Tax Payments under NRRA
Under the NRRA language, surplus lines brokers will return to a single-state tax payment system that existed across the country until the 1990s. Brokers will no longer have to comply with the tax provision of all states where portions of the risk reside. They will make a single tax payment to the home state of the insured.
The multi-state tax payment system that presently exists will come to an end as the NRRA authorizes allocation of taxes "paid to the home state" so existing tax system would not meet the requirements of the NRRA.
As a result, legislators have a high level decision to make. They can opt for a tax allocation procedure consistent with the Congressional statement of intent, such as a compact, or they can allow the single state tax system to become effective on the effective date of the NRRA. This is a significant policy decision that needs to be made by the legislators.
Once the tax is collected by the home state, it is not clear if there is any way to allocate the tax to the other states, short of an interstate compact.
Surplus Lines Interstate Compact
Over the past few years NAPSLO has been involved with a number of industry groups to pursue the development of a surplus lines insurance multi-state interstate compliance compact (SLIMPACT) that would address the surplus lines premium tax remittance and multi-state compliance issues plaguing the E&S industry.
With language from the Nonadmitted and Reinsurance Reform Act recently signed into law, and the law to go into effect in July 2011, it is the intent of Congress for the states to implement an interstate compact to collect and allocate surplus lines premium taxes.
If the states do not form a compact or implement some other tax allocation system, taxes on a multistate risk will be collected and retained by the home state of the insured.
How a Tax Compact Would Work
Under an interstate compact a clearinghouse would be established to receive transaction and tax data which will be used to report, periodically, each state’s allocated share of the surplus lines tax. The compact commission would adopt uniform tax allocation formulas to be used by each compacting state.
In discussions with the states, NAPSLO promoted an interstate tax compact because it would:
- Clarify the law and ease the regulatory burdens on E&S brokers when placing multistate risks;
- Allow each compacting state to collect taxes on all nonadmitted risks where risk exposures are present in the compacting state(s); and
- Save E&S brokers, over time, millions of dollars in frictional costs associated with current efforts to comply and pay taxes state by state on each multistate risk the broker places
For discussion purposes, NAPSLO worked with a group to prepare a draft interstate compact and a memo explaining the issues that are available. The draft interstate compact, a copy of an Executive Summary, and a set of FAQs are available to read.
