According to Bruce Wright of Eversheds Sutherland, state and local income taxes are an evolving issue that concerns captive insurers. He explains that state and local income taxes are imposed based on three factors, including (1) tax rate and (2) an allocation factor that are applied to (3) combined income. Captive insurers require a determination as to whether their income will be included with the combined income of the parent organization.

Most states have a rule that says an insurance company is only taxed based on premium, and generally they are not taxed on income. However, some states are challenging whether captive insurers' income should be included with combined income when determining the overall income tax of the parent.

We may see more cases in the future as well as additional state legislation involving this issue as states look for revenue, according to Mr. Wright.