In figuring Virginia's insurance retaliatory tax, does a fee another state charges only its own domestic insurers count against a Virginia insurer operating there?

Plain-English summary

A risk retention group (a type of insurer) commercially domiciled in another state (State A) filed Virginia's retaliatory-tax report showing no tax due. The Department disagreed, added State A's "internal audit fee" to the cost comparison, and assessed retaliatory tax. The insurer appealed.

The Department agreed with the insurer and abated the assessment: the internal audit fee doesn't belong in the comparison because State A charges it only to its own domestic insurers — not to a Virginia insurer operating in State A.

How Virginia's retaliatory tax works

Virginia's retaliatory tax (Va. Code § 38.2-1026) is a mirror: if another state would make a Virginia-domiciled insurer pay more regulatory cost to operate there than Virginia charges that state's insurers here, Virginia raises its charge on that state's insurers to match. In short, you compare:

• What the foreign insurer actually pays Virginia; against
• What a Virginia insurer would pay to operate in the foreign insurer's home state.

If the second number is higher, Virginia charges the difference as retaliatory tax.

The Department's mistake

The key phrase in the statute is "domestic insurer . . . subject to regulatory costs in another state." That means a Virginia insurer operating elsewhere — not an out-of-state insurer paying fees in its own state.

State A's internal audit fee was imposed only on State A's own domestic insurers. A Virginia risk retention group operating in State A would not pay it — it would pay only an annual filing statement fee. By adding the internal audit fee, the Department had effectively treated the out-of-state insurer's home-state costs as the comparison figure, which the statute doesn't allow. (An out-of-state insurer is "domestic" under its own state's law but "foreign" under Virginia's law.)

The result

Corrected, a Virginia insurer's cost to operate in State A (just the annual filing fee) was less than what the taxpayer actually paid Virginia. So no retaliatory tax was due for 2017, and the assessment was abated.

What this means for you

• Retaliatory tax compares the right two figures. It measures what a Virginia insurer would pay in the other state — not what the other state's insurers pay at home.
• Home-state-only fees don't count. A fee another state imposes solely on its own domestic insurers doesn't enter Virginia's retaliatory comparison for a Virginia insurer operating there.
• "Domestic" means Virginia here. In Va. Code § 38.2-1026, "domestic insurer" refers to a Virginia insurer; the same company can be "domestic" in its home state and "foreign" to Virginia.
• Insurers should check the comparison basis. If the Department's retaliatory assessment includes fees a Virginia insurer wouldn't actually pay in the other state, that's grounds to contest it.

Common questions

Q: What triggers Virginia's insurance retaliatory tax?

A: It applies when a Virginia-domiciled insurer would pay more to operate in another state than Virginia charges that state's insurers here. Virginia then raises its charge to match.

Q: Does every fee the other state charges count in the comparison?

A: No. Only costs a Virginia insurer would actually incur operating in that state count. Fees the other state imposes only on its own domestic insurers don't apply to a Virginia insurer and are excluded.

Q: Why was the tax abated here?

A: Once the State A internal audit fee (charged only to State A insurers) was removed, a Virginia insurer's State A costs were lower than what this insurer paid Virginia — so no retaliatory tax was due.

Citations and references

• Va. Code § 38.2-1026 — retaliatory tax; Virginia increases its costs on a foreign insurer to match what the other state imposes on Virginia-domiciled insurers operating there

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-93

Original ruling text

August 23, 2019

Re: § 58.1-1821 Application: Retaliatory Tax

Dear *:

This will respond to your letter in which you seek correction of the assessment of retaliatory tax issued to * (the “Taxpayer”) for the taxable year ended December 31, 2017.

FACTS

The Taxpayer, a risk retention group commercially domiciled in * (State A), filed a Form 800RET, Virginia Retaliatory Tax Report, reporting no tax due because its regulatory costs to operate in Virginia exceeded the regulatory costs a risk retention group commercially domiciled in Virginia would pay to State A. Under review, the Department increased the regulatory costs a risk retention group commercially domiciled in Virginia would pay to State A by including the cost of an internal audit fee. Because such regulatory costs, as adjusted, exceeded the costs the Taxpayer paid to Virginia, an assessment was issued for retaliatory tax due. The Taxpayer appeals, contending that the assessment was in error because the regulatory costs for a risk retention group commercially domiciled in Virginia but operating in State A were less than the Taxpayer paid for operating in Virginia.

DETERMINATION

Virginia Code § 38.2-1026 provides:

When a domestic insurer or its agents are subject to regulatory costs in another state that are greater than those imposed in this Commonwealth upon insurers domiciled in that state or their agents, then the regulatory costs imposed by this Commonwealth on those foreign insurers or their agents shall be increased to equal the regulatory costs imposed by the other state on the domestic insurer or its agents.

For the retaliatory tax to be imposed, the regulatory costs of a Virginia insurer operating in another state must be higher than what Virginia imposes on similar insurers that operate in Virginia but are commercially domiciled in the other state. In this case, based on the information provided by the Taxpayer, foreign risk retention groups operating in State A, which would include a Virginia risk retention group operating there, only pay an annual filing statement fee. Such fee was less than the regulatory costs imposed by Virginia on the Taxpayer.

The internal audit fee that the Department attributed to a Virginia risk retention group operating in State A was only imposed by State A on its domestic insurers, i.e ., State A insurers. It appears that in making the adjustment, the Department equated “domestic insurers . . . subject to regulatory costs in another state” in Virginia Code § 38.2-1026 with what an out-of-state insurance company would pay to its own state. That reference to “domestic insurers,” however, means Virginia insurers, not out-of-state insurers incurring regulatory costs in their own states. Such out-of-state insurers would be “domestic” insurers with respect to their own laws, but foreign insurers with respect to Virginia’s laws.

Accordingly, the Taxpayer was not liable for any retaliatory taxes to Virginia for the 2017 taxable year. The assessment, therefore, will be abated.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1995.M