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Starbucks Disputes Captive Premium Taxes Levied by Washington State

Washington State 480x377
December 12, 2019

In yet another captive insurance company premium tax squabble, Washington State wants to impose a fine on Vermont-domiciled Olympic Casualty Insurance Company, owned by famed Seattle-based coffee maker Starbucks Corporation, for not paying state premium taxes.

In a letter to a Starbucks attorney, Ross Valore, an insurance enforcement specialist with the Washington State Office of the Insurance Commissioner (OIC), said Olympic did not pay premium taxes on a wide range of coverages.

In all, the OIC said Olympic owes more than $12.6 million in unpaid premium taxes plus $5.6 million in interest and just over $2 million in tax penalties.

However, Mr. Valore said in his letter that the insurance department has proposed a tax penalty of just over $513,000 and a $25,000 fine.

"As part of the self-report form, entities who self-report agree to consent to the applicable settlement terms and fully cooperate with the Washington State Office of the Insurance Commissioner during the self-reporting process," Mr. Valore wrote.

But, in a request to the OIC for a hearing on the tax issue, Starbucks said captives are a form of self-insurance. As a result, the OIC "has neither the authority to regulate nor any legitimate interest in regulating Washington-based companies such as Starbucks that insure their own risks."

In addition, Starbucks said that, as a captive licensed in Vermont, the state of Vermont, "not Washington, has regulatory and taxing authority over Olympic."

Starbucks' dispute with Washington State over captive premium taxes is the most recent wrangle on the captive tax issue between the state and a big employer.

Earlier this year, an administrative law judge at the OIC set a date for the next hearing on the challenge by Alaska Air Group, Inc., to the Washington State Insurance Department's attempt to impose hefty financial fines on the airline for not paying premium taxes on coverage its captive insurer provides to Alaska Air subsidiaries operating in Washington.

Julia Eisentrout, an administrative law judge at Washington's OIC, set hearing dates of July 13–17, 2020, and, if necessary, July 20–24 on the Alaska Air case.

That litigation involves Washington State's move to collect $2.5 million from the Alaska Air captive, Hawaii-domiciled ASA Assurance, Inc. The assessment includes $1.8 million in unpaid premium taxes, $228,354 in interest, $364,698 in penalties, and a $100,000 fine, a spokeswoman with the Washington State OIC said earlier.

"By transacting insurance in Washington State without holding a certificate of authority, issuing unauthorized insurance to Washington insureds without having it placed through a licensed surplus line broker, and failing to timely remit a 2 percent premium tax to the state of Washington for insurance on risks or exposures located in Washington State, ASA Assurance, Inc., violated" Washington State law, according to an order issued by Washington Insurance Commissioner Mike Kreidler.

The legal disputes over captive premium taxes come as Washington State may become the next US state with a captive insurance company statute.

As earlier reported, the OIC disclosed on its website that the OIC will introduce legislation in the 2020 session "that will create a statutory framework for how captive insurance companies can be formed by Washington State companies, who can form them, and what taxes will be paid by them to" the state of Washington.

If Washington State lawmakers approve captive legislation, Washington will become the second far-northwest state to have a captive statute. Neighboring state Oregon, which had 17 captives at the of 2018, passed legislation in 2012 to allow captives to be set up in the state.

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