By Madison Barnett and Timothy Gustafson

In a case involving the exclusion of captive insurance companies from combined reporting groups, the Indiana Tax Court held that a captive must be physically present in Indiana to be “subject to” the insurance premiums tax and therefore exempt from the corporate income tax. The Tax Court initially had ruled that two foreign captive reinsurers were “subject to” the premiums tax, although they did not actually pay the tax, based on the plain meaning of the phrase “subject to.” After the Indiana Supreme Court reversed this ruling, the Tax Court on remand had to determine whether the foreign reinsurers were doing business in Indiana so as to be “subject to” premiums tax. The Tax Court ruled that while the captives received premiums on insurance policies covering risks within Indiana, a physical presence rather than economic presence standard applies to the premiums tax and thus the captives were not doing business in Indiana. The Tax Court also rejected a Commerce Clause challenge to the outcome—taxing domestic reinsurers under the premiums tax but foreign reinsurers under the corporate income tax—finding that state taxes on insurance are “immune from Commerce Clause challenges” under the federal McCarran-Ferguson Act. United Parcel Service, Inc. v. Ind. Dep’t of Revenue, Case No. 49T10-0704-TA-24 (Ind. Tax Ct. Sept. 16, 2013), on remand from Ind. Dep’t of Revenue v. United Parcel Service, Inc., 969 N.E.2d 596 (Ind. 2012), rev’g United Parcel Service, Inc. v. Ind. Dep’t of Revenue, 940 N.E.2d 870 (Ind. Tax Ct. 2010).