Insurance Brokers Told to Pay City Tax By JACQUELINE FOX Staff Reporter Health and life insurance brokers across the Valley and citywide are being put on notice that, contrary to widespread belief, they are not exempt from paying city business taxes, as are their counterparts in the industry who are classified as appointed insurance agents and exempt through state law. At issue is the definition between a broker and an appointed agent. From the city’s point of view, brokers are defined as those individuals who operate independently from insurance firms, selling packages of health and life insurance products they bundle together and collect a commission on, typically between 4 and 25 percent. Appointed agents, on the other hand, are considered to be individuals who work directly and exclusively for the insurance companies. Those companies, the city adds, are charged with paying business taxes, so their agents pay only what’s called an “in lieu” tax to the state. But brokers are considered to be operating as independently run businesses and must pay city business taxes, the city says. And many of them are finding themselves among the large number of individuals being tracked down through a program that allows the city to share tax information with the State Franchise Tax Board. The city’s office of finance has sent them letters notifying them that they have been identified as doing business in the city through the tax board partnership and are required to show proof that they are an appointed agent, or begin paying business taxes or face penalties. According to Bob Eustrom, chief of enforcement with the office of finance, the city is not systematically targeting insurance brokers, but rather they are among the roughly 200,000 business operators identified through the file-sharing program established under AB 63 two years ago. “We are really in the very early stages of pursuing brokers, as we are with all businesses that surface through the sharing of information with the state,” Eustrom said. According to Bruce Benton, president of the Los Angeles chapter of the Association of Health Underwriters and owner of Woodland Hills-based Smith Benton Insurance, many brokers are confused over their status and have asked for clarification from the city. He, along with other brokers, several of whom declined to speak publicly about the issue, say that, because health/life brokers often also act as agents for insurance companies, they have always believed they were exempt from paying city business taxes. Benton said he has asked his membership of roughly 500 insurance brokers and agents for feedback on their status and, in the meantime, says many are already paying their accountants to investigate state laws to see if they apply or not. “I think the city is very, very unclear in terms of what they consider an agent and a broker,” said Benton. “Clearly a considerable amount of people are being contacted, some have been audited and some have paid their CPAs upwards of $1,000 to investigate for them to see if they are exempt or have to pay. So there is obviously a huge situation here for the city to figure out.” But according to Eustrom, there is little left to interpretation. “We are not investigating our position on the difference,” he said. “We classify brokers as business owners, separate and apart from those agents of record who are paid for and work directly for insurance firms, and the tax laws for them apply.”
