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Business Taxes Law Guide—Revision 2024
Tax on Insurers Law
Revenue and Taxation Code
Division 2. Other Taxes
Part 7. Insurance Taxation
Chapter 3. All Insurance Other Than Ocean Marine
Article 2. Basis of Tax for Other Than Title Insurers
Section 12221
Text of Section Operative Through December 31, 2022
12221. "Gross premiums" as basis of tax. In the case of an insurer not transacting title insurance in this State, the basis of the tax is, in respect to each year, the amount of gross premiums, less return premiums, received in such year by such insurer upon its business done in this State. "Gross premiums" do not include premiums received for reinsurance and for ocean marine insurance. Gross premiums of reciprocal or interinsurance exchanges shall be determined as provided in Section 1530 of the Insurance Code. For purposes of the tax imposed by this chapter, "gross premiums" shall be deemed to include home protection contract fees defined in Section 12740 of the Insurance Code.
History—Added by Stats. 1961, p. 1982, operative January 1, 1962. Derived from former Section 12252. Stats. 1981, Ch. 820, in effect January 1, 1982, added the fourth sentence.
Text of Section Operative January 1, 2023
12221. "Gross premiums" as basis of tax. In the case of an insurer not transacting title insurance in this State, the basis of the tax is, in respect to each year, the amount of gross premiums, less return premiums, received in such year by such insurer upon its business done in this State. "Gross premiums" do not include premiums received for reinsurance and for ocean marine insurance. Gross premiums of reciprocal or interinsurance exchanges shall be determined as provided in Section 1530 of the Insurance Code. For purposes of the tax imposed by this chapter, "gross premiums" shall be deemed to include home protection contract fees defined in Section 12740 of the Insurance Code. Notwithstanding the rate specified in Section 12202, for annuity policies or contracts that constitute qualified funding assets pursuant to Section 130(d) of Title 26 of the United States Code, the gross premiums tax rate for premiums received for those annuity policies and contracts shall be 0 percent for premiums received on or after January 1, 2023.
History—Added by Stats. 2022, Ch. 474 (SB 1496), in effect January 1, 2023.
Gross premiums.—The term "gross premiums" includes the following: assessments (Bankers Life Co. v. Richardson (1923) 192 Cal. 113; Western Travelers Accident Association v. Johnson (1936) 14 Cal.App.2d 306); the consideration paid for annuity contracts (Equitable Life Assur. Society v. Johnson (1942) 53 Cal.App.2d 49); the full sums received by bail bond agents from those desiring bail bonds (Groves v. City of Los Angeles (1953) 40 Cal.2d 751).
Fees which are charged all applicants for membership in a mutual company do not constitute gross premiums within the meaning of this section, since they are not a part of the consideration paid for insurance, when the membership entitles the holder only to apply for insurance and not to receive it and the fees are not returnable if insurance is rejected or the member elects not to apply for it. State Farm Mutual Automobile Insurance Co. v. Carpenter (1939) 31 Cal.App.2d 178.
Amounts retained by an insurance company from wages due its employees participating in a voluntary retirement plan are not insurance premiums under this section where the company has no profit motive in establishing the plan. California-Western States Life Insurance Company v. State Board of Equalization (1957) 151 Cal.App.2d 559.
Gross premiums include amounts paid as reimbursement for additional expense incurred in selling insurance on an installment basis such as additional bookkeeping expense and collection expense. Allstate Insurance Company v. State Board of Equalization (1959) 169 Cal.App.2d 165.
Insurer developed "mini-met" plan pursuant to which existing group health insurance policyholders assumed the obligation to pay claims of the insured employees up to a certain "trigger-point" amount. Insurer was liable for claims above the trigger-point amount. Taxable gross premiums includes net premiums (calculated with reference to amounts paid out of policyholders' funds) as well as loading (amounts paid directly to the insurer). Metropolitan Life Insurance Co. v. State Board of Equalization (1982) 32 Cal.3d 649.
Although a service charge in connection with a premium financing plan is part of taxable gross premiums, the interest charged in connection with the plan is nontaxable investment income. Mercury Casualty Co. v. State Board of Equalization (1983) 141 Cal.App.3d 43.
Auto club members paying for insurance obtained through the club on an installment basis paid the club a $1 service fee along with each payment. The club retained the fee and forwarded the balance to the insurer. The service fee was part of the insurer's taxable gross premiums. Interinsurance Exchange v. State Board of Equalization (1984) 156 Cal.App.3d 606.
ERISA does not preempt California's method of taxation pursuant to Metropolitan Life Insurance Co. v. State Board of Equalization (1982) 32 Cal.3d 649. General Motors Corp. v. California State Board of Equalization (9th Cir. 1987) 815 F.2d 1305, cert. denied (1988) 485 U.S. 941.
The "true economic substance" of the insurer's SFGP policy was that the employer bears the bulk of the insurance risk in acting as an independent insurer for all claims below the liability limit; that the employer in performing its independent obligations under the SFGP is not acting as "a mere agent" of the insurer for the collection of premiums; and the obligations of the insurer are not "inextricably intertwined" with those of the employers. Accordingly tax applies only to the amounts actually paid as premiums to the insurer and not to the amount of claims paid from employer funds. Aetna Life Ins. Co. v. State Board of Equalization (1992) 11 Cal.App.4th 1207.
An insurer issuing minimum premium policies taxable under Metropolitan Life Ins. Co. v. State Board of Equalization (1982) 32 Cal.3d 649 was not denied equal protection even though the same policies issued to policyholders who are Taft-Hartley Trusts would be taxed differently. Great-West Life Assurance v. State Board of Equalization (1993) 19 Cal.App.4th 1553.
Where only one factor in Metropolitan Life Ins. Co. v. State Board of Equalization (1982) 32 Cal.3d 649 was present (regarding claims administration by an insurance company) and the other three factors were absent and the trigger point was well above 100 percent of expected claims thereby shifting the insurance risk to the employer, the employer, and not the insurance company, was the insurer as to the pretrigger point claims paid from employer funds, and the insurance company was therefore not liable for gross premiums tax on that aspect of the contracts. Prudential Ins. Co. v. State Board of Equalization (1993) 21 Cal.App.4th 458.
The amount of an insurer's taxable gross premiums does not include the amount of claims paid out of contractholder's funds when the insurer is fulfilling an administrative services contract and not providing insurance. Lincoln National Life Insurance Co. v. State Board of Equalization (1994) 30 Cal.App.4th 1411.
Return premiums.—The term "return premiums" refers to that portion of the gross premiums received by an insurance company which has been unearned and which the company is lawfully bound to return. It does not include dividends paid to members of a mutual company. Northwestern Mutual Life Insurance Co. v. Roberts (1918) 177 Cal. 540.
The cash or surrender values paid upon the cancellation of life policies are not "return premiums," but values paid on the cancellation of pure annuity contracts prior to the starting of payments to the annuitant are by contract "return premiums" within the constitutional meaning. Equitable Life Assur. Society v. Johnson (1942) 53 Cal.App.2d 49.
Dividends.—A mutual life insurance company is not subject to taxation on that portion of a premium which is satisfied by the application of a dividend representing the excess of the previous year's premium over the actual cost of the insurance furnished. Mutual Benefit Life Insurance Co. v. Richardson (1923) 192 Cal. 369. [Cf. Northwestern Mutual Life Insurance Co. v. Roberts (1918) 177 Cal. 540.]
Doing business.—An insurance association organized in California to take over the business of a Nebraska association was, in accepting in this State the applications of the members of the foreign association to continue their insurance, doing business in this State. Assuming, however, that the contracts of insurance were made in their entirety outside the State, all amounts received on such contracts were subject to the tax, the association having withdrawn from the other State and thereafter conducted its business under its California license, and all payments being sent by mail to its office in California. Western Travelers Accident Association v. Johnson (1936) 14 Cal.App.2d 306.
A foreign insurance company is not subject to tax on premiums remitted directly to its home office by mail after it had actually ceased to do business in California and its certificate of authority had expired. People v. Alliance Life Insurance Co. (1944) 65 Cal.App.2d 808.
Renewal premiums collected at the Nevada office of a life insurance company which was incorporated in California and has its principal place of business in this State from policyholders residing in states in which the company is not licensed to do business are "premiums received * * * upon its business done in this State" within the meaning of this section, where all of the company's services to these policyholders, other than the collection of premiums, are rendered to them at its home office in California. Occidental Life Insurance Co. v. State Board of Equalization (1956) 139 Cal.4th 468.
Amounts designated by an inter-insurance exchange as savings to its subscribers but which amounts were actually paid by the exchange to attorney-in-fact were part of taxable gross premiums and should not be considered part of savings within the words "returned to subscribers and/or credited to their accounts as savings" as used in Ins. Code section 1530. Industrial Indem. Exch. v. State Board of Equalization (1945) 26 Cal.2d 772.
Reciprocal or inter-insurance exchanges.—In computing its gross premiums tax liability for the business year 1964, the taxpayer, a reciprocal inter-insurance exchange, was not entitled to deduct savings dividends which it declared to subscribers (policyholders) in 1964 on policies expiring in 1965, to the extent that those dividends remained on the taxpayer's books on December 31, 1964, as declared and unpaid. Such amounts were not "credited" to the accounts of subscribers, within the meaning of Section 1530 of the Insurance Code, until such time as the policies in question expired and the formerly unpaid dividends were either paid to the subscribers or applied by them against renewal premiums. California State Auto. Assn. Inter-Insurance Bureau v. State Board of Equalization (1974) 44 Cal.App.3d 13.