H 4972 General Bill, By Tripp
 A BILL TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION
 38-7-15 SO AS TO ALLOW LIFE AND HEALTH INSURERS TO ELECT TO PAY THE GENERAL
 CORPORATE TAX ON NET INCOME INSTEAD OF THE PREMIUM TAX; BY ADDING SECTION
 38-7-95 SO AS TO CREATE A LIMITED EMPLOYMENT TAX CREDIT AGAINST EITHER THE
 PREMIUM TAX OR THE INCOME TAX FOR ALL INSURANCE COMPANIES BASED UPON A
 PERCENTAGE OF NONCOMMISSION COMPENSATION PAID TO SOUTH CAROLINA EMPLOYEES; TO
 AMEND SECTION 12-6-50, RELATING TO INTERNAL REVENUE CODE SECTIONS SPECIFICALLY
 NOT ADOPTED BY THE STATE, SO AS TO PRESERVE INTERNAL REVENUE CODE SECTIONS 801
 THROUGH 845 FROM EXCLUSION IN THE CASE OF LIFE AND HEALTH INSURERS ELECTING TO
 PAY THE INCOME TAX; TO AMEND SECTION 12-6-550, RELATING TO CORPORATIONS EXEMPT
 FROM TAXES IMPOSED BY SECTIONS 12-6-530 AND 12-6-540, SO AS TO EXCLUDE LIFE
 AND HEALTH INSURERS ELECTING TO PAY THE INCOME TAX FROM THE EXEMPTION; TO
 AMEND SECTION 12-6-2290, RELATING TO THE APPORTIONMENT OF REMAINING NET INCOME
 WHERE PRINCIPAL PROFITS OR INCOME DERIVED FROM SOURCES NOT OTHERWISE
 DESCRIBED, SO AS TO PROVIDE FOR THE APPORTIONMENT OF LIFE AND HEALTH INSURER
 INCOME ALLOCATED TO SOUTH CAROLINA ACCORDING TO A ONE-FACTOR FORMULA BASED ON
 PREMIUMS; TO AMEND SECTION 12-6-5020, RELATING TO THE AUTHORIZED FILING OF A
 CONSOLIDATED CORPORATE INCOME TAX RETURN, SO AS TO PROVIDE RULES PERTAINING TO
 CONSOLIDATED RETURNS FOR LIFE AND HEALTH INSURERS ELECTING TO PAY THE INCOME
 TAX; TO AMEND SECTION 38-7-90, RELATING TO RETALIATORY TAXES, SO AS TO PROVIDE
 AN EXEMPTION UNDER CERTAIN CIRCUMSTANCES FOR LIFE AND HEALTH INSURERS
 DOMICILED IN ANOTHER STATE; TO AMEND SECTION 38-7-160, RELATING TO MUNICIPAL
 LICENSE FEES AND TAXES, SO AS TO PROVIDE LIFE AND HEALTH INSURERS A CREDIT FOR
 MUNICIPAL TAXES AGAINST PREMIUM OR INCOME TAXES, AND TO LIMIT MUNICIPAL TAXES
 BASED ON PREMIUMS; TO AMEND SECTION 38-7-190, RELATING TO TAX CREDITS, SO AS
 TO PROVIDE THAT SPECIFIED TAX CREDITS MAY NOT BE RECAPTURED FROM FOREIGN
 INSURANCE COMPANIES THROUGH THE RETALIATORY TAX PROVIDED UNDER SECTION
 38-7-90; AND TO AMEND SECTION 38-29-160, RELATING TO PRODUCTION OF THE
 CERTIFICATE OF CONTRIBUTIONS, THE OFFSET OF A WRITE-OFF AGAINST TAX LIABILITY,
 AND THE PAYMENT OF CERTAIN REFUNDS TO THE STATE, SO AS TO EXTEND THE PREMIUM
 TAX OFFSET FOR LIFE AND HEALTH GUARANTY ASSOCIATION ASSESSMENTS TO THE INCOME
 TAX.

   03/26/02  House  Introduced and read first time HJ-28
   03/26/02  House  Referred to Committee on Labor, Commerce and
                     Industry HJ-29
   03/27/02         Scrivener's error corrected

TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION 38-7-15 SO AS TO ALLOW LIFE AND HEALTH INSURERS TO ELECT TO PAY THE GENERAL CORPORATE TAX ON NET INCOME INSTEAD OF THE PREMIUM TAX; BY ADDING SECTION 38-7-95 SO AS TO CREATE A LIMITED EMPLOYMENT TAX CREDIT AGAINST EITHER THE PREMIUM TAX OR THE INCOME TAX FOR ALL INSURANCE COMPANIES BASED UPON A PERCENTAGE OF NONCOMMISSION COMPENSATION PAID TO SOUTH CAROLINA EMPLOYEES; TO AMEND SECTION 12-6-50, RELATING TO INTERNAL REVENUE CODE SECTIONS SPECIFICALLY NOT ADOPTED BY THE STATE, SO AS TO PRESERVE INTERNAL REVENUE CODE SECTIONS 801 THROUGH 845 FROM EXCLUSION IN THE CASE OF LIFE AND HEALTH INSURERS ELECTING TO PAY THE INCOME TAX; TO AMEND SECTION 12-6-550, RELATING TO CORPORATIONS EXEMPT FROM TAXES IMPOSED BY SECTIONS 12-6-530 AND 12-6-540, SO AS TO EXCLUDE LIFE AND HEALTH INSURERS ELECTING TO PAY THE INCOME TAX FROM THE EXEMPTION; TO AMEND SECTION 12-6-2290, RELATING TO THE APPORTIONMENT OF REMAINING NET INCOME WHERE PRINCIPAL PROFITS OR INCOME DERIVED FROM SOURCES NOT OTHERWISE DESCRIBED, SO AS TO PROVIDE FOR THE APPORTIONMENT OF LIFE AND HEALTH INSURER INCOME ALLOCATED TO SOUTH CAROLINA ACCORDING TO A ONE-FACTOR FORMULA BASED ON PREMIUMS; TO AMEND SECTION 12-6-5020, RELATING TO THE AUTHORIZED FILING OF A CONSOLIDATED CORPORATE INCOME TAX RETURN, SO AS TO PROVIDE RULES PERTAINING TO CONSOLIDATED RETURNS FOR LIFE AND HEALTH INSURERS ELECTING TO PAY THE INCOME TAX; TO AMEND SECTION 38-7-90, RELATING TO RETALIATORY TAXES, SO AS TO PROVIDE AN EXEMPTION UNDER CERTAIN CIRCUMSTANCES FOR LIFE AND HEALTH INSURERS DOMICILED IN ANOTHER STATE; TO AMEND SECTION 38-7-160, RELATING TO MUNICIPAL LICENSE FEES AND TAXES, SO AS TO PROVIDE LIFE AND HEALTH INSURERS A CREDIT FOR MUNICIPAL TAXES AGAINST PREMIUM OR INCOME TAXES, AND TO LIMIT MUNICIPAL TAXES BASED ON PREMIUMS; TO AMEND SECTION 38-7-190, RELATING TO TAX CREDITS, SO AS TO PROVIDE THAT SPECIFIED TAX CREDITS MAY NOT BE RECAPTURED FROM FOREIGN INSURANCE COMPANIES THROUGH THE RETALIATORY TAX PROVIDED UNDER SECTION 38-7-90; AND TO AMEND SECTION 38-29-160, RELATING TO PRODUCTION OF THE CERTIFICATE OF CONTRIBUTIONS, THE OFFSET OF A WRITE-OFF AGAINST TAX LIABILITY, AND THE PAYMENT OF CERTAIN REFUNDS TO THE STATE, SO AS TO EXTEND THE PREMIUM TAX OFFSET FOR LIFE AND HEALTH GUARANTY ASSOCIATION ASSESSMENTS TO THE INCOME TAX.

Be it enacted by the General Assembly of the State of South Carolina:

SECTION    1.    The 1976 Code is amended by adding:

    "Section 38-7-15.    (A)    An insurance company organized as a life and health insurer may elect to be taxed either on the basis of premiums under Section 38-7-20 or on the basis of income under Section 12-6-530.

        (1)    The election is for an initial period of three years, except as provided in item (2) of this subsection. The election remains effective unless notice of a method change is given as provided in subsection (B). If such notice is given, the change is effective for a period of not less than three years except as provided in item (2) and remains in effect until such time as the insurance company gives notice under subsection (B) of an additional change.

        (2)    Upon request, an insurance company having made an election under this section, at the discretion of the department, may be permitted to change its basis of taxation from income tax to premium tax, or from premium tax to income tax, during the three-year period prescribed in paragraphs (1) and (3) if any of the following occurs:

            (a)    a material change of law affecting the insurance company;

            (b)    a significant merger, acquisition, or reorganization involving the insurance company;

            (c)    a material change of fact relating to the insurance company's business.

        (3)    Elections subsequent to an initial election must be subject to the same three-year restriction placed upon changing an initial election.

    (B)    An insurance company must make its initial election under this section, in writing, before the end of the calendar year preceding the year for which the election is to take effect. Subsequent elections to change the method of taxation must be made by an insurance company, in writing, before the end of the calendar year preceding the year for which the election is to take effect. Each election under this section shall apply to full calendar years and shall in no event apply to part years.

    (C)    Until an initial election is made under paragraph (1) of subsection (A), an insurance company organized as a life and health insurer will remain subject to the premium tax under Section 38-7-20.

    (D)    Elections under this section are governed by regulations promulgated by the department."

SECTION    2.    The 1976 Code is amended by adding:

    "Section 38-7-95.    (A)    Except as provided in subsection (E), for tax years beginning after December 31, 2002, each insurance company required to pay a tax on premiums under Section 38-7-20, or electing under Section 38-7-15 to pay the income tax under Section 12-6-530, must be allowed as a credit against such tax for ten percent of the salaries paid to South Carolina employees. The credit allowed under this section may not exceed one-half of one percent of the premiums that are, or in the case of an insurance company electing to pay the income tax under Section 12-6-530 would be, taxable under Section 38-7-20.

    (B)    As used in this section, unless the context otherwise requires:

        (1)    'Affiliate' means an insurance company which, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another insurance company. Affiliate also includes any company or business entity other than an insurance company which, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with an insurance company and which performs insurance company operations for an insurance company. For purposes of this definition, control exists if any company or business entity, directly or indirectly, owns, holds with the power to vote or holds proxies representing all the voting stock or other voting securities of any other company or business entity.

        (2)    'South Carolina employees' means persons who reside in this State, who are common law employees of an insurance company or its affiliate, and who are first employed by the insurance company or its affiliate in South Carolina after December 31, 2002. South Carolina employees does not include independent contractors or any person to the extent the person's compensation is based on commissions.

        (3)    'Insurance company' or 'company' means any entity subject to the tax on premiums under Section 38-7-20 or electing under Section 38-7-15 to pay the income tax under Section 12-6-530.

        (4)    'Insurance company operations' means one or more or any combination of the following functions or services performed in connection with the development, sale, and administration of products giving rise to receipts that are, or in the case of a company electing under Section 38-7-15 to pay the income tax imposed under Section 12-6-530 would be, subject to the tax on premiums under Section 38-7-20, actuarial, medical, legal, investments, accounting, auditing, underwriting, policy issuance, information, policyholder services, premium collection, claims, advertising and publications, public relations, human resources, marketing, sales office staff, training of sales and service personnel, and clerical, managerial, and other support for any of these functions or services.

        (5)    'Salaries' means gross compensation paid to South Carolina employees as reported to this State for income tax purposes during the calendar year for which a tax on premiums under Section 38-7-20 or a tax on income under Section 12-6-530 is imposed, but only to the extent compensation is paid for insurance company operations performed in this State for an insurance company or its insurance company affiliates subject to the tax on premiums under Section 38-7-20 or electing under Section 38-7-15 to pay the tax on income under Section 12-6-530. Salaries does not include compensation based on commissions.

    (C)    For an insurance company having affiliates:

        (1)    salaries paid by a noninsurance company affiliate must be allocated among insurance company affiliates pursuant to the agreement between or among the insurance company and its affiliates;

        (2)    the total premiums of an insurance company that are, or in the case of an insurance company electing under Section 38-7-15 to pay the income tax under Section 12-6-530 would be subject to tax under Section 38-7-20 and those of its insurance company affiliates subject to the tax may be aggregated. In addition, all salaries paid to South Carolina employees may be aggregated. Subject to the limitation on the salary credit set forth in subsection (A) of this section, the total allowable salary credit may be determined as if all the aggregated premiums were received and all the aggregated salaries were paid by one insurance company. Once the total allowable salary credit is determined for all insurance company affiliates, the total credit may be allocated among the insurance company and its insurance company affiliates at the discretion of the insurance company on a per insurance company basis, subject to the limitation on the salary credit as set forth in subsection (A) of this section.

    (D)    The computation of salaries, the allowable salary credit, and the allocation of the credit among insurance company affiliates must be made on forms supplied by the Commissioner of Insurance.

    (E)    If an insurance company claims an employment or jobs related tax credit under Section 12-6-3360 or any other provision of law excepting this section with respect to a person first employed by the company in South Carolina after December 31, 2002, then no credit may be allowed under this section with respect to the employee."

SECTION    3.    Section 12-6-50(10) of the 1976 Code is amended to read:

    "(10)    Sections 801 through 845 relating to the taxation of insurance companies, except in the case of insurance companies organized as life and health insurers electing under Section 38-7-15 to be taxed under Section 12-6-530;"

SECTION    4.    Section 12-6-550(3) of the 1976 Code is amended to read:

    "(3)    insurance companies other than those organized as life and health insurers electing under Section 38-7-15 to pay the tax imposed by Section 12-6-530;"

SECTION    5.    Section 12-6-2290 of the 1976 Code is amended to read:

    "Section 12-6-2290.    (A)    If In general, if the principal profits or income of a taxpayer are derived from sources other than those described in Section 12-6-2250 or Section 12-6-2310, the taxpayer shall apportion its remaining net income using a fraction in which the numerator is gross receipts from within this State during the taxable year and the denominator is total gross receipts from everywhere during the taxable year.

    (B)    For insurance companies organized as life and health insurers, the numerator of the apportionment factor in subsection (A) is premiums received from within the State during the taxable year as reported to the Commissioner of Insurance in Schedule T of the insurance company's annual report filed pursuant to Title 38, excluding annuity and other fund deposits, and the denominator of such factor is total premiums received from everywhere during the taxable years reported to the Commissioner of Insurance in Schedule T of the insurance company's annual report filed pursuant to Title 38, excluding annuity and other fund deposits."

SECTION    6.    Section 12-6-5020 of the 1976 Code is amended by adding new subsections at the end to read:

    "(I)    An insurance company organized as a life and health insurer electing under Section 38-7-15 to pay the tax imposed by Section 12-6-530 may join an election to file a consolidated return with one or more other similar insurance companies meeting the common control requirements of subsection (A) of this section. The insurance companies may not elect to file, or be required to file, a consolidated return with another entity that is not an insurance company organized as a life and health insurer.

    (J)    For purposes of computing any tax due under Section 38-7-90 from an insurance company not organized under the laws of South Carolina, the total tax determined on a consolidated return shall be allocated among the similar insurance companies joined in the consolidated return in order to determine the amount of tax considered paid to South Carolina under Section 12-6-530 by each of the electing insurance companies. The numerator of the fraction used in the allocation is the total premiums received from within the State during the taxable year as reported by the individual electing insurance company to the Commissioner of Insurance in Schedule T of the insurance company's annual report filed pursuant to Title 38 of the 1976 Code, and the denominator of this fraction is the total of all South Carolina premiums for all similar insurance companies joined in the consolidated return."

SECTION    7.    Section 38-7-90 of the 1976 Code is amended by adding a new subsection at the end to read:

    "(D)    This section shall not apply to an insurance company organized as a life and health insurer and domiciled in a state that, with respect to similar South Carolina insurance companies:

        (1)    does not impose a tax based on premiums;

        (2)    has adopted a tax based on net income instead of a tax based on premiums; or

        (3)    allows the insurance companies to elect to pay a tax based on net income instead of a tax based on premiums in substantially the same manner as in Section 38-7-15."

SECTION    8.    Section 38-7-160 of the 1976 Code is amended to read:

    "Section 38-7-160.    (A)    This title may not be construed as preventing any municipality from levying and collecting license fees or taxes in accordance with its ordinances. However, no municipality may charge a license fee to fire insurers or their agents licensed by the director or his designee in any other manner than on a percentage of the premiums collected in the municipality or realized from risks located within the limits of the municipality, or both, the license fee not to exceed two percent of the premiums collected in the municipality and realized from risks located in the municipality, except in cities of fifty thousand inhabitants or more, where not exceeding five percent may be charged. Preference must be given hereunder to the municipality wherein the insured property is located, and, if a license is levied against the insuring company on such basis, that company may not be subject to a similar license from a municipality wherein it may collect the premium for such transaction.

    (B)    Notwithstanding the limitations contained in subsection (A), after March 11, 2002, no municipality shall adopt a license fee or tax based on premiums applicable to insurance companies organized as life and health insurers that exceed three-fourths of one percent of such premiums. This subsection may not be construed to prohibit a rate in excess of three-fourths of one percent, and otherwise within the limits of subsection (A), that was adopted before March 12, 2002.

    (C)    In computing any tax due under Section 38-7-20 or Section 12-6-530, a credit must be allowed for any municipal license fees or taxes imposed under the authority of this section and paid during the taxable year by an insurance company organized as a life and health insurer. The credit under this subsection must be applied to the tax due after all other allowable credits have been applied, and if the amount of the credit under this subsection exceeds the amount of tax due after other credits and before application of the credit under this subsection, the amount of the credit under this subsection shall be limited to the amount of tax due after all other allowable credits have been applied.

    (D)    For each taxable year beginning after December 31, 2002, each insurance company organized as a life and health insurer and claiming the credit under Section 38-7-95 shall report to the department the cumulative number of its South Carolina employees as defined in Section 38-7-95. After June thirtieth of the year following the calendar year in which the cumulative number of South Carolina employees of all the insurance companies doing business in this State exceeds two thousand, no municipality shall impose license fees or taxes on these insurance companies. Thereafter, each municipality that imposed municipal license fees or taxes on the insurance companies before July first shall receive from the State annually on or before May thirty-first of the following calendar year and each year thereafter an amount, if any, equal to one hundred percent of the most recent annual amount it received from such insurance companies due May thirty-first preceding July first. The amounts payable under this subsection shall be paid out of insurance company premium taxes collected under Section 38-7-20, insurance company income taxes collected under Section 12-6-530, and retaliatory collections under Section 38-7-90. If the State fails to make the full payment required in this subsection by May thirty-first of any calendar year, the prohibition against the imposition of municipal license fees or taxes under this subsection must be suspended until such time as the State resumes full payment. The department shall adopt and promulgate regulations as may be required."

SECTION    9.    Section 38-7-190 of the 1976 Code is amended by adding new items at the end to read:

    "(6)    In computing any tax due under Section 38-7-90 from a taxpayer not organized under the laws of South Carolina, credits allowed under Sections 38-7-95, 38-29-160 and Chapter 6 of Title 12 shall be treated as taxes paid to South Carolina and shall reduce any tax otherwise calculated to be due under Section 38-7-90.

        (7)    Except as otherwise provided by statute, any credits against insurance company taxes described in this section and in excess of applicable limitations for a taxable year shall be carried forward for five years or until used, whichever first occurs."

SECTION    10.    Section 38-29-160 of the 1976 Code is amended to read:

    "Section 38-29-160.    (1)    Unless a longer period has been allowed by the director or his designee, a member insurer, at its option, has the right to show a certificate of contribution as an asset in the form approved by the director or his designee pursuant to subsection (8) of Section 38-29-80, at percentages of the original face amount approved by the director or his designee, for calendar years as follows:

        one hundred percent for the calendar year of issuance;

        eighty percent for the first calendar year after the year of issuance;

        sixty percent for the second calendar year after the year of issuance;

        forty percent for the third calendar year after the year of issuance;

        twenty percent for the fourth calendar year after the year of issuance;

        zero percent for the fifth calendar year after the year of issuance and thereafter.

    (2)    The insurer may offset the amount written off by it in a calendar year under subsection (1) against its premium (or income) or income tax liability to this State accrued with respect to business transacted in that year.

    (3)    Any sums acquired by refund, pursuant to subsection (6) of Section 38-29-80, from the association which have previously been written off by contributing insurers and offset against premium (or income) or income taxes as provided in subsection (2) of this section and are not then needed for purposes of this chapter must be paid by the association to the department and by him deposited with the State Treasurer for credit to the general fund of this State."

SECTION 11.    Except as otherwise expressly provided, this act takes effect January 1, 2003.