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Insurance Tax Special Report to the May 2009 Tax Policy News
Survey of States - Multistate Taxation of Surplus Lines Insurance Business


The article "Thinking Outside the Box" in the August 2006 issue of Tax Policy News discussed the allocation and taxation issues involving surplus lines insurance policies issued on a multi-state basis. As that article stated, "because of differing state statutes, regulations, due dates and tax rates, some agents and policyholders may be unsure how to report and pay taxes to each state."

Congress has recently considered legislation that would mandate a federal solution to this issue. While the federal legislation covers several areas, we are only concerned with the provisions that relate to multi-state tax reporting at this time. In addition, some state regulatory and tax authorities have met with representatives of the industry and certain state stamping offices over the past two and a half years to discuss how a tax and regulatory compact might work. Participants expressed many ideas that would provide a structure to handle multi-state regulatory filings and tax payments to the states. This effort resulted in a draft agreement known as the Surplus Lines Insurance Multi-State Compliance Compact (SLIMPACT). To date, the federal legislation has not passed nor have states adopted the SLIMPACT.

In order to determine how the federal legislation and SLIMPACT might impact tax filings, the Texas Comptroller's Office, with cooperation from the Texas Department of Insurance, conducted a survey in 2008. This survey was sent to all 50 states and U.S. Territories that are members of the National Association of Insurance Commissioners (NAIC).

The Texas survey asked key questions that would help determine the impact to the states of following a federally mandated tax filing and payment requirements and limitations based on the policyholders' state of residence/domicile (the Federal Plan) as compared to the state of residence/domicile of the surplus lines agents that place such policies (the Alternative Plan).

One of the key elements of the Federal Plan is that tax report filings are based on the "home state of the insured." Under this plan, the definition of "home state" includes the state where negotiations take place, the policy is delivered, the largest portion of the risk is located, the principal residence of the insured is located, the principal office of the insured is located, or the corporation or entity is located. The draft SLIMPACT included a similar definition.

The Alternative Plan is similar to the suggestion from the August 2006 "Thinking Outside the Box" Tax Policy News article and would require tax report filings in each state only from agents "resident" to that state. As such, an agent residing/headquartered in Texas would file on a multi-state basis only with Texas, reporting the premium on the business for each state to which it applies. Under the Alternative Plan, each state would be responsible for verifying compliance for the agents/agencies in its state.

To better illustrate the impact of the Federal Plan and the Alternative Plan, below is a comparison of the actual survey numbers from California, Florida and New York. For purposes of the survey, a reference to agents includes agencies. In evaluating the survey results we have made certain assumptions, including: states currently require licensed resident and non-resident agents to file and pay taxes; non-licensed agents may file direct procurement or independently procured taxes on an individual policy basis; under the Federal Plan, if there is an agent involved in the placement, the business is considered surplus lines and not independently procured as it may currently be in some states. (This classification would expand surplus lines filings in some states.)

State Number of Resident Agents Licensed for Surplus Lines Number of Resident and Non-Resident Agents Licensed for Surplus Lines Possible Increase in the number of Agents Filing under Federal Plan Possible number of Agents Filing under Alternate Plan
California 1,121 1,691 20,491 1,121
Florida 797 1,068 21,114 797
New York 1,201 2,152 20,030 1,201

Under the Alternative Plan, California would receive tax filings from 1,121 agents/agencies. This is a decrease of 570 tax filings for the state. Under the Federal Plan, the possible number of tax filings in California could equal the total number of surplus lines licenses issued nationwide, which is 22,182. California could therefore see an increase of 20,491 from their present situation of 1,691.

In summary, surplus lines multi-state taxation as currently administered by the states can be complicated and confusing. Obviously, a change is needed to make the reporting and paying of taxes more uniform. Any legislation or tax agreement should take into consideration the desired result of tax streamlining and the administrative costs to achieve that result. Finally, it may not be feasible to use the same approach for regulatory and tax filing purposes.

You may review a summary of the Survey Results by following this link.

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