United States

Arizona: Medicaid Contractors are Insurance Companies Exempt from Corporate Income Tax

Sep 26, 2016
From KPMG TaxWatch

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The Arizona Department of Revenue recently released a ruling addressing whether two companies were considered “insurance companies” so that they were exempt from paying Arizona corporate income tax. The Arizona Health Care Cost Containment System or AHCCCS is a Medicaid program that provides health insurance to qualifying Arizona consumers. AHCCCS contracts with HMOs and other companies to administer and provide health insurance plans to qualifying Medicaid recipients. AHCCCS compensates such entities through a prepaid capitated fee. This fee requires the contractor entity to deliver healthcare services for the duration of the contract to a specified number of members based on a fixed rate per member. The fee is not adjusted to account for the actual number of members who receive care or the actual amount of service provided.  AHCCCS contractors are required to pay a two percent tax based on the total capitation fee received. This tax is identified as a premiums tax, but is imposed under Title 36 of the Arizona Code rather than Title 20, which is the section under which premiums tax is generally imposed on insurance companies. The two companies requesting the ruling were both AHCCCS contractors that paid the two percent tax on capitation fees. They requested a ruling as to whether they were considered “insurance companies” exempt from corporate income tax.

The Department ruled that because the tax paid on the prepaid capitated fee was identified as a premiums tax, the companies were exempt from corporate income tax. The law exempting entities paying premiums tax from corporate income tax did not require that the premiums tax had to be assessed under Title 20—the law simply required that premiums tax be paid. In the Department’s view, the companies were the functional equivalent of insurance companies and were therefore exempt from Arizona’s corporation income tax. Please contact Brandee Tilman at 213-955-8985 with questions on Taxpayer Information Ruling LR15-007.

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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.