July 24, 1978
Subject:
Insurance; Tax on group insurance premiums; group insurance procured by North Carolina Farm Bureau agents through a North Carolina Farm Bureau insurance agency from an Illinois agency and holder of a group policy issued by a California insurance company.
Requested By:
John R. Ingram Commissioner of Insurance
Question:
Are premiums collected from various insureds in state by a North Carolina insurance agency and remitted out of state for group insurance issued by an insurance company that is not licensed in North Carolina subject to a 5% premium tax imposed by G.S. 58-53.3?
Conclusion:
Yes.
Sequoia Insurance Company (hereafter Sequoia), a California corporation that is not licensed to sell insurance in North Carolina, has issued an "Errors and Omissions" master group policy (No. EL 20-10-11) to American Agricultural Insurance Agency, Inc. (hereafter AAIAI. AAIAI is an Illinois corporation and is not licensed in North Carolina. In turn, AAIAI issues certificates of insurance to, among others, 100 and more North Carolina Farm Bureau agencies. Premiums for such insurance are paid annually by each county agency to the North Carolina Farm Bureau Insurance Agency, Inc. (hereafter N.C. Agency). When all premiums for each covered agency or agency has been collected, the N.C. Agency forwards its single check for the premiums to AAIAI. AAIAI responds by issuing renewal certificates to the covered agents or agencies. No payment is made by anyone to the State of North Carolina as a tax on the premiums.
G.S. 58-53.3 requires that:
"When any person procures insurance on any risk located in this state with an insurance company not licensed to do business in this state, it shall be the duty of such person to deduct from the premium charged on the policy or policies for such insurance five per centum (5%) of the premium and remit same to the Commissioner of Insurance of the state. . . ."
There are several statutory requirements for tax liability: (1) The tax is imposed on a person. G.S. 58-2(7) defines a person as "an individual, aggregation of individuals, corporation, company, statutory definition of person. (2) There must be a procurement. The N.C. Agency collects the premium money, accounts for it, administers to the program statewide, and forwards the gross premium to AAIAI for the commodity. A 5% brokerage commission is withheld from gross premiums by the N.C. Agency for its services. Upon receipt of the premium from the N.C. Agency, AAIAI issues the several certificates of insurance to the county agencies. These actions of the N.C. Agency clearly constitute a procurement. (3) Insurance must be procured. There is no controversy but that the certificates issued by AAIAI under the Sequoia master policy constitute insurance. (4) The insurance must cover a risk located in this state. Here the risk is to protect against liability from errors and omissions of several hundred agents in the performance of their jobs at 100 and more locations in the state. It is quite likely that the potential risk is exclusively within the geographic limits of North Carolina. Consequently the risk is located within North Carolina. (5) The insurance company must not be licensed in North Carolina. Again there is no controversy. Sequoia is an insurance company and is not licensed to do business in North Carolina.
Each of the statutory requirements is met. Under the statute, the N.C. Agency has a duty to deduct 5% of the gross premiums and remit same to the Commissioner of Insurance. Failure of the N.C. Agency to deduct 5% of the gross premiums and remit same to the Commissioner of Insurance. Failure of the N.C. Agency to deduct and remit that percentage would constitute a violation of G.S. 58-53.3.
Counsel for Sequoia cites several cases to the effect that levy of the tax would constitute a deprivation of federal constitutional rights. State Bd. of Insurance v. Todd Shipyards Corp., 82 S.Ct. 1380 (1962); Connecticut General Life Ins. Co. v. Johnson, 58 S.Ct. 436 (1938); St. Louis Cotton Compress Co. v. State of Arkansas, 43 S.Ct. 125 (1922); Alleger v. State of Louisiana, 17 S.Ct. 427 (1897). Those cases are distinguishable because no tax is sought to be levied against Sequoia. Moreover, the insurance is against errors and omissions. Claims would be made by North Carolina residents on North Carolina transactions. Claims would have to be adjusted and settled in North Carolina.
Additionally, the 100 or more N.C. County Farm Bureaus, (the insureds) deal with the N.C. Agency to obtain the insurance and make payment of annual premiums within the state to that same corporation. Thus, a substantial portion of the recurring negotiation for the insurance occurs in North Carolina. The totality of those transactions between the local agencies and the N.C. Agency are intrastate in nature. These activities are not slight and casual as in Hartford Accident & Indemnity Co. v. Delta & Pine Land Co., 292 U.S. 143, 78 LEd. 1178 (1934) but are substantial as in Clay v. Sun Ins. Office, 377 U.S. 179, 12 LEd. 2d 229 (1964). These facts are sufficient to provide North Carolina with a substantial nexus for the tax purposes. See Texas v. New Jersey, 379 U.S. 674, 13 LEd. 2d 596, 85 S.Ct. 626 (1965).
Rufus L. Edmisten Attorney General
Richard L. Griffin Assistant Attorney General