Washington Legal Decision Clarifies Insurance B&O Tax Exemption Opportunity

A version of this article was published in the April 2023 edition of Washington Healthcare News.

The Washington State Court of Appeals issued a decision on February 27, 2023, in Envolve Pharmacy Solutions, Inc. v. Department of Revenue, that provides clarity on activities functionally related to insurance, that are exempt from business and occupation (B&O) tax pursuant to RCW 82.04.320.

The case clarified that a separate legal entity that doesn’t directly report premiums or pay premiums tax to the Washington Office of the Insurance Commissioner can also potentially qualify for the insurance B&O tax exemption—provided its activities are functionally related to an insurance business who files and pays Washington premium tax.

What This Means for Non-Carrier Entities Performing Insurance Business Activities

This means administrative entities performing insurance business activities—which are discussed further below—for insurance carriers, health maintenance organizations (HMO), and other entities that report Washington gross premiums tax could be exempt from B&O tax.

As this is a clarification of an existing law, there are potential refund opportunities if taxpayers overpaid B&O tax on their activities. A refund claim can be filed to recover overpaid B&O tax in the last four years plus the current calendar year.

Performing Insurance Business Activities

RCW 82.04.320 provides a B&O tax exemption for “any person in respect to insurance business upon which a tax based on gross premiums is paid to the state.” The Washington Department of Revenue (DOR) previously published an Interim Guidance Statement that provides the following non-exclusive list of activities as directly relating to the insurance business:

  • Inspecting, evaluating, and testing insured—or prospective insured—property for risk of fire and other property loss
  • Loss prevention engineering
  • Appraising insured property
  • Setting rates for, and underwriting insurance policies
  • Investigating claims
  • Determining cause
  • Recommending changes to prevent recurrence
  • Negotiating settlements of such claims
  • Defending contested claims
  • Handling subrogation proceedings
  • Making advance, partial, and final payments to the insured

Functionally related services means activities associated and necessary to accomplishing the insurance function. Services performed are considered functionally related if they relate exclusively to the insurance business that pays the premium taxes.

We’re Here to Help

For more information or questions about the WA B&O insurance business exemption, contact your Moss Adams professional. You can also visit our State & Local Tax Services page.

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