SECTION 3.822. Basis and Reporting of Surplus Lines Premium Tax, the Allocation of Premium for Surplus Lines and Independently Procured Premium Tax, and Multiple Agent Transactions for Surplus Lines Insurance

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Exempt premiums--If a surplus lines policy covers risks or exposures that are properly allocated to federal waters, international waters, or risks or exposures that are under the jurisdiction of a foreign government, then the premiums on such policies or portions of such policies are not taxable in Texas.

(2) Federal preemptions to state taxation for surplus lines insurance--Federal preemptions from state taxation exist for premiums on policies that are issued for the following entities:

(A) The Federal Deposit Insurance Corporation (FDIC), when it acts as the receiver of a failed financial institution that holds the property being insured;

(B) The National Credit Union Administration; and

(C) A federally chartered credit union.

(3) Multiple agent transaction--A transaction in which two or more agents, each acting as a surplus lines agent of record, place portions of the total insurance coverage, under a cover note or under a subscription policy, for a single insured.

(4) Premium received--The total gross amount of premium that is collected for the coverage that the contract or policy provides, which includes, but is not limited to, premiums, membership fees, assessments, dues, policy fees, or any other consideration for insurance. This amount includes agent fees that are charged in addition to, or in lieu of, a commission. Premium received does not include any separately billed finance charge that is associated with the financing of the premium.

(5) Premium written--The total gross amount of premium for the coverage that the insurance contract or policy provides, which includes, but is not limited to, premiums, membership fees, assessments, dues, policy fees, or any other consideration for insurance that is billed to the insured. This amount includes agent fees that are charged in addition to, or in lieu of, a commission. Premium written does not include any separately billed finance charge that is associated with the financing of the premium.

(6) Properly allocated and apportioned--The division or distribution of premium among or between the various locations afforded coverage under the insurance contract. This distribution of premium must comply with the methods that this section describes.

(7) Surplus lines agent or agency--An agent or agency that holds a surplus lines license that this state has issued pursuant to Insurance Code, Article 1.14-2.

(8) Surplus lines agent of record--The Texas licensed surplus lines agent who places a policy with an eligible surplus lines insurer, or the Texas licensed surplus lines agent who transacts business directly with an out-of-state agent not licensed by Texas as a surplus lines agent to obtain coverage with an eligible surplus lines insurer. The agent in these situations is the agent of record for such agent's portion of the premium for the policy placement.

(9) Taxable surplus lines premium--For surplus lines taxation purposes, except for exempt or federally pre-empted premiums, surplus lines premium is taxable under Insurance Code, Article 1.14-2, §12(a).

(10) Texas waters--Waters within 10.359 statute miles or nine nautical miles from the Texas coastline.

(b) Determination of Texas premium and tax due. Unless otherwise properly allocated and reported pursuant to subsection (c) of this section, all premiums that are associated with a surplus lines policy are Texas premiums for taxation and reporting purposes. Premiums on policies for risks in Texas waters are subject to Texas taxation. All surplus lines insurance premium taxes must be computed on the total gross premium written or premium received for the policy as of the date that coverage becomes effective, except as follows:

(1) A policy that is issued for a term in excess of one year, with a fixed premium that is payable annually, shall be taxed on the first year's premium at the statutory rate as of the date that the policy is effective. The tax on premiums payable for subsequent years shall be computed and collected as of the date that such subsequent premiums become due and payable. For taxation purposes, that date is the policy anniversary date.

(2) Premium deposits made on a policy that provides for retrospective premium adjustments are premiums for such policy as of the effective date of the policy, and are taxed accordingly.

(3) Retrospective premium adjustments that are made under the terms of a surplus lines policy and that require the insured's payment of additional premiums are taxed at the rate originally charged. Retrospective premium adjustments that require the return of a portion of premium or premium deposit are effectuated by the surplus lines agents through a tax refund at the rate originally charged.

(c) Allocation of premium. A surplus lines agent of record may allocate the premium by use of the method that most reasonably and equitably allocates the premium that applies to Texas, other states, and nontaxable jurisdictions on those policies that cover multiple locations. The amount of premium on each policy must be allocated as Texas premium, other states premium, and exempt/preempted premium and must be reported to the Surplus Lines Stamping Office of Texas in a format that the Texas Department of Insurance and the Surplus Lines Stamping Office of Texas provide. Policies for risks that are 100 percent exempt, are preempted by federal statute and are on risks located entirely outside Texas, or risks that are allocated entirely to another state, are not required to be reported to the Surplus Lines Stamping Office of Texas. The premiums for these policies must be reported to the comptroller on a form prescribed for this purpose. The premium allocated to other states must be reported in the aggregate for all other states, beginning with policies that are effective the month that follows adoption of this section. The allocation standard chosen must be maintained in the policy file at the office of the surplus lines agent of record, and must be available upon request for inspection for taxation and regulation purposes for a minimum of four years, beginning the day after the date on which the annual tax report is due.

(1) Acceptable apportionment or premium allocation standards are as follows:

(A) (PA)--percentage of physical assets in Texas;

(B) (EP)--percentage of payroll that applies to employees who are located or conduct business in Texas;

(C) (S)--percentage of sales in Texas;

(D) (TC)--percentage of taxable capital for franchise tax purposes in Texas;

(E) (T)--percentage of time that an insured's conduct or property is exposed to coverage in Texas;

(F) (X)--any other method of equitable apportionment that is adequately described.

(2) Premiums that are properly allocated to any other state or states, and that are specifically exempt from taxation under the regulations of the other state or states, are not taxable in Texas.

(3) The apportionment or allocation standards under subsection (c)(1) of this section also apply to independently procured insurance premiums under Insurance Code, Title 2, §101.252.

(d) Tax base election. Surplus lines agents may elect to report and pay the premium tax on a premium-written or premium-received basis. All premiums will be taxed on the same basis. Each surplus lines agent must file an election on forms that the comptroller prescribes, and must state the method of taxation that the agent has chosen. If an agent fails to file an election, the agent must report on a premium-written basis. The tax base election chosen must be identified on the first tax report filing made that follows adoption of this section. Subject to approval from the comptroller, agents are allowed to change their election every four years prospectively. After the expiration of the initial four year election period, a change in the tax base election will be effective beginning the year received by the comptroller. An agent who changes from a premium-received to a premium-written basis will owe taxes on all outstanding receivables as of January 1 of the year of the change.

(1) Agents who elect to pay premium taxes on a premium-written basis will owe tax on all premium written during the reporting period, regardless of whether the tax has been collected, unless the premium is properly allocated or apportioned and reported under subsection (c) of this section.

(2) Agents who elect to pay premium taxes on a premium-received basis will owe tax on all premium received, regardless of whether the tax has been collected during the reporting period, unless the premium is properly allocated or apportioned and reported under subsection (c) of this section.

(3) Failure to bill and collect the tax at the time of delivery of the cover note, certificate of insurance, policy, or other initial confirmation of coverage is a violation of Insurance Code, Article 1.14-2, §12.

(e) Prepayment of taxes. Beginning January 1, 2000, licensed surplus lines agents are required to remit tax prepayments.

(1) A surplus lines agent must remit a premium tax prepayment by the 15th day of the month that follows any month in which accrued taxes equal or exceed $70,000, based on the tax base elected by the agent under subsection (d) of this section. The prepayment amount must equal the accrued liability at the end of the month.

(2) Failure to make the required prepayments will result in the application of penalty and interest.

(f) Bad debts. Any portion of the policy premium that is not collectible is considered to be a bad debt.

(1) An agent is not required to report tax on any amount that has been entered in the agent's books as a bad debt during the reporting period in which the contract was made, provided that the agent has deducted such amount on the agent's federal income tax return for that period.

(2) An agent is entitled to a credit for tax reported and paid on an account that is later determined to be a bad debt. The agent may take a deduction on the surplus lines tax report form, or obtain a refund from the comptroller, in the reporting period in which the agent's books reflect the bad debt. Deductions and refunds due to bad debts are limited to four years from the date on which the account is entered in the agent's books as a bad debt.

(3) A deduction may only be claimed on that portion of the bad debt that represents the amount reported subject to tax. In determination of that amount, all payments and credits to the policy may be applied ratably against the various charges that comprise the bad debt, except as paragraph (4) of this subsection provides.

(4) An agent may not deduct the expense of collection of bad debt, or the amount that the agent pays to a third party or that the third party retains for the service of collection of bad debt, from the amount subject to tax.

(5) To claim bad debt deductions, an agent's records must show:

(A) the date of the original or renewal insurance policy;

(B) the name and address of the insured;

(C) the amount that the insured contracted to pay;

(D) taxable and nontaxable charges;

(E) the amount on which the agent paid tax;

(F) all payments or other credits that are applied to the account of the insured; and

(G) evidence that the uncollected amount has been designated as a bad debt in the agent's books and records and was claimed as a bad debt deduction for income tax purposes.

(6) If an agent later collects all or part of an account for which a bad debt deduction was claimed, the amount collected must be reported as taxable premium in the reporting period in which such collection was made and taxed at the rate originally assessed.

(7) Installment policies may not be labeled as bad debts merely for the purpose of delay of payment of the premium tax.

(g) Financed or periodic payment transactions. Financed or periodic payment transactions include all policies in which the terms of the contract provide for deferred payments of the premium. These transactions include installment policies, conditional contracts, and premium-financed policies.

(1) Tax is due on the premium, interest charges, finance charges, and all other service charges incurred as a part of the policy issuance, unless these charges are stated separately to the insured by such means as an invoice, billing, ticket, or contract.

(2) An agent must report and pay tax on financed or periodic payment transactions based on one of the reporting methods that subsection (d) of this section describes.

(A) If the agent has elected to pay tax based on a premium-written basis, the entire amount of tax is due on the premium for the policy period and must be reported during the initial year in which the policy is effective.

(B) If the agent has elected to pay tax on a premium-receipts basis, tax must be reported based on the actual premium collected during the reporting period, excluding separately stated finance charges.

(h) Multiple agent transaction. Each agent of record in a multiple agent transaction is responsible for filing the policy that covers such agent's portion of the premium with the Surplus Lines Stamping Office of Texas, for filing an annual tax report with the comptroller on such business, and for payment of premium taxes on such premium or portion of such premium.

(i) Absorption of tax. As stated in Insurance Code, Article 1.14-2, §12, surplus lines agents are prohibited from absorption of the surplus lines premium tax. The assessment of tax due but not collected from insureds does not constitute absorption of taxes. Agents who are found to be absorbing tax through practices such as rebating or failing to bill for tax, or through violation of any subsection of this section, will be reported to the Texas Department of Insurance for regulatory action.

Source Note: The provisions of this §3.822 adopted to be effective March 20, 2001, 26 TexReg 2199