Background Memorandum To: Multi-State Tax Working Group From: Edward Simpson, IID Manager Date: June 3, 2005 Subject: Background on surplus lines premium tax with multi-state exposures ____________________________________________________________________________ The payment of premium tax on surplus lines and direct placements with multi-state or cross-state border exposures has been a chronic and significant problem for both the surplus lines industry and state regulators. Over the years the NAIC has taken steps to create a uniform and consistent nationwide mechanism through which taxes on surplus lines and direct placement risks can be properly paid by the industry. Unfortunately, these efforts have not been successful because various state surplus lines premium tax laws affecting multi-state risks are either conflicting, inconsistent, or even non-existent. NAIC Model Laws #870 and #872 address the issue, but these acts have not been passed in all jurisdictions. Further, the most recent United States Supreme Court decision on the right of states to tax cross-border placements appears, in some cases, to place the levying of such tax at odds with the McCarran-Ferguson Act and the U.S. Constitution itself. The SMART Act currently making its way through Congressional channels contains provisions that address the situation, but this Act is still being negotiated and has not become law. The Issue All states hold surplus lines brokers responsible for remitting the premium taxes arising from a surplus lines transaction. For policies where 100% of the risk lies within a single state the payment of premium taxes is a straightforward process, however, in many cases the policy may provide coverage for properties and risks that span a number of states. In these situations the collection and remittance of premium taxes becomes more complex. Some states can be referred to as "allocation" states whereas others can be referred to as "full premium" jurisdictions. Allocation states require the surplus lines broker to allocate premiums to those states in which exposures exist and to pay tax on the portion of the premium allocated to their state. Further, allocation states may sometimes require out-of-state brokers to remit taxes on the allocated portion of any risk apportioned to them by the out-of-state broker. Others may require the insured to pay the taxes directly under the state's independent procurement laws. On the other hand, full premium states require the surplus lines broker to pay tax on the entire amount of premium, regardless of the locations of the risk. In some cases double-taxation, or at least a conflict in state laws, can occur if the policy is placed in a full premium state and part of the risk resides in an allocation state. Surplus lines brokers, through their trade organization the National Association of Professional Surplus Lines Offices (NAPSLO), have made numerous complaints to regulators about encountering inconsistencies among state surplus lines tax laws. Among those complaints is the lack of a universal formula employed to allocate taxes among the states, and on occasion the allocation method in one state not being accepted in another state. Surplus lines brokers may also encounter frustration when attempting to determine how to pay taxes to states whose

statutes are silent on the out-of-state broker's obligation to pay or remit a tax. Further, taxing authorities vary across state lines, with departments of insurance sometimes responsible for collecting the tax and other revenue authorities responsible in others. Independent Procurement Taxes Independent procurements are an additional complication to the issue, so it will be useful to illustrate how independent procurements apply. Assume an insured with Exposure One in State A and Exposure Two in State B, and a surplus lines transaction covering both risks takes place in State A. From the perspective of State B this is an independent procurement for Exposure Two; the insured is located in State B but the insurance transaction took place outside of State B's borders. Most states tax these transactions and in many cases the insured is required to pay the premium tax. In some cases the surplus lines broker may pay the tax in order to avoid the awkward situation of involving the insured in the substance of the tax issues. Unfortunately this can sometimes result in the broker receiving a notice of having conducted an illegal sale in the state, thus discouraging further good faith attempts at paying the tax. The more and more common practice of a broker is to pay all the tax to the state in which it is licensed so if questions arise the broker can refer the inquirer to the state insurance department on the basis that the tax has been paid. While this is a defensive move on the part of industry, it does not necessarily result in the taxes being remitted to all states that may lay claim to a portion of the tax. As mentioned above, brokers have noted that independent procurement taxes are paid to the state insurance department in some states and to different revenue departments in others. NITCH In 1995 the Multi-state Tax Working Group of the Surplus Lines (C) Task Force was charged with proposing a solution to the multi-state tax dilemma. The result was the Non-admitted Insurance Tax Clearinghouse (NITCH). This proposed solution consisted of a subscription service to the surplus lines industry, comprised of software containing current non-admitted insurance laws and regulations, tax reporting forms, state formulae for premium tax allocation, and other related information. The service could also include optional on-line updates. Although a good effort, NITCH had a fatal flaw. While the service was a good compendium of the various state surplus lines tax laws the software had no effect on resolving the conflicts and inconsistencies that existed within those statutes. The working group requested a budget of $959,250 to implement the proposal, but budget constraints during that time precluded funding the project. Neither did the program attract any industry support and the Internal Administration (EX1) subcommittee decided to table the project. At the December 1995 national meeting the working group recommended the group be dissolved since it had completed its charges, and with that the NITCH project was abandoned. Multi-State Tax Working Group Reconstituted At the 2000 Spring national meeting the Surplus Lines Task Force reconstituted the Multi-State Tax Working Group. NAPSLO was requested to provide background information, position papers, and surveys of the states to assist the working group in its discussions. (See attachments). The group's initial approach was to promote allocation among all states and allow non-resident surplus lines brokers to file and pay independent procurement taxes in other

states. This solution had long been advanced by NAPSLO and the group was cautiously supportive of it. At subsequent meetings of the group the state surveys and other information requested of NAPSLO was discussed. It was found that a number of states whose statutes made them full taxation jurisdictions were in practice allocation states, but other than that little progress was made as far as resolving the underlying conflicts and inconsistencies. At the summer 2001 national meeting the group determined that its next task was to contact the full premium states and discuss their rationale for taxing the full premium rather than allocating premium among the affected states. It was also at this meeting that the implications of the pending Dow v. Rylander case were first discussed. Dow v. Rylander Dow Chemical, a Delaware company headquartered in Michigan, owns property in Texas. It insured the property through an out-of-state insurance company not authorized to do business in Texas, making it an independent procurement from the perspective of Texas. The insurance purchase, policy placement, and premium payment all occurred outside of Texas. Dow was billed approximately $400,000 in premium taxes under the independent procurement statute, which the company subsequently paid under protest and brought suit to recover. Although this suit was brought in Texas it could just as easily have occurred in any state where independent procurements are taxed. The district court initially dismissed the suit and Dow appealed to the U.S. Supreme Court. The Court decided in Dow's favor and declared that because the company was an out-of-state business the independent procurement tax violated the McCarran-Ferguson Act under the Due Process Clause of the Fourteenth Amendment. Texas continues to impose a tax on independent procurements, but only on those involving companies domiciled or headquartered in Texas. This appears to be allowed by statute and the Constitution, however, the Supreme Court decision, being the law of the land, effectively rendered all the states' independent procurement tax laws illegal where the only contact a company has with a state is the presence of insured property. In this most recent iteration of the working group the approach to resolving the multi-state tax situation had been to encourage allocation as the uniform method of apportioning taxes. The state in which the transaction took place would collect its portion of tax under the surplus lines statutes, and the remaining affected states would collect under independent procurement laws. All states would be encouraged to adopt similar surplus lines/independent procurement legislation or regulations. With the Dow v. Rylander decision the working group decided that approach was effectively made unfeasible. Also, NAPSLO, which had made this approach the cornerstone of their lobbying efforts, abandoned their support of the method and advocated the "full premium" solution. At the Spring 2002 national meeting the NAIC Executive Committee designated the work of the group as optional for the coming year, effectively deferring any further work for at least one year. The working group has not met since that last adjournment and has de facto been dissolved since March, 2002.

SMART Act Title VIII of the SMART Act addresses the multi-state surplus lines tax by mandating an interstate compact that provides for the reporting, payment, collection, and allocation of surplus lines and independent procurement transactions. If enacted as presently written the Act requires that all surplus lines and direct procurement taxes be remitted by the broker or the insured to the insured's home state. If the coverage involves a multi-state exposure a Tax Allocation Report must also be filed with the tax. The Act stipulates that if a majority of states adopts a model law that establishes an allocation method, then all states must abide by that allocation method. Any state not enacting allocation laws consistent with the model act or compact appears to be precluded from collecting or sharing in surplus lines or independent procurement taxes, at least insofar as cross-border risks are concerned. Further, the Act states that Congress intends for the states to share in the taxes based upon the allocations and that states will pay to, or at least be liable for paying to, each other each state's rightful share of the taxes. The SMART Act sets a three year time limit for a majority of states to form the compact and enact the model laws, else the allocation methods set out in the SMART Act will take effect. Whether the Act successfully addresses the constitutional issues raised by Dow v. Rylander is beyond the scope of this memorandum, however, the authors of the bill are aware of the Court's decision. At this point the Act is in the process of being written and still has some distance to go before becoming law. This also raises the issue that, in the absence of enabling Federal legislation, is there a state solution to the tax situation that can withstand the legal challenges presented by Dow v. Rylander. NAIC Spring 2005 National Meeting The Surplus Lines (C) Task Force met in Salt Lake City on March 12, 2005. At that meeting Mr. Joe DeMauro (NY) expressed his intentions to revisit the multi-state tax issue. After some discussion the Task Force members voted to reappoint the Multi-state Tax Working Group. The NAPSLO representative once again offered his organization's assistance in reviving the discussion. The purpose of this memorandum is to provide the Working Group's participants background information and history of the multi-state tax issues. If additional information or material is desired please contact the author or the Working Group's Staff support. Attachments: - NAPSLO report on Surplus Lines Premium Taxation - Surplus lines premium tax assessment methods by state - Independent procurement tax collection authority by state - Surplus lines premium tax collection authority by state - State chart: Allocation vs. Full Premium SMART Act. Title VII – Surplus Lines, with proposed industry changes NAIC Model Law #870 – Nonadmitted Insurer Model Act (Refer to Sections 5F and 6) NAIC Model Law #872 - Allocation of Surplus Lines and Independently Procured Insurance Premium Tax on Multi-State Risks

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REPORT OF THE NAPSLO SPECIAL COMMITTEE ON SURPLUS LINES PREMIUM TAXATION

“PRINCIPLES AND GUIDELINES FOR A

CONSISTENT APPROACH TO TAXATION”

SEPTEMBER 2000

COMMITTEE MEMBERS NICHOLAS D. CORTEZI, CHAIR PAUL M. DECOTIS, ASLI ALL RISKS, LTD. DECOTIS INSURANCE ASSOCIATES, INC. DANIEL MAHER, JR. ROBERT T. SARGENT, CPCU, RPLU EXCESS LINE ASSOCIATION OF NEW YORK TENNANT RISK SERVICES, INC. MICHAEL J. SNEAD, CPCU, CLU RICHARD M. BOUHAN ADMIRAL INSURANCE COMPANY NAPSLO

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Excess and surplus lines regulatory and tax laws vary significantly from state to state. When a surplus lines insurance policy provides coverage on risks in more than one state, these laws often conflict, to the point, that full compliance, by the broker that placed the policy, with the laws and regulations of each state is virtually impossible. At a minimum, these inconsistencies in state laws make multi-state surplus lines transactions complicated and confusing, and add unnecessary costs to the transaction. At their worst, the inconsistencies and conflicts actually frustrate the transaction to the detriment of the consumer and the broker. In discussing this industry wide dilemma among members of an industry based volunteer committee established by NAPSLO, certain principles and guidelines were discussed and established which, if implemented, would diminish existing compliance dilemmas and represent a positive approach to surplus lines tax remittance and overall surplus lines regulation.

PRINCIPLES AND GUIDELINES 1) Excess and surplus lines brokers want to comply with applicable laws in all states in

conducting their business. 2) Full compliance, in any given transaction, includes the payment of all taxes to all

jurisdictions whose tax laws apply to an excess and surplus line transaction. 3) The establishment of clear and consistent surplus lines tax laws, in and among all states,

will establish tax payment certainty in surplus lines transactions. This will relieve current concerns surplus lines brokers have regarding the potential regulatory or legal jeopardy arising out of their attempt to comply with conflicting and confusing surplus lines premium tax remittance laws.

4) While the creation, among the states, of a uniform regulatory and tax remittance system

for surplus lines transactions is an ideal goal, it is not a practical one at this time. It is, however, possible to harmonize state laws so that the state regulatory system is more consistent and less complicated and allows for easier compliance in multi-state surplus lines transactions.

5) Harmonizing state laws is most readily accomplished by: (1) identifying the common

features that currently exist in various state excess and surplus lines laws and (2) securing, in those states whose laws do not contain these common features, the necessary legislative and regulatory changes to obtain commonality, consistency and compatibility among the excess and surplus lines laws of all the states.

6) The vast majority of state excess and surplus lines tax laws require licensed surplus lines

brokers to remit premium tax to the state on the premium represented by the portion of the risk located or to be performed in the state. This is known as the “allocation approach” to surplus lines premium taxation. Remittance of the surplus lines premium tax due to the state under the “allocation approach” is the legal obligation of the excess and surplus lines broker.

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Under circumstances where a surplus lines policy includes coverage on locations or on risks that are to be performed in states other than that in which the excess and surplus lines broker is licensed and obligated to remit the tax, a tax on the portion of the premium represented by such locations or risks may be imposed by the state or states in which the risks are located or to be performed. This tax is not a surplus lines tax, but an independent procurement tax. In contrast to the surplus lines tax, the remittance of the independent procurement tax is the legal obligation of the insured.

7) If all states imposed a tax on excess and surplus lines transactions in a similar manner,

many of the conflicts and inconsistencies in state laws which create tax remittance problems for surplus lines brokers would be eliminated. Under current surplus lines tax laws, the conflicts and inconsistencies occur primarily when: (1) the state in which the broker is resident and licensed imposes a tax on the entire premium and another state or other states impose a tax on an allocated share of the premium resulting in double taxation on portions of the premium and (2) two or more states impose a tax on their allocated portion of the premium and each state requires filings to be made by the placing broker or by a broker licensed in the state or states that impose the tax on the allocated premium

8) With the enactment of Gramm-Leach-Bliley Act, harmonizing the state surplus lines laws

has become critical as part of the effort to create uniform or reciprocal producer licensing laws among the states.

9) In today’s economy, surplus lines transactions frequently involve multi-state risks not a

single state exposure. The single state exposure was the common way excess and surplus lines risks were insured when the excess and surplus lines laws were first adopted over 110 years ago.

10) State regulators and legislators are being challenged to create greater uniformity in state

insurance regulatory laws, especially in the area of producer licensing. If the states are successful in this effort, an efficient “national” system of insurance regulation, controlled by the states, will emerge. If the states fail to achieve a reduction in the administrative burden of state regulatory compliance, then a “federal” system of insurance regulation will be imposed. The regulation of excess and surplus lines brokers and agents must be an integral part of any “national” program of insurance regulation.

11) If tax remittance procedures and allocation formulas for surplus lines and independent

procurement taxes were made more consistent, it is possible that the NITCH (Nonadmitted Insurance Tax Clearinghouse) project, on which the industry and regulators worked so diligently a few years ago, could be revitalized and moved forward.

12) All states should provide for a waiver of premium allocation for personal and commercial

lines polices where the policy premium is de minimus so as not to justify the cost involved in allocating premium and calculating and remitting tax to other states. The premium level at which such a waiver should be allowed is $1,000 of premium allocated

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to a state under a particular policy. 13) The harmonization of excess and surplus lines tax laws will involve approaching states:

(1) that do not use the allocation approach to surplus lines taxation and request that they change tax laws to an allocation approach; (2) that do not have independent procurement tax laws and request that such laws be enacted in those states; and (3) that mandate that a resident excess and surplus lines broker be involved in insuring a risk in their state which is part of a transaction conducted outside their state and adopt policies that recognize and accept, without legal ramifications to the filing broker, the validity of an out-of-state filing appropriately made by a licensed excess and surplus lines broker of another state.

Regulation of the Surplus Lines Industry after Gramm Leach Bliley

“The Future is Now”

Foreword

The Gramm Leach Bliley (GLBA) Act of 1999 compelled state governments to modernize a number of state laws, in particular, the laws governing the licensing of agents, brokers and surplus line brokers. The states were compelled to act under threat of federal preemption. As a result of GLBA at least 42 states have amended their producer licensing laws. It appears all but 2 states now provide for the issuance of full nonresident surplus line broker licenses. Historically, these nonresidents could not obtain nonresident surplus line licenses (except for producing risk purchasing group business under the Federal Liability Risk Retention Act). Since these licenses were unavailable historically, brokers have had to place their out of state nonadmitted risks through resident surplus line brokers, similar in some respects to countersignature laws, or resort to other means to complete the placement.

I. OPPORTUNITIES There is good news for the E&S market as a result of GLBA and the availability of full nonresident surplus line broker licenses, but there are also a number of issues that need to be addressed by the states to properly implement and regulate transactions under these newly created licenses. The good news is surplus line brokers (hereinafter E&S brokers) can obtain licenses to directly place nonadmitted business in nonresident states although as licenses they have then undertaken an obligation to comply with the E&S laws of those nonresident states where applicable. The costs to a nonresident for using a state resident E&S broker can be eliminated. E&S brokers with offices in several states can consolidate into one or at least fewer offices, if they choose. E&S brokers with separate corporations for separate state operations might find it practical to operate only one corporate entity.

II. CHALLENGES While there is good news a number of outstanding unaddressed issues need to be resolved to provide E&S brokers clarity. E&S brokers desire to comply with applicable law in all states in which they conduct their business. It is in their interest to do so since noncompliance can jeopardize their licenses, their reputations and ultimately their ability

to make a living. The E&S broker’s failure to follow applicable E&S laws can subject the licensee to fines, penalties and personal liability for client losses. In order to assure compliance, however, the laws must be clear and to the greatest extent possible, uniform. The reciprocal licensing bill passed by most states was based on the NAIC “Producer Licensing Model Act”. That model provides the following safe harbor.

“a license as an insurance producer shall not be required of…..” “A person who is not a resident of this state who sells, solicits, or negotiates a contract of insurance for commercial property and casualty risks to an insured with risks located in more than one state insured under that contract, provided that that person is otherwise licensed as an insurance producer to sell, solicit or negotiate that insurance in the state where the insured maintains its principal place of business and the contract of insurance insures risks located in that state……”

No similar provision was adopted with respect to E&S licensees. Therefore it is not clear when a resident E&S broker is operating under his resident license versus a nonresident license. In fact most states have left the existing substantive law of the state alone which, in most states, implies that any transaction by an E&S licensee involving a nonadmitted insurer, is governed by the law of that state.

In most cases, the law is silent as to when you are operating under a resident versus nonresident E&S license.

For example, if a New Jersey surplus lines broker places a nonadmitted risk which is located exclusively in Colorado, the law is silent on whether this is a New Jersey surplus line transaction or a Colorado transaction under a nonresident E&S license. Many would logically assume that under the foregoing example only Colorado surplus lines law applies. If you change the scenario and 50% of the risk is in New Jersey and 50% is in Colorado, which law applies?

It is difficult, sometimes impossible for an E&S broker to comply on a single multistate account with multiple state laws which may and often do conflict. The laws of the states need to clearly state when an E&S broker is operating under a resident license versus a nonresident license. For example, the New York Senate (but not the Assembly) passed Senate bill S.6701 in 2002 which contained the following language. (7) For purposes of this article, unless exempt under the provisions of section two thousand one hundred seventeen of this article, a policy of insurance obtained from an insurer not authorized to transact business in this state must be procured pursuant to an excess line license when the entire property or risk exposure insured or any part thereof, is located in New York state and: (A) the insured negotiated to acquire the coverage from within New York state; or

(B) the policy was delivered to the insured in New York state. (8) Nothing in this article shall prohibit an excess line licensee from placing risks under the excess or surplus line law of another state provided that the excess line licensee: (A) is licensed under the applicable state law as an excess or surplus line broker or places such risk through a licensed excess or surplus line broker in such state; and (B) either no portion of the property or risk exposure is in New York, or the insured has property or risk exposure both in New York and in another state where the insured maintains a bona fide office from which it negotiated to acquire the coverage and to which the policy is delivered. This language gives clarity to E&S brokers. It would establish which laws apply on any given transaction. It also preserves a one state filing, approach which is critical if an E&S broker is to comply and still make a reasonable return for the effort. Attempting to meet the diligent search and other requirements by making multiple filings on each multistate risk is an unworkable, unreasonable alternative. The New York state legislation poses a reasonable alternative. The state from which the insured negotiated becomes the determining factor as to which state’s E&S law applies. All parties benefit because:

1) the insured is most likely to turn to his state regulator and his state law, should

coverage disputes or other trouble arise, 2) the state where coverage was negotiated is most often the state with the most

substantial connection to the insured and the transaction, 3) it is a clear standard which is relatively simple to apply and enforce, 4) it is very similar in concept to the NAIC model, and 5) courts, which are often called upon to decide which state law applies to a

transaction, often use the situs of a particular party as determinative.

III. SOLUTIONS

Leaving aside the tax issues involving multistate risks for the moment, one preeminent goal of the E&S industry should be to develop a system of one state filling for nonadmitted business with a consistent, uniform, compatible, uncomplicated and clear framework for reporting and regulation. In order to achieve this goal, the first order of business is to identify existing impediments and propose workable solutions. Most state E&S laws were not altered at all substantively to meet the requirements of GLBA. In essence, the laws were amended to authorize full, nonresident E&S broker licenses leaving intact a legal system which contemplates resident licensees procuring nonadmitted policies only for residents of that state. These laws/regulations are antiquated and need to be changed.

Each state by new legislation, regulation or by written interpretation from the insurance department needs to address:

1) which transactions are subject to a resident E&S license versus a nonresident E&S license [similar in approach to the NAIC model and New York legislation referred to above],

2) modification of recordkeeping requirements to authorize nonresident licensees to maintain all records in their resident state offices.

3) modification of premium accounting and depository bank requirements providing that nonresident licensees who are in compliance with their home state requirements, are deemed to be in compliance with the requirements of the state where they have a nonresident license [states may wish to except from this deemer resident states which do not mandate fiduciary trust accounting requirements],

4) modification of any other vestiges in the laws or regulations which contemplate only resident E&S licensees.

The framework for implementing these changes could begin with proposed modifications of the National Conference of Insurance Legislators (hereinafter “NCOIL”), then the National Association of Insurance Commissioners (hereinafter “NAIC”), Model Nonadmitted Acts, respectively. Working first with state legislators at NCOIL and perhaps the National Council of State Legislators (hereinafter “NCSL”), to highlight the need for changes is likely to help build momentum across numerous states simultaneously. Active involvement by and among NAPSLO, state stamping offices and other state surplus line associations will also help achieve these solutions.

IV. Chronic Tax Complications

A workable global solution to the tax payment obligations on multistate risks has long eluded the industry. Many pine for the old pre-allocation days when payment of 100% of the tax to the “home” state or single situs approach was in vogue. Unfortunately, that view ignores the history of tax allocation. The industry has supported state by state legislation to implement tax allocation. Allocating the risk for tax purposes avoided the then existing rapacious alternative which was to pay every state where a risk was located a full tax payment on 100% of the premium. Historically, on national accounts the premium taxes, so calculated, could equal or exceed the premium. The foundation for any real solution on the tax issue must be that each state gets its fair share of the tax revenues. Would the states have it any other way? Though complicated, a two stage solution, one for the short term and the other for the long term, should be considered. In the short term, E&S brokers will continue, generally, on their current course. An E&S broker usually files the necessary affidavits or other documents in one state and either encourages or otherwise leaves it to the insured to pay direct/or independent procurement

taxes in any other state where the risk has a presence. In some cases, the E&S broker files in more than one state when state laws clearly conflict. While the one state filing goal is a paramount one, in the short term the foregoing approach continues to be a reasonable compromise, in light of the absence of alternative methods of compliance. Moreover, in convincing states to change their laws to allow E&S brokers to file and pay taxes to a nonresident state because the insured’s office from which he negotiated is in the nonresident state, when portions of the risk are in the resident state, will require great persuasion. To avoid multiple state filing and multiple state compliance requirements, E&S brokers will have to step up efforts and agree to work with all such insureds to make sure direct/independent taxes are paid to the resident state on such accounts. Otherwise, the states will balk at the solution as proposed. The long term solution, as proposed long ago, failed due to an inability to implement the proposal in any practical way. That solution remains a modified version of “Nitch” the, National Insurance Tax Clearinghouse project. The project failed for lack of funding, lack of a method to practically implement the proposal and the absence of any state or states willing to step up and assume a level of leadership necessary to bring the project to fruition. A practical approach exists but will require significant long term efforts and commitment to achieve success. A legislative approach requiring adoption of an interstate compact, which is a treaty agreement among those states that adopt it, could succeed with strong, broad industry support, a well thought out and professionally drafted compact and professional presentation to various legislative bodies. (A compact on sales and use tax cooperation and coordination is currently being considered by a number of states). The following is an outline of issues which the compact should address.

• No state would be required to change the current tax rate charged. The rate charged by any given state would be applied to the allocable premium for that state.

• All states adopting the compact would be required to adopt new, simplified formulas for tax allocation.

• The allocation formulas would be based on the insureds prior year end data which is verifiable such as prior year’s payroll by state. (For ease of application, allocation at inception will apply to any further premium transactions for the year).

• Instead of a specific number of states being required to adopt the compact before it becomes effective, the effectiveness would be triggered when the compact is adopted by states which process in the aggregate 60% or more of total gross E&S premium. (An independent report such as the report by AM Best would be used for state by state gross premium calculations).

• E&S brokers would report all necessary allocation information (for instance, payroll by state), to the filing office for the state where the filing is made.

• The state or the filing (stamping) office would capture premium allocation data on each such multistate placement and report aggregate data for the reporting period by E&S broker to any other states’ filing offices or to NITCH as a separate entity. Each state filing office or NITCH would then issue an aggregate report to each E&S broker for each state license held. The report would provide state by state date reflecting tax liability by state.

• Tax exempt lines would remain unchanged state by state. No tax payment nor tax allocation would be paid in states where the insurer is licensed, if any, nor paid on exempt lines.

• E&S brokers would not have to be licensed in a state merely because of an allocation. Nonresident E&S licenses would be required when an E&S broker makes placements which need to be filed in any particular nonresident state. Each E&S broker would make filings as necessary reporting data for allocation when applicable. The filing office or NITCH would assist with the calculation of all applicable taxes. The E&S broker would receive periodic reports which would provide aggregate tax data, and a tax statement for each license held.

• Initial funding could come from states currently having stamping offices and representing some 70% of the nations E&S premiums, assuming some or all of these states could be persuaded to move forward early in adopting the compact. These entities could cooperate to create software for reporting. Ultimately, states without stamping offices could assign these duties within their insurance or tax departments or contract to a stamping office or other entity to comply.

• NITCH, would become the data warehouse as a result of the compact. NITCH would consolidate the data reported by the states and or stamping offices. NITCH, the stamping offices and the states would arrange to issue one billing statement per license to each E&S broker as well as collecting and sorting the taxes paid to the appropriate states.

• For states which currently allocate taxes and have an independent or direct procurement tax, the compact would arguably be revenue neutral. Many observers however, would argue this would increase collections since the independent or direct procurement taxes are currently obscure to many policyholders and often are overlooked and go unpaid.

• Even if a state viewed the changes in allocation formula as potentially reducing revenue, they could adjust the rate after monitoring tax revenues for a year or two.

• States which do not currently allocate or have no direct/independent procurement tax (approximately 10 states) could amend their tax law and adopt a direct/independent procurement tax, gaining revenue currently lost.

• Small states which perceive that they lose tax revenues to larger states where E&S filings are more often made, should favor such a compact.

• Larger states are unlikely to lose revenues if direct procurement taxes are substantially underpaid as currently believed.

A compact would not have to be adopted by all states to be successful. If states which account for 60% of all E&S premiums were to adopt the compact, it would not only achieve success in part, it would likely persuade other states to follow.

V. CONCLUSION

If the approaches outlined above, were adopted and implemented by most states, the E&S market will have attained,

• Clarity, consistency and a level of harmonization of states laws greatly reducing the complexities in complying with E&S laws,

• Preservation of a one state filing system for affidavits or other documents, • Interstate cooperation with states assisting each other in receiving fair shares of

taxes due and in maintaining a state, not federal based system of insurance regulation.

SURPLUS LINES PREMIUM TAX ASSESSMENT METHOD BY STATESTATE STATUTE DESCRIPTION Alabama 27-10-31-b If a surplus line policy covers risks or exposures only partially in this state, the tax so payable shall

be computed on the proportion of the premium which is properly allocable to the risks or exposures located in this state.

Alaska 21.34.18(c) If a surplus lines policy procured through a surplus lines broker covers risks or exposures onlypartially located or to be performed in this state, the tax payable shall be computed on theportions of the premium properly attributable to the risks or exposures located or to be performed in this state.

Arizona 20-416(c) For the purpose of determining the surplus lines tax, the total premium charged for surplus linesinsurance placed in a single transaction with one underwriter shall be allocated to this statein the proportion as the total premium on the insured properties or operations in this state.

Arkansas 23-65-31(b) If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state

California ‡ 1775.5 For the purpose of determining such tax, the total premium charged shall be allocated to thisstate in such proportion as the total premium on the insured properties or operations in this state.

Colorado 10-5-111(2) If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state

Connecticut 38a-227(d) If a policy covers risks or exposures only partially in this state, the tax payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state

Delaware 18 ‡ 1917 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state

District of 35-1544(a) Each agent or broker so licensed shall pay to the Collector of Taxes, through the commissioner,Columbia on February 1st and August 1st of each year a sum equal to 2 percentum of the amount of

gross premiums upon all kinds of policies procured by him during the immediately preceding6 months' period ending December 31st and June 30th, respectively.

Florida 626.932 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state

SURPLUS LINES PREMIUM TAX ASSESSMENT METHOD BY STATESTATE STATUTE DESCRIPTION Georgia 35-5-31 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payable

shall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state

Hawaii 431:8-31 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state

Idaho 41-1229 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state

Illinois 215 ILCS Each surplus line producer shall file with the Director on or before February 1 and August 15/445 of each year a report in the form prescribed by the Director on all surplus line insurance

procured during the preceding 6 month period ending December 31 or June 30 respectively,and on filing of such report shall pay to the Director for the use and benefit of the State a sum equal to 3% of the gross premiums less returned premiums upon all surplus line insuranceprocured or cancelled during the preceding 6 months.

Indiana 27-1-15.5-5 Every surplus lines insurance agent so licensed under this section shall, on or before February 1and August 1 of each year, collect from the insured and remit to the department an amountequal to two-and-one-half percent (2 1/2%) of all gross premiums upon all policies and contracts of any kind or kinds procured by such agent or broker under the provisions of this section during the preceding six (6) months period ending December 31 and June 30,respectively.

Iowa 507A.9 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state

Kansas 40-246(c) Any individual placing a policy with an insurer not authorized to do business in this state ona risk domiciled in a state other than this state, but also covering a risk or location in Kansas,shall file with the commissioner a statement in the form prescribed by the commissioner,describing the risk and shall pay to the commissioner a sum equal to 6% of the portion of the premium applicable to the risk located in Kansas 120 days after writing the risk.

Kentucky 304.10-180 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state

SURPLUS LINES PREMIUM TAX ASSESSMENT METHOD BY STATESTATE STATUTE DESCRIPTION Louisiana R.S.22:126 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payable

shall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state

Maine 24-A ‡ 2016 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state

Maryland ‡ 3-324 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state

Massachusetts 175:168 The broker must, in January, file with the state treasurer a sworn statement of the gross premiums charged for insurance or procured or placed and the gross return premiums onsuch insurance cancelled under such license during the year ending on December 31stlast preceding, and at the time of filing such statement will pay to the commonwealth anamount equal to four percent of such premiums less such return premiums so reported.

Michigan 500.451 Any unauthorized insurer transacting insurance in this state shall be subject to a tax of2% of premiums written in this state and to an additional regulatory fee of 0.5% on premiums written in this state. The tax required by this section shall be considereddelinquent if not paid within 30days after a copy of the computation of the tax by thecommissioner is delivered to the insurer in the manner prescribed by law for the service of process.

Minnesota 60A.209 If the insurance covers a subject of insurance residing, located, or to be performed outside this state, for the purposes of this section, a proper pro rata portion of the entirepremium payable for all of that insurance shall be allocated according to the subjectsof insurance residing, located, or to be performed in this state.

Mississippi 83-5-61 Corporations not authorized to transact business in this state, shall file with theinsurance commissioner of the state a sworn statement or declaration, setting forth thename of the company, number of policy, amount of insurance rate, premium, and description,shall be required to pay a tax thereon of 3% of the premiums on said policies, and shall further pay a fee of $1.00 on each policy for filing of said statement or declaration, whichrecord shall not be a public record.

Missouri 384.059 There is hereby imposed on surplus brokers for the privilege of doing business of a surpluslines broker in this state a tax of 5% of the net premium received with respect to surplus lines insurance on risks located in this state.

SURPLUS LINES PREMIUM TAX ASSESSMENT METHOD BY STATESTATE STATUTE DESCRIPTION Montana 33-2-311 If a surplus lines policy covers risks or exposures only partially in this state, the tax payable

must be computed upon the proportion of the premium which is properly allocable to therisks or exposures located in this state.

Nebraska 44-5506 Every surplus lines licensee transacting business under the Surplus Lines Insurance Actshall annually, on or before February 15 in each year, make and file with the departmenta verified statement upon a form prescribed by the department which shall exhibit the trueamount if all such business transacted during the year ending on December 31 next preceding the filing thereof. The licensee shall, at the time such statement is filed, pay to the department a tax of 3% on the total gross amount of direct writing premiumsreceived by the licensee.

Nevada 685A.180 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state.

New Hampshire 406-B:12 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state.

New Jersey 17:22-6.59 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state.

New Mexico 59A-14-12 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state.

New York ‡ 9102 In determining the amount of direct premiums taxable in this state, all such premiumswritten, procured, or received in this state shall be deemed written on property or riskslocated or resident in this state except such premiums properly allocated and reportedas taxable premiums of any other state or states.

North Carolina 58-21-8 Gross premiums charged, less any return premiums, for surplus lines insurance aresubject to a premium receipts tax of 5%, which shall be collected by the surplus lineslicensee as specified by the Commissioner, in addition to the full amount of the grosspremium charged by the insurer for the insurance.

North Dakota 26.1-44-06 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state.

SURPLUS LINES PREMIUM TAX ASSESSMENT METHOD BY STATESTATE STATUTE DESCRIPTION Ohio 3905.36 Surplus lines insurer shall annually, on or before the first day of July, pay to the treasurer

of state a tax of five percent so such premium, fee, assessment, dues, or other consideration, as calculated on a form prescribed by the treasurer of state. This sectiondoes not apply to: Transactions in this state involving a policy solicited, written, anddelivered outside this state covering only subjects of insurance not resident, located,or to be performed in this state at the time of issuance, provided such transactions aresubsequent to the issuance of the policy.

Oklahoma 36 ‡ 1115 The total premium for surplus lines insurance placed in a single transaction with oneunderwriter or group of underwriters, whether in one or more policies, shall be allocatedto this state in such proportion as the total premium on the insured properties oroperations in this state, computed on the exposure in this state on the basis of any single standard rating method in use in all states or countries where such insurance applies,bears to the total premium so computed in all such states or countries.

Pennsylvania 40 P.S. In the event that a placement of insurance involves subjects of insurance resident, located,‡ 995.1621 or to be performed in one or more states other than this commonwealth, then the premium

taxes provided for in this section shall be levied only on that portion of the premiumreasonably ascribable to that portion of the risk situated in this Commonwealth.

Puerto Rico T.26 ‡ 1013 There is hereby imposed upon each surplus line coverage granted in Puerto Rico, orwhich covers risks or residents, located or to be performed in Puerto Rico whereverit was negotiated, a tax equal to nine percent (9%) of the total premium collectedon account thereof, exclusive of tax. The broker shall be responsible for the collectionand payment of the tax.

Rhode Island 27-3-38 Every person, firm, or corporation licensed pursuant to the provisions of this section shallfile with the insurance commissioner, not later than April 1 of each year, a certificate ofthe tax administrator, on a blank furnished by the insurance commissioner, certifyingthat the licensee has paid to the tax administrator, for all policies procured by thelicensee pursuant to the license during the next preceding calendar year, a tax, computed at the rate of three percent (3%) on the gross premiums charged the insuredby the insurers, less the amount of premiums returned to the insureds.

South Carolina 38-45-30 A surplus lines insurer must pay to the department within thirty days after March 31st, June 30th, September 30th, and December 31st each year, a broker's premium tax of fourpercent (4%) upon the premiums approved for policies of insurers not licensed inthis state.

SURPLUS LINES PREMIUM TAX ASSESSMENT METHOD BY STATESTATE STATUTE DESCRIPTION South Dakota 58-32-45 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payable

shall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state.

Tennessee 56-14-113 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state. In determining the amount of direct premiums taxable in this state, all such premiumswritten, procured, or received in this state shall be deemed written on property or riskslocated or resident in this state except such premiums properly allocated and reportedas taxable premiums of any other state or states.

Texas 1.14-2 ‡ 12 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state. In determining the amount of direct premiums taxable in this state, all such premiumswritten, procured, or received in this state shall be deemed written on property or riskslocated or resident in this state except such premiums properly allocated and reportedas taxable premiums of any other state or states.

Utah 31A-3-303 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state. However, all premiums with respect to surplus linesinsurance received in this state by a surplus lines broker or charged on policies written ornegotiated in or from this state are taxable in full under this part, subject to a credit forany tax actually paid in another state to the extent of a reasonable allocation on thebasis of if risk locations.

Vermont 8 ‡ 5036 If any such insurance also covers a subject located or to be performed outside this statea proper pro rata portion of the entire premium shall be allocated to the subjects ofinsurance located or to be performed in this state.

SURPLUS LINES PREMIUM TAX ASSESSMENT METHOD BY STATESTATE STATUTE DESCRIPTION Virginia 38.2-4809A Each person licensed or required to be licensed under this chapter whose annual premium

tax liability can reasonably be expected to exceed $1,500 shall file a quarterly tax reportwith the Commission. Such report shall be on a form prescribed by the Commission.This report shall be filed no later than thirty days after the end of each calendar quarter.Notwithstanding any provision to the contrary, each such person shall pay the premiumtax owed for the direct gross premiums adjusted for additional and returned premiumsshown by each quarterly tax report when such report is filed with the Commission.

Virgin Islands 22 ‡ 662 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state.

Washington 48.15.120 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state.

West Virginia 33-12-16 The annual tax to be paid under the provisions of this section, shall be a sum equal to2% of the gross premiums received on the gross business procured by such licensee onsubjects of insurance, resident, located, or to be preformed in this state and obtained pursuant to the provisions of this article, including any so-called dividends on participatinginsurance policies applied in reduction of premiums, less premiums returnable forcancellation.

Wisconsin 618.43 If a policy covers risks that are only partially located in this state, the premium shall bereasonably allocated among the states on the basis of risk locations in computing thetax, except that all premiums received in this state or charged on policies written ornegotiated in this state shall be taxable in full under this section, with a credit for anytax actually paid in another state to the extent of a reasonable allocation on the basisof risk locations.

Wyoming 26-11-118 If a surplus lines policy covers risks or exposures only partially in this state, the tax so payableshall be computed on the portion of the premium which is properly allocable to the risks orexposures located in this state.

INDEPENDENT PROCUREMENT TAX COLLECTION ENTITY BY STATE STATE TAX COLLECTION ENTITY INSURANCE CODE

Alabama State Treasurer Through Commissioner of

Ins. §270-10-35

Alaska Director of Insurance §21.33.061

Arizona** Director of Insurance §20-401.07

Arkansas State Treasurer Through Commissioner of

Ins. §23-65-103

California Franchise Tax Board

§1760 §1761 Part 7.5, Section

13210 of Revenue & Taxation Code

Colorado Division of Insurance

§10-3-903(2)(d) §10-3-209 §10-3-909

Connecticut Commissioner of Insurance §38(a)-271 §38)a)-277

Delaware * —

District of Columbia * —

Florida Insurance Department §626.938

Georgia Commissioner of Insurance §33-5-33

Hawaii Commissioner of Insurance §431:8-205

Idaho Director of Insurance §41-1233 §41-402

Illinois * —

Indiana * —

Iowa Commissioner of Insurance §507A.8 §507A.9

Kansas * —

Kentucky Secretary of Revenue §304.11-030 §304.11-050

Louisiana Commissioner of Insurance §22:1265(2)(B)

Maine Superintendent of Insurance 24-A §2113

STATE TAX COLLECTION ENTITY INSURANCE CODE

Maryland Commissioner of Insurance §209

Massachusetts * —

Michigan Commissioner of Insurance §500.402(b) §500-1951

Minnesota Commissioner of Insurance §60A.19(8)

Mississippi Commissioner of Insurance §83-5-61

Missouri Director of Insurance §384.051

Montana Commissioner of Insurance §33-2-706

Nebraska * —

Nevada State Treasurer Through Department

of Taxation §680B.040 §680B.027

New Hampshire Commissioner of Insurance §406-B:12

New Jersey Commissioner of Banking & Insurance §17:22-6.64

New Mexico Superintendent of Insurance

§59A-6-2 §59A-14-1 §59A-15-2 §591-15-4

New York Commissioner of Taxation & Insurance NY Tax Law §1551

North Carolina Commissioner of Insurance §58-28-5

North Dakota * —

Ohio Superintendent of Insurance §3905.36

Oklahoma Commissioner of Insurance §1115(D)(1)

Oregon * —

Pennsylvania Department of Revenue With Report to

Commissioner of Insurance §40-15-121 §40-15-122

Rhode Island * —

South Carolina * —

South Dakota State Treasurer Through Department of

Ins. §58-32-47 §58-32-50

Tennessee * —

STATE TAX COLLECTION ENTITY INSURANCE CODE

Texas State Comptroller Art. 1.14-1

2(b)(4), §12(c)

Utah Commissioner of Insurance §31A-15-104 §31A-3-301

Vermont Commissioner of Insurance §5036(d)

Virginia * §38.2-1802(A)

Washington * —

West Virginia * —

Wisconsin Commissioner of Insurance §618.42 §618.43

Wyoming * — * No independent procurement tax provision. **Payment of 3% premium tax payable on Industrial Insurance only. Notes: 1. Direct Procurement Taxes are calculated in most states as a percentage of gross

premiums. 2. In most states, written reports of independent procurements are required to be filed with

the Insurance Department within 30, 60 or 90 days.

Surplus Lines Premium Tax Collection Entity By State

State Tax Payment Entity Ins. Code Section

Alabama State Treasurer through Commissioner of Insurance §27-10-31

Alaska Director of Insurance §21.34.180a

Arizona State Treasurer through Director of Insurance §20-416

Arkansas State Treasurer through Commissioner of Insurance §23-65-306

California Commissioner of Insurance §1775.5

Colorado Division of Insurance §10-5-111

Connecticut Commissioner of Insurance §38-84

Delaware State Treasurer through Commissioner of Insurance §18-1917

Dist. of Columbia Collector of Taxes §35-1544

Florida Insurance Department through Florida Surplus Lines Service Office §626.932

Georgia Commissioner of Insurance §33-5-31

Hawaii Director of Finance through Insurance Commissioner §431-338

Idaho State Treasurer through the Director of Insurance §41-1229

Illinois Director of Insurance §215 ILCS 5/445

Indiana Department of Insurance §27-1-15.5-5

Iowa Commissioner of Insurance §515.147

Kansas Commissioner of Insurance §40-246C

Kentucky Commissioner of Insurance §304.10-180

Louisiana Commissioner of Insurance §22:1265

Maine Superintendent of Insurance §19:2016

Maryland Commissioner of Insurance §195

Massachusetts State Treasurer §175:168

Michigan Commissioner of Insurance §500.1906

Minnesota Commissioner of Revenue §60A-198

Mississippi Commissioner of Insurance §83-21-25

Missouri Department of Insurance §384.059

Montana Commissioner of Insurance §33-2-311

Nebraska Department of Insurance 44-5506

Nevada Commissioner of Insurance §685A.180

New Hampshire Commissioner of Insurance §405:29

New Jersey Commissioner of Banking & Insurance §17:22-6.59

New Mexico Superintendent of Insurance §59A-14-12

New York Superintendent of Insurance §9102

State Tax Payment Entity Ins. Code Section

North Carolina Commissioner of Insurance §58-437

North Dakota Commissioner of Insurance §26.1-44-07

Ohio Superintendent of Insurance §3905.35

Oklahoma State Treasurer through the Insurance Commissioner §1115

Oregon Commissioner of Insurance §744.370

Pennsylvania File Report w/Dept. of Revenue with tax due, file copy of Report with Commissioner §40-15-122

Rhode Island Tax Administrator, file copy of tax administrator certificate w/ Insurance Commissioner §27-3-38

South Carolina Commissioner of Insurance §38-45-30

South Dakota State Treasurer, through Director of Insurance §58-32-44

Tennessee Commissioner of Insurance §56-14-113

Texas State Comptroller §Art. 1.14-2

Utah Commissioner of Insurance through Surplus Lines Association §31A

Vermont Commissioner of Insurance §5035(b)

Virginia File Report w/ Commissioner, send duplicate report and tax payment to Commissioner of Taxes

§38.2-4809

Washington State Treasurer through the Commissioner §48.15.120

West Virginia Commissioner of Insurance §33-12-16a

Wisconsin Commissioner of Insurance §618.43

Wyoming Commissioner of Insurance §26-11-118 1. Surplus Lines Taxes are generally calculated as a percentage of total premium and fees less return premiums for the reporting

period. 2. Reporting period for Surplus Lines Premium Tax ranges between 30, 60, 90 days and 1 year.

Summary of State Laws — Allocation Vs. Full Premium Tax A = Allocation State F = Full Premium

State Allocation/Full

Alabama A

Alaska A

Arizona A

Arkansas A

California A

Colorado A

Connecticut A

Delaware A

District of Columbia F

Florida F

Georgia A

Hawaii A

Idaho A

Illinois Partial Allocation (Property Only)

Indiana F

Iowa A

Kansas A

Kentucky A

Louisiana A

Maine A

Maryland F

Michigan F

Minnesota A

Mississippi A

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Title VIII – Surplus Lines: {Insert new section 801 and renumber accordingly… [gives the States 3 years to establish an interstate compact for surplus lines taxes; the compact would govern with respect to any States involved in the transaction that have adopted it; if the insured’s home State has not adopted such compact or with respect to any other State that has not adopted the compact, then Subtitle A would apply resulting in all taxes being paid to the insured’s State] SEC. 801. PROMOTION OF INTERSTATE COMPACT FOR REPORTING, PAYMENT, COLLECTION, AND ALLOCATION OF SURPLUS LINES TAXES.

(a) REQUIREMENT FOR SURPLUS LINES INTERSTATE COMPACT.—The Congress intends that each State adopt an interstate compact that provides for reporting, payment, collection, and allocation of premium taxes for surplus lines insurance and independently procured insurance that meets the following requirements –

(1) Establishment— (A) is established by an interstate compact authorized under this section; (B) as of three years after the date of enactment of this Act is adopted in a materially identical form by a majority of the States; (C) uses uniform national standards for reporting, payment, collection, and allocation of premium taxes for surplus lines insurance and independently procured insurance without State specific deviations or alternative standards; (D) provides for all applicable governing standards to be clearly stated in writing and published in statute, rule, or regulation; and (2) Reporting— {? Reporting / payment / and collection must be limited to a

single entity} (3) Payment— {?} (4) Collection— {?} (5) Allocation— {?}

(b) CONSENT FOR THE COMPACT.—The consent of the Congress is hereby given to the States to enter into the interstate compact described in subsection (a).

(c) CONDITIONS OF CONSENT.—The consent of the Congress under subsection (a)—

(1) shall become effective on the enactment of this Act; and (2) is given to the interstate compact in the form described in subsection (a)

as revised, altered, or amended only to the extent that the interstate compact as so revised, altered, or amended complies with the provisions of this title.

(d) No State may require reporting, payment, or collection of premium taxes for surplus lines insurance and independently procured insurance except—

(1) if both such State and the home State of the insured have adopted an interstate compact meeting the requirements of this section; or

(2) pursuant to sections 801-805 of this Subtitle.

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SEC. 802. SINGLE STATE COLLECTION AND UNIFORM ALLOCATION OF PREMIUM TAXES ON SURPLUS LINES AND INDEPENDENTLY PROCURED INSURANCE. (formerly section 801) 5 (a) REQUIREMENT TO UPDATE STATE LAWS.—The 6 Congress intends that States adopt updated laws and regulations providing for premium taxes for surplus lines insurance and independently procured insurance be paid to 8 the home State of the insured, which shall then remit such 9 premium tax payments among the appropriate States ac10 cording to State law. 11 (b) PREEMPTION OF STATE LAW AND APPLICA12 BILITY OF MODEL ACT.—For any State that does not 13 have in effect, upon the expiration of the 3-year period 14 beginning on the date of the enactment of this Act , up15 dated laws and regulations as provided in subsection (a)— 16 (1) the provisions of this subtitle shall apply 17 with respect to the State; 16 (1) the provisions of this subtitle shall govern the reporting, payment, collection, and allocation of premium taxes for surplus lines insurance and independently procured insurance with respect to such State; 18 (2) all laws, regulations, provisions, or other ac19 tions of the State that are different from this sub20 title that provide for taxation of premiums on insur21 ance are preempted to the extent that they relate to 22 surplus lines insurance and independently procured 23 insurance; and 24 (3) the State may provide for taxation of sur25 plus lines insurance and independently procured in26 surance only in accordance with the provisions of 1 this subtitle or laws and regulations or other actions 2 of the State that conform to this subtitle. 4 (b) PREEMPTION.—A State may regulate or limit eli5 gibility of surplus lines insurers only in accordance with 6 the provisions of the Non-Admitted Insurance Model Act 7 referred to in subsection (a) and with subsection (a), and 8 any laws, regulations, provisions, or other actions of a 9 State that are different are preempted to the extent they 10 do not conform with the requirements of this section. SEC. 803. REPORTING AND PAYMENT OF PREMIUM TAXES. (formerly Sec. 802) (a) PREMIUM TAX PAID ONLY TO HOME STATE OF INSURED.—The entire premium tax due on an insurance policy covering multi-State risks that is procured, either directly or through a broker, from an insurer that is a nonadmitted insurer in the insured’s home State shall be paid by the broker or the insured, as applicable, only to the insured’s home State.

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(b) PREMIUM TAX PAYMENT PURSUANT TO A MODEL LAW.—If a majority of the States have adopted a model law in materially the same form providing for payment of premium taxes on policies for surplus lines insurance or independently procured insurance in accordance with subsection (a)— (1) all States shall require payment of such taxes only according to such model law; and (2) subsection (c) shall not apply. (c) PREMIUM TAX PAYMENT IF NO MODEL LAW IS ADOPTED.— (1) REQUIREMENT.—Except as provided in subsection (b), all States shall require payment of premium taxes on policies for surplus lines insurance or independently procured insurance in accordance with this subsection. (1) REQUIREMENT.—Except as provided in subsection (b), a State may require payment of premium taxes on policies for surplus lines insurance or independently procured insurance only in accordance with this subsection. (2) PAYMENT AND REPORTING OF TAXES.—A surplus lines broker or an insured that has independently procured insurance shall— (A) annually file a Tax Allocation Report with the home State of the insured; and (B) pay to the home State the full amount of premium tax owed as indicated on the Tax Allocation Report. The filing of a Tax Allocation Report and the payment of tax may be made by a person authorized by the insured to act as its agent. SEC. 804. ALLOCATION OF PREMIUM TAXES. (formerly sec. 803) 15 (a) REMITTANCE OF TAXES AMONG THE STATES.— 16 The Congress intends that, after the home State of an 17 insured collects premium taxes for the placement of sur18 plus lines or an independently procured insurance policy 19 for a multi-State risk, the home State shall share the taxes 20 among the other States, either on an allocation basis ac21 cording to where the policy risks are located or pursuant 22 to a model law adopted by a majority of the States. 23 (b) REQUIRED REMITTANCE PURSUANT TO A MODEL 24 LAW.—If a majority of the States have adopted a model 25 law in materially the same form governing allocation 1 among the States of premium taxes collected by a home 2 State for surplus lines or independently procured insur3 ance for a multi-State risk— 4 (1) all States shall allocate such taxes according 5 to such model law and the home State shall be liable 6 to other States for the appropriate share of such 7 taxes as provided for in the model law; and 8 (2) subsection (c) shall not apply. 9 (c) PREMIUM TAX ALLOCATION AMONG THE STATES 10 IF NO MODEL LAW IS ADOPTED.— 11 (1) REQUIREMENT.—Except as provided in 12 subsection (b), a home State shall allocate, and is

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13 liable for, the appropriate percentage of premium 14 taxes collected for surplus lines insurance or inde15 pendently procured insurance in accordance with 16 this subsection. (1) REQUIREMENT.—Except as provided in Section 801 and subsection (b) of this section, a State may not collect any fees relating to licensing of an individual or entity as non-domiciliary insurance broker in the State, or require any reporting, payment, or collection of premium taxes for surplus lines insurance and independently procured insurance unless the State has in effect at such time laws or regulations that provide for allocation for the appropriate percentage of premium taxes collected for surplus lines insurance or independently procured insurance in accordance with this subsection. 17 (2) ALLOCATION BASED ON TAX ALLOCATION 18 REPORT.—Upon receipt of a Tax Allocation Report 19 and premium tax payment, Congress intends that a home State insurance 20 commissioner shall furnish to all other States listed 21 in the Tax Allocation Report a copy of the Tax Allo22 cation Report and shall remit to such States the ap23 propriate allocations of premium tax paid by the 24 surplus lines broker or insured, as applicable. (3) COMPUTATION 1 OF ALLOCATION.— Congress intends that The per2 centage of a premium tax payable by a home State 3 to other States in connection with a surplus lines or 4 independently procured insurance policy covering 5 multi-State risks shall be computed based on the 6 portion of the premium attributable to the prop7 erties, risks, or exposures located or to be performed 8 in each State. 9 (4) PRESUMPTION.— Congress intends that In determining the 10 amount of premium taxable by a State in connection 11 with the placement of a surplus lines or independ12 ently procured insurance policy covering multi-State 13 risks, all premium written, procured, or received in 14 such State shall be presumed to be written on prop15 erties, risks, or exposures located or to be performed 16 in the State, except premium that is properly allo17 cated or apportioned and reported as taxable pre18 mium of another State. 19 (5) DETERMINATION OF TAXABLE GROSS PRE20 MIUM.— Congress intends that In determining the amount of gross pre21 mium that is taxable by a State for placement of 22 surplus lines or independently procured insurance 23 policies covering multi-State risks, the tax due shall 24 be computed on the portion of the premium attrib25 utable to properties, risks, or exposures located or to 1 be performed in the State and which relates to the 2 kinds of insurance being placed by using one of the

5

3 following methods: 4 (A) Allocation of premium on the same 5 basis or bases used to establish the policy pre6 mium. 7 (B) Allocation of premium as prescribed in 8 the Allocation Schedule that pertains to the 9 classification describing the coverage, subject to 10 the following: 11 (i) If the Allocation Schedule does not 12 identify a classification appropriate to the 13 properties, risks, or exposures being in14 sured, the surplus lines broker or the in15 sured who has independently procured in16 surance shall use an alternative equitable 17 method of allocation. 18 (ii) If a policy covers more than one 19 classification— 20 (I) for any portion of the cov21 erage identified by a classification on 22 the Allocation Schedule, the tax shall 23 be computed by using the Allocation 24 Schedule for the corresponding por25 tion of the premium; 1 (II) for any portion of the cov2 erage not identified by a classification 3 on the Allocation Schedule, the tax 4 shall be computed by using an alter5 native equitable method of allocation 6 for the property or risk; and 7 (III) for any portion of the cov8 erage where the premium is indivis9 ible, the tax shall be computed by 10 using the method of allocation which 11 pertains to the classification describ12 ing the predominant coverage. 13 (C) If the information provided by the sur14 plus lines broker is insufficient to substantiate 15 the method of allocation used by the surplus 16 lines broker, or if a home State insurance com17 missioner determines that the broker’s method 18 is incorrect, the home State insurance commis19 sioner shall determine the equitable and appro20 priate amount of tax due to reciprocal States as 21 follows: 22 (i) By use of the Allocation Schedule 23 where the risk is appropriately identified in

6

24 the schedule. 1 (ii) Where the Allocation Schedule 2 does not identify a classification appro3 priate to the coverage, the home State in4 surance commissioner may give significant 5 weight to documented evidence of the un6 derwriting bases and other criteria used by 7 the insurer. The home State insurance 8 commissioner may also consider other 9 available information to the extent suffi10 cient and relevant, including the percent11 age of the insured’s physical assets in each 12 State, the percentage of the insured’s sales 13 in each State, the percentage of income or 14 resources derived from each State, and the 15 amount of premium tax paid to each juris16 diction for the policy. {New global definition} [New definition => “(_) MAJORITY OF STATES.—The term "majority of States" means at least 29 States that represent at least 50% of the population of the United States as determined in the most recent Federal census.”] [Sec. 821, add a new definition=> “(6) NON-ADMITTED INSURANCE MODEL ACT .— For purposes of this section, the term Non-Admitted Insurance Model Act means the provisions of the Non-Admitted Insurance Model Act adopted by the NAIC on [date adopted] , except that such term shall not include any—

(A) State-specific deviations, (B) alternative standards, (C) best practices, or (D) any subsequent changes to such Act except as provided in ___

___ {allow subsequent changes if adopted by a majority of States that don’t violate (A)-(C)”] [Strike “sophisticated commercial purchaser” and replace with “exempt commercial purchaser”; make the definition exclusive and dynamic as for other model act standards] [Insert at the top of page 20 a new definition => “(8) PREMIUM TAX.—The term "premium tax" means all taxes, fees, assessments and other charges imposed by a State on an insured based on any payment made as consideration for an insurance contract for surplus lines or independently procured insurance coverage, including premium deposits, assessments, registration fees and any other compensation given in consideration for a contract of insurance.”]

7

Additional Items for Discussion for Title VIII – Surplus Lines Should SMART encourage the States to consider risk-based analysis of financial condition (or any other assessments) of non-admitted insurers? Should SMART allow a single state compliance procedure for all multi-state commercial risks regardless of whether or not the insured is a “Sophisticated Commercial Purchaser?” Issues for Global Discussion What factors should be used for a uniform definition of “sophisticated commercial purchaser?” Should some factors, such as net worth, be weighted over others? Do we need a global definition of State of domicile for an insured (principal place of business)?

© 2002 National Association of Insurance Commissioners 16

Drafting Note: Individual states should consider whether such declarations of ineligibility are appropriate in view of the state’s other due process and administrative procedure requirements.

F. Surplus Lines Tax

(1) In addition to the full amount of gross premiums charged by the insurer for the insurance, every person licensed pursuant to Section 5H of this Act shall collect and pay to the commissioner a sum equal to [insert number] percent of the gross premiums charged, less any return premiums, for surplus lines insurance provided by the licensee pursuant to the license. Where the insurance covers properties, risks or exposures located or to be performed both in and out of this state, the sum payable shall be computed on that portion of the gross premiums allocated to this state pursuant to Paragraph (4) of this subsection less the amount of gross premiums allocated to this state and returned to the insured. The tax on any portion of the premium unearned at termination of insurance having been credited by the state to the licensee shall be returned to the policyholder directly by the surplus lines licensee or through the producing broker, if any. The surplus lines licensee is prohibited from rebating, for any reason, any part of the tax.

(2) At the time of filing the [insert monthly, quarterly, annual] report as set

forth in Subsection R of this section, each surplus lines licensee shall pay the premium tax due for the policies written during the period covered by the report.

(3) If a surplus lines policy procured through a surplus lines licensee covers

properties, risks or exposures only partially located or to be performed in this state, the tax due shall be computed on the portions of the premiums which are attributable to the properties, risks or exposures located or to be performed in this state. In determining the amount of premiums taxable in this state, all premiums written, procured or received in this state shall be considered written on properties, risks or exposures located or to be performed in this state, except premiums which are properly allocated or apportioned and reported as taxable premiums of a reciprocal state. In no event shall the tax payable to this state be less than the tax due pursuant to Paragraph (4) of this subsection; provided, however, in the event that the amount of tax due under this provision is less than $50 in any jurisdiction, it shall be payable in the jurisdiction in which the affidavit required in Subsection K of this section is filed.

The commissioner shall, at least annually furnish to the commissioner of a reciprocal state, as defined in Section 3L, a copy of all filings reporting an allocation of taxes as required by this subsection.

© 2002 National Association of Insurance Commissioners 17

(4) In determining the amount of gross premiums taxable in this state for a placement of surplus lines insurance covering properties, risks or exposures only partially located or to be performed in this state, the tax due shall be computed on the portions of the premiums which are attributable to properties, risks or exposures located or to be performed in this state and which relates to the kinds of insurance being placed as determined by reference to an allocation schedule duly promulgated in a regulation by the commissioner.

(a) If a policy covers more than one classification:

(i) For any portion of the coverage identified by a

classification on the Allocation Schedule, the tax shall be computed by using the Allocation Schedule for the corresponding portion of the premium;

(ii) For any portion of the coverage not identified by a

classification on the Allocation Schedule, the tax shall be computed by using an alternative equitable method of allocation for the property or risk;

(iii) For any portion of the coverage where the premium is

indivisible, the tax shall be computed by using the method of allocation which pertains to the classification describing the predominant coverage.

(b) If the information provided by the surplus lines licensee is

insufficient to substantiate the method of allocation used by the surplus lines licensee, or if the commissioner determines that the licensee’s method is incorrect, the commissioner shall determine the equitable and appropriate amount of tax due to this state as follows:

(i) By use of the Allocation Schedule where the risk is

appropriately identified in the schedule;

(ii) Where the Allocation Schedule does not identify a classification appropriate to the coverage, the commissioner may give significant weight to documented evidence of the underwriting bases and other criteria used by the insurer. The commissioner may also consider other available information to the extent sufficient and relevant, including the percentage of the insured’s physical assets in this state, the percentage of the insured’s sales in this state, the percentage of income or resources derived from this

© 2002 National Association of Insurance Commissioners 18

state, and the amount of premium tax paid to another jurisdiction for the policy.

Drafting Note: Subparagraph (b) above may be included in the Act or in a separate regulation at the option of the state. It is highly recommended that the model Allocation Schedule and reporting form be adopted by regulation in conjunction with the adoption of the above language. In order for the model law to work effectively, the allocation schedules used by the states should be as uniform as possible. Editor’s Note: A model allocation schedule does not yet exist, but is in the process of development.

G. Collection of Tax

If the tax owed by a surplus lines licensee under this section has been collected and is not paid within the time prescribed, the same shall be recoverable in a suit brought by the commissioner against the surplus lines licensee and the surety on the bond filed under Subsection H of this section. The commissioner may charge interest at the rate of [insert number] percent per year for the unpaid tax.

H. Surplus Lines Licenses

(1) A person shall not procure a contract of surplus lines insurance with a

nonadmitted insurer unless the person possesses a current surplus lines insurance license issued by the commissioner.

(2) The commissioner may issue a surplus lines license to a qualified holder

of a current property and casualty agent’s or broker’s or general agent’s license but only when the broker or agent has:

(a) Remitted the $[insert amount] annual fee to the commissioner;

(b) Submitted a completed license application on a form supplied by

the commissioner;

(c) Passed a qualifying examination approved by the commissioner, except that all holders of a license prior to the effective date of this Act shall be deemed to have passed such an examination;

(d) In the case of a resident agent, filed with the commissioner, and

continues to maintain during the term of the license, in force and unimpaired, a bond in favor of this state in the penal sum of $[insert amount] aggregate liability, with corporate sureties approved by the commissioner. The bond shall be conditioned that the surplus lines licensee will conduct business in accordance with the provisions of this Act and will promptly remit the taxes as

© 2002 National Association of Insurance Commissioners 29

(11) Identity of the producing broker, any confirming correspondence from the insurer or its representative, and the application.

The record of each contract shall be kept open at all reasonable times to examination by the commissioner without notice for a period not less than five (5) years following termination of the contract. In lieu of maintaining offices in this state, each nonresident surplus lines licensee shall make available to the commissioner any and all records that the commissioner deems necessary for examination.

Drafting Note: States may wish to extend the five-year period prescribed for open access to insurance records because of the long-term nature of this business.

R. Reports—Summary of Exported Business

On or before the end of the month following each [insert month, quarter, year], each surplus lines licensee shall file with the commissioner, on forms prescribed by the commissioner, a verified report in duplicate of all surplus lines insurance transacted during the preceding period, showing:

(1) Aggregate gross premiums written;

(2) Aggregate return premiums;

(3) Amount of aggregate tax remitted to this state; and

(4) Amount of aggregate tax due or remitted to each other state for which an

allocation is made pursuant to Subsection F of this section. Drafting Note: States desiring to have taxes remitted annually may call for more frequent detailed listing of business. Section 6. Insurance Independently Procured—Duty to Report and Pay Tax

A. Each insured in this state who procures or continues or renews insurance with a nonadmitted insurer on properties, risks or exposures located or to be performed in whole or in part in this state, other than insurance procured through a surplus lines licensee, shall, within [insert number] days after the date the insurance was so procured, continued or renewed, file a written report with the commissioner, upon forms prescribed by the commissioner, showing the name and address of the insured or insureds, name and address of the insurer, the subject of the insurance, a general description of the coverage, the amount of premium currently charged, and additional pertinent information reasonably requested by the commissioner.

For the purposes of this subsection, properties, risks or exposures only partially located or to be performed in this state, which are covered under a multi-state

© 2002 National Association of Insurance Commissioners 30

policy placed by a surplus lines licensee in another state, shall be deemed to be insurance independently procured unless the insurer is an admitted insurer.

Drafting Note: Subsection A may need to be revised in those states exempting from taxation insurance procured by nonprofit educational institutions and their employers, from nonprofit educational insurers.

B. Gross premiums charged for the insurance, less any return premiums, are subject to a tax at the rate of [insert number] percent. At the time of filing the report required in Subsection A of this section, the insured shall pay the tax to the commissioner, who shall transmit the same for distribution as provided in this Act.

Drafting Note: Existing state laws and procedures may require that the tax report be forwarded to another state agency, such as the Department of the Treasury, rather than to the commissioner. In addition, some states may require the tax to be paid on a periodic basis (e.g. annually) rather than at the time of the filing required by Subsection A. Subsections A and B may need to be revised in these states.

C. If an independently procured policy covers properties, risks or exposures only partially located or to be performed in this state, the tax payable shall be computed on the portion of the premium properly attributable to the properties, risks or exposures located or to be performed in this state, as set forth in Sections 5F(3) and 5F(4) of this Act.

D. Delinquent taxes hereunder shall bear interest at the rate of [insert number]

percent per year.

E. This section does not abrogate or modify, and shall not be construed or deemed to abrogate or modify any other provision of this Act.

Section 7. Penalties

A. A person who in this state represents or aids a nonadmitted insurer in violation of this Act may be found guilty of a criminal act and subject to a fine not in excess of $[insert amount].

Drafting Note: Some states might want to specify “misdemeanor” or “felony” rather than “criminal act” in Section 7A.

B. In addition to any other penalty provided herein or otherwise provided by law, including any suspension, revocation or refusal to renew a license, any person, firm, association or corporation violating any provision of this Act shall be liable to a civil penalty not exceeding $[insert amount] for the first offense, and not exceeding $[insert amount] for each succeeding offense.

© NAIC 1996

ALLOCATION OF SURPLUS LINES AND INDEPENDENTLY PROCURED INSURANCE PREMIUM TAX ON MULTI-STATE RISKS MODEL REGULATION

Table of Contents Section 1. Purpose Section 2. Allocation of Premium Tax on Multi-State Risks Section 3. Reporting and Remittance of Tax Appendix A. Allocation Schedule Appendix B. Tax Allocation Report Section 1. Purpose The purpose of this regulation is to:

A. Implement the provisions of Section [insert citation to state law equivalent to Section 5 of the Nonadmitted Insurance Model Act] by requiring surplus lines licensees to allocate premiums where a placement of surplus lines insurance covers properties, risks or exposures located or to be performed in various states (multi-state risks);

B. Facilitate payment of surplus lines tax or independently procured insurance tax in

this state pursuant to [cite state law equivalent to Section 6 of the Nonadmitted Insurance Model Act]; and

C. Provide a mechanism by which a surplus lines licensee or insured shall allocate premiums and pay premium taxes to each state where placement of surplus lines insurance covers properties, risks or exposures located or to be performed in each state.

Section 2. Allocation of Premium Tax on Multi-State Risks

A. In determining the amount of premiums taxable in this state, all premiums written, procured or received in this state shall be presumed to be written on properties, risks or exposures located or to be performed in this state, except

(1) For a reciprocal state, premiums that are allocated or apportioned as

taxable premiums of the reciprocal state in accordance with the provisions of this regulation, but the tax payable to this state shall not be less than the tax due pursuant to this regulation. However, if the amount of tax due under this provision is less than $50 in any jurisdiction, it shall be payable in the jurisdiction in which the affidavit is required to be filed; or

© NAIC 1996 2

(2) For a nonreciprocal state, premiums that are allocated or apportioned as taxable premiums of the nonreciprocal state and the taxes have been paid to the nonreciprocal state.

B. On an insurance policy covering properties, risks or exposures located or to be

performed in various states, the tax to be paid to the commissioner of each state shall be computed on that portion of the policy premium that is attributable to properties, risks or exposures located or to be performed in each state.

C. The surplus lines licensee or the insured who has independently procured

insurance shall determine the taxable portion of the premium by using one of the following methods:

(1) Allocate premium on the same basis or bases used to establish the policy

premium; or (2) Allocate premium as prescribed in the allocation schedule in Appendix A

of this regulation that pertains to the classification describing the coverage, subject to the following:

(a) If the allocation schedule does not identify a classification

appropriate to the properties, risks or exposures being insured, the surplus lines licensee or the insured who has independently procured insurance shall use an alternative equitable method of allocation; and

(b) If a policy covers more than one classification:

(i) For any portion of the coverage identified by a

classification on the allocation schedule, the tax shall be computed by using the allocation schedule for the corresponding portion of the premium;

(ii) For any portion of the coverage not identified by a

classification on the allocation schedule, the tax shall be computed in accordance with Subparagraph (a) of this paragraph; and

(iii) For any portion of the coverage where the premium is

indivisible, the tax shall be computed by using the method of allocation that pertains to the classification describing the predominant coverage.

D. If the information provided by the surplus lines licensee or the insured who has

independently procured insurance is insufficient to substantiate its method of allocation, or if the commissioner determines that its method is incorrect, the

© NAIC 1996 3

commissioner shall determine the equitable and appropriate amount of tax due to this state, as follows:

(1) If the allocation schedule identifies a classification appropriate to the

coverage, the commissioner shall use the method prescribed in Subsection C.

(2) If the Allocation Schedule does not identify a classification appropriate to

the coverage, the commissioner, in determining the equitable and appropriate amount of tax due to the state, shall give significant weight to documented evidence of the underwriting bases and other criteria used by the insurer. The commissioner may also consider other available information, to the extent sufficient and relevant, such as the percentage of the insured’s physical assets in this state, the percentage of the insured’s employee payroll in this state, the percentage of the insured’s sales in this state and the amount of premium tax paid to another jurisdiction for the policy.

Drafting Note: In some states, determination of, and payment of, tax is the responsibility of a state official other than the commissioner. Subsection D should be modified as necessary to reflect state law. Section 3. Reporting and Remittance of Tax

A. Each licensee or insured who has independently procured insurance shall file a tax allocation report, as specified in Appendix B of this regulation. The filing of a tax allocation report and the remittance of tax may be made by a person authorized by the insured to act as its agent.

B. The commissioner shall at least annually furnish to the commissioner of a

reciprocal state a copy of all filings reporting an allocation of taxes required by this section.

C. The preparation and submission of tax allocation reports and the payment of

independently procured insurance taxes by a surplus lines licensee of another state to the commissioner of this state either directly or indirectly for lawful transactions taking place outside this state shall not be considered the placement of insurance in this state by the surplus lines licensee.

© NAIC 1996 4

APPENDIX A

SURPLUS LINES PREMIUM TAX ALLOCATION SCHEDULE

Criteria for Tax

Allocation of Multi-State Risks CODE CLASSIFICATION ALLOCATE TO STATE BY PROPERTY INSURANCE: 01 Real Property (including buildings and other

permanent additions)

Insured value of structures and other property in state

02 Personal Property (including inland marine)

Insured value of property permanently or principally situated in state

03 Business Interruption, Time Element, or similar time value coverages

Insured time valued elements in state

04 Farmowners, Homeowners, and Businessowners (BOP)

Insured value of structures and other property in state

05 Aircraft Insured value of aircraft principally hangared or principally used in state

06 Motor Vehicle Insured value of motor vehicles principally garaged or principally used in state

07 Kidnap & Ransom Number of insured employees principally employed in state

08 Ocean Marine None to state

© NAIC 1996 5

FIDELITY AND SURETY: 11 Fidelity, Forgery, and other Indemnity Bonds Number of insured employees in

state

12 Bankers’ Blanket Bonds Number of insured employees in state

13 Performance Bonds Total bond value of contracts in state

14 Other surety Bonds Total bond value of contracts in state

CREDIT INSURANCE: 21 Credit Insurance Value of insured debt in state

RESIDUAL VALUE INSURANCE: 31 Residual Value Insurance Allocate to value of underlying

property

LIABILITY INSURANCE: 41 Manufacturers and Contractors Payroll in state

42 Premises Operations Square footage of premises in

state

43 Owners and Contractors Protective Cost of contract in state

44 Products Receipts in state

45 Completed Operations Receipts in state

46 Municipalities, Public Authorities and other Political Subdivisions

Number of municipalities, etc. in state

47 Child Care Number of children in state

© NAIC 1996 6

48 Contractual If “stand alone” policy, value of sales in state

49 Recreational Amount of gate receipts in state

50 Environmental Impairment Number of units of exposure in state

51 Asbestos Abatement Payroll in state

52 Employee/Member Benefit Program Number of employees/members in state

53 Special Events Receipts from state

54 Professional Liability Number of insureds in state

55 Errors and Omissions Revenues generated in state

56-A For-Profit Organization Revenues generated in state

56-B Not-for-Profit Organization Number of directors and officers based in state

57 Hospital, Nursing Home, and Adult Home Number of beds in facility plus one additional bed for each 100 outpatient visits at locations in state

58 Liquor Liability Receipts from sales of alcoholic beverages in state

59 Railroad Protective Miles of track in state

60 Aircraft Number of aircraft principally hangared or principally used in state

61 Motor Vehicle Number of motor vehicles principally garaged or principally used in state

© NAIC 1996 7

62 Umbrella Classification of predominant coverage; except if underlying coverages are divisible, then use underlying classifications

63 Excess Liability If directly over primary, use underlying classifications. If over umbrella, use method in Code 62.

© NAIC 1996 8

APPENDIX B

TAX ALLOCATION REPORT

AFFIDAVIT #________________

1. NAME AND LICENSE NO. OF SURPLUS LINES PRODUCER

________________________________ ___________________________________ 2. NAMES, ADDRESSES, TELEPHONE NOS., AND NAIC NOS. OF INSURERS

________________________________________________________________________

________________________________________________________________________

________________________________________________________________________ 3. NAME OF INSURED AND POLICY NUMBER _______________ ________________

_______________ ________________ If purchasing group or an authorized group, list (a) name of group; (b) names of individual members for whom the allocation is being made; and (c) the policy numbers (group and individual) and certificate numbers, as applicable. 4. TOTAL GROSS POLICY PREMIUM

(PG. 2 ITEM 8, COL. 5 TOTAL) $________________ 5. PREMIUM ALLOCATED TO (insert state) ______________ $________________

(PG. 2 ITEM 8, COL. 6 TOTAL) 6. AMOUNT OF PREMIUM TAX DUE TO (state) _____________ $________________

(PG. 2 ITEM 8, COL. 7 TOTAL) NOTE: This payment shall be included with your quarterly (or annual) premium tax payment. 7. LIST ALL STATES IN WHICH EXPOSURE EXISTS AND THE CORRESPONDING

PREMIUMS AND TAXES ALLOCATED TO EACH STATE (USE A SEPARATE PAGE IF NEEDED).

8. Calculation of Premium Tax Allocation:

1 2 3 4 5 6 7

TOTALS

XXXXX

XXXXX

XXXXX

$____________

$____________

$____________

Notes: Column 1:

(a) If policy covers more than one classification, enter each classification code separately. (b) For any portion of the premium that is not divisible, list all coverages and specify the predominant coverage.

Columns 2 and 3:

(c) Indicate the units, insured values, numbers, etc. upon which the allocation is made. If classification code and method of allocation for all or a portion of the policy is not listed in the Allocation Schedule, attach explanatory memorandum describing the property or risk and supporting the alternative equitable method of allocation used for that portion.

Column 7:

(d) Insert tax rate.

Classification Codes and Methods of Allocation as indicated in the Allocation Schedule

Total Amount of Exposure

Exposure in (insert state)

% Ratio of Column 3 to Column 2

Total Gross Policy Premium

Premium Allocated to (insert state). Multiply Column 4 by Column 5

Tax Due to (insert state). Multiply Column 6 by _______

10

THE FOLLOWING CERTIFICATION MUST BE COMPLETED The undersigned certifies that the information reported in Items 1 through 8 of this form, including all attached supporting documentation, is true to the best of my knowledge, information and belief under penalties of perjury. ________________________ _________________________________________ Date Signature of Licensee or Sublicensee

_____________________________

Legislative History (all references are to the Proceedings of the NAIC). 1995 Proc. 3rd Quarter (adopted).