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