States trying to collect premium tax on surplus lines/non-admitted insurers face difficulties similar to those that they face when trying to collect sales and use tax on remote sales—figuring out how to capture taxes from out of state. But unlike sales and use tax, an area in which states have asserted their authority to collect tax on remote sales via click-through nexus or affiliate nexus statutes, federal law prohibits states from collecting premium tax on surplus lines/non-admitted insureds from out-of-state via the Non-admitted and Reinsurance Reform Act of 2010 (NRRA).
That prohibition comes with an exception though—if states can find a way to work together. In that same legislation, Congress passed the buck on out-of-state premium tax collection to states by allowing them to enter into agreements to allocate premium taxes to an insured’s home state via a tax-allocating clearinghouse and related uniform provisions for reporting, payment, collection and allocation of premium taxes for non-admitted insurance.
Although insurance tax and sales and use tax considerations can be very different, the uniformity goal may pose the same challenges as those faced by the Streamlined Sales and Use Tax Agreement—getting key states to sign on, for example. And keeping in mind the long push for federal sales tax legislation, perhaps these insurance provisions are a cautionary tale that federal legislation might not be the panacea that tax folks want it to be, in either the insurance tax or sales and use tax arenas.
Now, based on differing interpretations of what tax-allocation provisions work best, two main forms of collaboration among the states have developed out of the NRRA’s provisions: the Non-Admitted Insurance Multistate Agreement (NIMA) and the Surplus Lines Insurance Multistate Compliance Compact (SLIMPACT). Which one will emerge as the more dominant agreement—if either?
States that do not adopt either of these may tax and keep 100 percent of the surplus lines premium tax provided for home state insureds, according to a guide issued by The Council of Insurance Agents and Brokers.
Recent momentum has been behind NIMA—an interstate agreement (not a compact) that aims to create a central clearinghouse for reporting and collecting surplus lines taxes, and distributing them among states that are part of the agreement. So far, several jurisdictions have joined NIMA: Florida, Louisiana, South Dakota, Utah and Wyoming and Puerto Rico. Wisconsin and Tennessee recently joined as “associate members,” meaning that they can test out the benefits of NIMA membership on a trial basis.
SLIMPACT is an interstate compact designed to clarify laws and ease regulatory burdens, allow each member state to collect taxes on all non-admitted risks when they are present in the compacting state and save multistate compliance costs, according to the SLIMPACT executive summary. The compact also allows states to agree on uniform standards for compliance. One of SLIMPACT’s main goals is to create a clearinghouse to facilitate determining “what each state is owed by each broker and what each broker owes each state.”
SLIMPACT’s momentum has stalled recently though, to the point that Tennessee dropped out (via 2014 H.B. 356) and joined NIMA instead. Compact terms dictate that its effectiveness is triggered upon adoption by either 10 states or when the adopting states represent 40 percent of the surplus lines U.S. market share adopt the compact. With eight member states—Alabama, Indiana, Kansas, Kentucky, New Mexico, North Dakota, Rhode Island and Vermont, according to the National Conference of Insurance Legislators—it has not yet become effective.
In both arrangements, only states that participate in that specific compact or agreement can receive taxes allocated from other states within the same agreement or compact.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Will more states join either of these clearinghouses, or opt to keep surplus lines premiums tax revenue for themselves?
For more information about state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library.
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