SECTION 3.835. Reporting of Unauthorized Insurance Premium Tax by Nonadmitted Captive Insurers

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

(1) Captive insurer--An insurance company that is formed for the purpose of insuring the risks of entities that are related to it through common ownership. These may be referred to as single-parent, in-house, or pure captives.

(2) Exempt premium--Premium that is not taxable in this state. Examples include premiums on risks or exposures that are properly allocated to federal waters or international waters; premiums on risks or exposures that are under the jurisdiction of a foreign government; and premiums that are specifically exempt from taxation under the regulations of another state.

(3) Nonadmitted insurer--An insurer who does not hold a certificate of authority in this state.

(4) Preempted premium--Federal preemptions from state taxation exist for premiums on policies that are issued to the following entities:

(A) the Federal Deposit Insurance Corporation, when it is the receiver of a failed financial institution that holds the property being insured. The preemption applies to receiverships only, not to supervision or conservatorships;

(B) federally chartered credit unions; and

(C) the National Credit Union Administration, when acting as conservator or liquidating agent for federally chartered credit unions.

(5) Taxable premium--The total gross amount of consideration paid for insurance coverage provided under the contract or policy, including, but not limited to, premiums, premium deposits, membership fees, assessments, dues, policy fees, or any other consideration for insurance that is required to be paid.

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

(b) Properly allocated and apportioned. Premium for a policy that covers risks in Texas and other states or jurisdictions is properly allocated and apportioned when it is divided or distributed to the various states or jurisdictions that are afforded coverage under the policy in accordance with the methods described in this section.

(1) The taxpayer must allocate the premium using the allocation standard that most reasonably and equitably apportions the premium applicable to the risk in Texas, other states, and nontaxable jurisdictions based on the type of policy. For example, an allocation based on the percentage of sales in Texas in relation to sales in other states would be a reasonable allocation for a product liability policy, but an allocation based on the percentage of physical assets in Texas would not.

(2) The allocation standard chosen must be maintained in the policy file at the office of the taxpayer and must be available for inspection upon request by the comptroller or the comptroller's authorized representative for a minimum of four years from the date the tax report is filed.

(3) Acceptable apportionment or premium allocation standards include:

(A) percentage of physical assets in Texas;

(B) percentage of payroll applicable to employees located or conducting business in Texas;

(C) percentage of sales in Texas;

(D) percentage of time insured's conduct or property is exposed to coverage in Texas;

(E) the total insured value of the property that is located in Texas; and

(F) any other method of equitable apportionment that is adequately described by the taxpayer in its records.

(c) Determination of premium tax due.

(1) Nonadmitted captive insurers must report tax to the comptroller on all premium, excluding exempt premium, preempted premium, and premium that is properly allocated and reported as a taxable premium of another state, that:

(A) covers risks or exposures located or resident in this state;

(B) is written, procured, or received in this state;

(C) is for a policy negotiated in this state; or

(D) is written for an insured whose home office or state of domicile or residence is located in this state.

(2) In the case of an indemnity policy that reimburses the insured for losses paid, the location of the risk or exposure insured is the location of the insured's home office.

(3) No later than March 1 following the calendar year in which the insurance was effectuated, continued, or renewed, and unless otherwise properly allocated and reported, a nonadmitted captive insurer will pay to the comptroller a tax of 4.85% of the taxable premiums described in paragraph (1) of this subsection. The tax under this section, if not paid when due, is a liability of the insurer, the insurer agent, or the insured, and each party is jointly and severally liable for payment of the tax.

(4) Insurance Code, §101.053(b)(6) exempts from regulation by the Department of Insurance an activity in this state by or on the sole behalf of a nonadmitted captive insurance company that insures solely:

(A) directors' and officers' liability insurance for the directors and officers of the company's parent and affiliated companies;

(B) the risks of the company's parent and affiliated companies; or

(C) both the individuals and entities described by subparagraphs (A) and (B) of this paragraph.

(5) The regulatory exemption under Insurance Code, §101.053(b)(6) does not exempt the insured or the insurer from payment of an applicable tax on premium.

(6) Premiums on policies for risks in Texas waters are subject to Texas taxation.

(7) All premium taxes are calculated on the total gross premium written for the policy as of the date that coverage becomes effective, except as follows:

(A) 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 at the statutory rate as of the date that such subsequent premiums become due and payable. For taxation purposes, that date is the policy anniversary date.

(B) 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.

(C) Retrospective premium adjustments made under the terms of a policy 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 through a tax refund at the rate originally charged.

(d) Business conducted through the mail or by email. Venue for an act performed by mail, facsimile, electronic mail, or other method is the place where the matter transmitted is delivered and takes effect.

Source Note: The provisions of this §3.835 adopted to be effective October 16, 2013, 38 TexReg 7120