More States Join Surplus Lines Tax Sharing Proposal

By | July 22, 2011

Four new members joined a surplus lines premium tax sharing agreement supported by state regulators this week, even while some predict confusion over a competing proposal may lead to the demise of any surplus lines multi-state premium tax sharing in the future.

The new members include Nebraska, Nevada, Puerto Rico, Utah and Wyoming, which brings the total number of states and one U.S. Territory participating in the Non-Admitted Insurance Multi-State Agreement (NIMA) to 10 members. The other participants include Connecticut, Florida, Hawaii, Mississippi, Louisiana, South Dakota, Utah and Wyoming. With these new members, the participating states collectively represent 21.6 percent of the surplus lines market.

NIMA is a tax sharing agreement that will allow states to report, collect, allocate and distribute surplus lines tax revenues consistent with the Non-Admitted and Reinsurance Reform Act (NRRA). The NRRA, part of the Dodd-Frank Wall Street Reform legislation passed in 2010, mandates that beginning July 21, 2011, the insured’s home state will be the only state with jurisdiction over multi-state surplus lines transactions and the only state that can require a tax be paid by the broker. Without a tax sharing agreement in place, several states could potentially lose surplus lines tax revenues; the lack of an agreement could create distortions in the marketplace.

As of the July 21 deadline, no such compact or tax sharing agreement exists. However two proposals — including the National Association of Insurance Commissioners’ supported NIMA proposal, and the Surplus Lines Insurance Multi-State Compliance Compact (SLIMPACT) proposal, which is supported by the National Conference of Insurance Legislators (NCOIL) and several industry groups — are being considered by state officials. The discrepancies between both proposals are creating concerns for agents and brokers when it comes to complying with the NRRA, some say.

Phil Ballinger, executive director of the Texas Surplus Lines Stamping Office, says the two proposals create a potential conflict when it comes to tax sharing between states on multi-state surplus lines risks because the proposals include competing “clearinghouses.”

Both SLIMPACT and NIMA will set up a clearinghouse, an entity designed to collect and redistribute any due multi-state surplus lines premium tax to the appropriate state where the risk may be located.

“NIMA is actually a tax collector. SLIMPACT maybe a tax collector or a data collector that tells agents at the end of the year or quarterly, whatever the periodic payment scheme ends up being, that you owe this much to this state, this much to this state, based on the business that you have reported to the clearinghouse,” Ballinger says.

Some states are adopting the NIMA proposal, while other states are adopting the SLIMPACT proposal, and still others have chosen neither — this creates a confusion environment for agents and brokers, Ballinger says.

“At least in the short term, chaotic is the only word you can use to describe it,” Ballinger says.

NIMA members predict more states will join once an official NIMA supported clearinghouse is established and is ready to begin administering funds.

But Ballinger notes that most of the big states, with the exception of Louisiana and Florida, have not joined a tax sharing agreement. That may be because without a tax sharing agreement in place, the states could elect to keep 100 percent of the tax revenue generated from multi-state transactions.

“Most of the multi-state transactions probably occur in the big states,” Ballinger says. “So if these smaller states are madly joining these agreements with a kiss and promise that they are all going to be receiving all these allocated shares of multi-state taxes on multi state risks, but all the big states don’t join, there may not be a lot of taxes flowing to the smaller states.”

Securing surplus lines premium tax revenue seems to be a primary motivator to join an agreement, or tax compact for states today.

“I am proud to announce Nevada’s entry into NIMA,” said Nevada Insurance Commissioner Brett Barratt. “By joining NIMA, Nevada will preserve at least $2 million in premium tax revenue with potential to collect even more revenue through NIMA.”

As the first U.S. territory to join NIMA, Puerto Rico Commissioner Ramon Cruz Colon says his country is eager to collaborate with other regulators in the collection and allocation of premium taxes for multi-state surplus lines insurance transactions. “We are readily committed to having the ability to collect surplus lines premium taxes and ensuring continuity in receiving taxes based on the risk or exposure located in our jurisdiction,” he says.

Richard Bouhan, executive director of the National Association of Surplus Lines Offices (NAPLSO), says it’s important to remember, a tax sharing agreement or tax compact, will not create any more revenue; it just redistributes the tax revenue already there. But as of today, there is no tax sharing agreement in place, Bouhan doesn’t expect to see one happening anytime soon, either.

“There is no compact clearinghouse in existence at this time and the prospect of one in the near future isn’t all that great,” Bouhan says.

Even so, agents and brokers remain concerned and confused over what might come if tax sharing between states comes into play.

“When you get into whose joined what clearinghouse and what allocation formulas are there, and how the other states get their money, and what tax rates do you even use on the other states allocated premiums — that’s unclear,” Ballinger says.

But Ballinger says some in the industry predict the confusion may lead to the demise of any tax compact, especially if the large states opt to forego joining either NIMA or SLIMPACT.

“There is a school of thought that speculates that if the large states stand pat for awhile, and these two agreements are made up of primarily smaller states, and they go along and there’s a bureaucracy set up, and there’s costs involved there, and yet there is still not a fair amount of taxes coming off of it back to the other states,” the tax agreements may fall apart without the participation of the big states,” Ballinger says. “That’s one possibility that I’ve heard expressed more than once.”

For now, the members of NIMA remain committed to making it work.

“The State of Mississippi is committed to the success of NIMA,” says Mississippi Insurance Commissioner Mike Chaney. “Working collaboratively we will develop a system that fairly distributes surplus lines taxes.”

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