As we have previously covered in detail, at the end of its 2014 regular legislative session, the Illinois General Assembly enacted a multimillion dollar tax on Illinois companies using captive insurance arrangements.  The law was enacted under the guise of technical corrections to the insurance code.

Historically, Illinois businesses meeting basic levels of sophistication and size were entitled to obtain coverage from nonadmitted insurers under an “industrial insured” exception to the general prohibition on transacting unauthorized insurance.  Senate Bill 3324, now Public Act 98-0978 (the Act), tightened the qualifying criteria for the industrial insured exception and imposed new taxes and fees totaling between 3.6 percent and 4.6 percent of premium—equivalent to those imposed on a policy procured by a surplus lines broker.  The potential financial impact has been estimated at upward of $100 million, falling squarely on large- and mid-sized companies headquartered in Illinois.  The affected business community was aghast when the surprising tax consequences were discovered, but its efforts to repeal the law in the General Assembly’s fall veto session proved unsuccessful.

The law now has come into effect, applying to policies effective on or after January 1, 2015.  The statute provides that reports are due to the Surplus Lines Association of Illinois within 90 days of the effective date of a policy, and so reports for calendar year policies must be filed by April 1, 2015.  Applicable taxes and fees are then due 30 days after the filing of the report.  The Department of Insurance has not yet provided any guidance on the new law, but the Surplus Lines Association of Illinois has updated its website with an online filing system for businesses subject to the tax.  Affected businesses must register and complete their online reports within the requisite 90-day deadline.  Reporting is on a policy-by-policy and transaction-by-transaction basis.  The system then calculates the applicable taxes and fees.  Once a transaction is submitted, the website instructs that Surplus Lines Association of Illinois will e-mail an invoice for its 0.1 percent association stamping fee, and the Illinois Department of Insurance will mail an invoice for the 3.5 percent premium tax and any applicable fire marshal tax.

It remains to be seen whether another, more successful effort to overturn the law will be undertaken during the 2015 legislative session.  In the interim, affected taxpayers are required to comply with the law’s filing requirements and will be assessed the new tax.