pursuant to the surplus line laws would not be subject to the regulations. Nonadmitted...