United States

Illinois: Insurance Premium Financing Entities Were Sales Finance Companies

Sep 18, 2017
From KPMG TaxWatch

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The Illinois Independent Tax Tribunal recently addressed whether certain entities were financial organizations or general corporations. This mattered because for the tax years at issue financial organizations and general corporations could not be included in the same unitary combined group. The case arose after the taxpayer amended its returns to treat certain entities, which had originally been included in its financial organizations’ combined group, as general corporations. The Department denied the refunds based on the amended returns and the matter eventually came before the Tax Tribunal.

The entities at issue provided short term loans to businesses that used the loan proceeds to finance their commercial property and casualty insurance premium obligations. Under Illinois law, the definition of a financial organization includes a “sales finance company.” A sales finance company is defined, in part, as a person primarily engaged in the business “of making loans for the express purpose of funding purchases of tangible personal property or services by the borrower.” The taxpayer argued that the entities were not “sales finance companies” (and were therefore not financial organizations) because the purchase of insurance was the purchase of an intangible, rather than the purchase of a service. In other words, the taxpayer asserted that providing insurance premium financing was not covered in the sales finance company definition because insurance contracts are intangible in nature. The Department, on the other hand, argued that the purchase of insurance was the purchase of a service and the entities therefore met the definition of sales finance companies.

The taxpayer appeared to base its position (at least in part) on the fact the insurance was provided by virtue of a contract between the insurer and the insured. In the taxpayer’s view, a contract is an intangible and cannot be considered a service. The Tribunal rejected this position, noting that sales finance companies are companies that finance sales of services and tangible personal property. These types of sales are often the basis of contracts and the taxpayer’s requested ruling would render these terms in the sales finance company definition moot. The Tribunal also noted that the appeals court had held in several decades-old cases that the sale of insurance is the sale of a service. The legislature, presumably knowing these older cases were out there, could have specifically defined insurance as something other than the sale of a service for purposes of the Illinois Income tax Act. After rejecting a number of other arguments set forth by the taxpayer, the Tribunal ruled that providing insurance is the provision of a service. Therefore, the entities were sales finance companies included in the definition of a financial organization. Please contact Brad Wilhelmson at 312- 665-2076 with questions on Premier Auto Financing, Inc. v. Illinois Dep’t of Revenue.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

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.