|(a) Definitions. The following words and terms, when
used in this section, shall have the following meanings, unless the
context clearly indicates otherwise.
(1) Exempt premiums--If a surplus lines policy covers
risks or exposures that are properly allocated to federal waters,
international waters, or risks or exposures that are under the jurisdiction
of a foreign government, then the premiums on such policies or portions
of such policies are not taxable in Texas.
(2) Federal preemptions to state taxation for surplus
lines insurance--Federal preemptions from state taxation exist for
premiums on policies that are issued for the following entities:
(A) The Federal Deposit Insurance Corporation (FDIC),
when it acts as the receiver of a failed financial institution that
holds the property being insured;
(B) The National Credit Union Administration; and
(C) A federally chartered credit union.
(3) Multiple agent transaction--A transaction in which
two or more agents, each acting as a surplus lines agent of record,
place portions of the total insurance coverage, under a cover note
or under a subscription policy, for a single insured.
(4) Premium received--The total gross amount of premium
that is collected for the coverage that the contract or policy provides,
which includes, but is not limited to, premiums, membership fees,
assessments, dues, policy fees, or any other consideration for insurance.
This amount includes agent fees that are charged in addition to, or
in lieu of, a commission. Premium received does not include any separately
billed finance charge that is associated with the financing of the
(5) Premium written--The total gross amount of premium
for the coverage that the insurance contract or policy provides, which
includes, but is not limited to, premiums, membership fees, assessments,
dues, policy fees, or any other consideration for insurance that is
billed to the insured. This amount includes agent fees that are charged
in addition to, or in lieu of, a commission. Premium written does
not include any separately billed finance charge that is associated
with the financing of the premium.
(6) Properly allocated and apportioned--The division
or distribution of premium among or between the various locations
afforded coverage under the insurance contract. This distribution
of premium must comply with the methods that this section describes.
(7) Surplus lines agent or agency--An agent or agency
that holds a surplus lines license that this state has issued pursuant
to Insurance Code, Article 1.14-2.
(8) Surplus lines agent of record--The Texas licensed
surplus lines agent who places a policy with an eligible surplus lines
insurer, or the Texas licensed surplus lines agent who transacts business
directly with an out-of-state agent not licensed by Texas as a surplus
lines agent to obtain coverage with an eligible surplus lines insurer.
The agent in these situations is the agent of record for such agent's
portion of the premium for the policy placement.
(9) Taxable surplus lines premium--For surplus lines
taxation purposes, except for exempt or federally pre-empted premiums,
surplus lines premium is taxable under Insurance Code, Article 1.14-2,
(10) Texas waters--Waters within 10.359 statute miles
or nine nautical miles from the Texas coastline.
(b) Determination of Texas premium and tax due. Unless
otherwise properly allocated and reported pursuant to subsection (c)
of this section, all premiums that are associated with a surplus lines
policy are Texas premiums for taxation and reporting purposes. Premiums
on policies for risks in Texas waters are subject to Texas taxation.
All surplus lines insurance premium taxes must be computed on the
total gross premium written or premium received for the policy as
of the date that coverage becomes effective, except as follows:
(1) A policy that is issued for a term in excess of
one year, with a fixed premium that is payable annually, shall be
taxed on the first year's premium at the statutory rate as of the
date that the policy is effective. The tax on premiums payable for
subsequent years shall be computed and collected as of the date that
such subsequent premiums become due and payable. For taxation purposes,
that date is the policy anniversary date.
(2) Premium deposits made on a policy that provides
for retrospective premium adjustments are premiums for such policy
as of the effective date of the policy, and are taxed accordingly.
(3) Retrospective premium adjustments that are made
under the terms of a surplus lines policy and that require the insured's
payment of additional premiums are taxed at the rate originally charged.
Retrospective premium adjustments that require the return of a portion
of premium or premium deposit are effectuated by the surplus lines
agents through a tax refund at the rate originally charged.
(c) Allocation of premium. A surplus lines agent of
record may allocate the premium by use of the method that most reasonably
and equitably allocates the premium that applies to Texas, other
states, and nontaxable jurisdictions on those policies that cover
multiple locations. The amount of premium on each policy must be allocated
as Texas premium, other states premium, and exempt/preempted premium
and must be reported to the Surplus Lines Stamping Office of Texas
in a format that the Texas Department of Insurance and the Surplus
Lines Stamping Office of Texas provide. Policies for risks that are
100 percent exempt, are preempted by federal statute and are on risks
located entirely outside Texas, or risks that are allocated entirely
to another state, are not required to be reported to the Surplus Lines
Stamping Office of Texas. The premiums for these policies must be
reported to the comptroller on a form prescribed for this purpose.
The premium allocated to other states must be reported in the aggregate
for all other states, beginning with policies that are effective the
month that follows adoption of this section. The allocation standard
chosen must be maintained in the policy file at the office of the
surplus lines agent of record, and must be available upon request
for inspection for taxation and regulation purposes for a minimum
of four years, beginning the day after the date on which the annual
tax report is due.
(1) Acceptable apportionment or premium allocation
standards are as follows:
(A) (PA)--percentage of physical assets in Texas;
(B) (EP)--percentage of payroll that applies to employees
who are located or conduct business in Texas;
(C) (S)--percentage of sales in Texas;
(D) (TC)--percentage of taxable capital for franchise
tax purposes in Texas;
(E) (T)--percentage of time that an insured's conduct
or property is exposed to coverage in Texas;
(F) (X)--any other method of equitable apportionment
that is adequately described.
(2) Premiums that are properly allocated to any other
state or states, and that are specifically exempt from taxation under
the regulations of the other state or states, are not taxable in Texas.
(3) The apportionment or allocation standards under
subsection (c)(1) of this section also apply to independently procured
insurance premiums under Insurance Code, Title 2, §101.252.
(d) Tax base election. Surplus lines agents may elect
to report and pay the premium tax on a premium-written or premium-received
basis. All premiums will be taxed on the same basis. Each surplus
lines agent must file an election on forms that the comptroller prescribes,
and must state the method of taxation that the agent has chosen. If
an agent fails to file an election, the agent must report on a premium-written
basis. The tax base election chosen must be identified on the first
tax report filing made that follows adoption of this section. Subject
to approval from the comptroller, agents are allowed to change their
election every four years prospectively. After the expiration of
the initial four year election period, a change in the tax base election
will be effective beginning the year received by the comptroller.
An agent who changes from a premium-received to a premium-written
basis will owe taxes on all outstanding receivables as of January
1 of the year of the change.
(1) Agents who elect to pay premium taxes on a premium-written
basis will owe tax on all premium written during the reporting period,
regardless of whether the tax has been collected, unless the premium
is properly allocated or apportioned and reported under subsection
(c) of this section.
(2) Agents who elect to pay premium taxes on a premium-received
basis will owe tax on all premium received, regardless of whether
the tax has been collected during the reporting period, unless the
premium is properly allocated or apportioned and reported under subsection
(c) of this section.
(3) Failure to bill and collect the tax at the time
of delivery of the cover note, certificate of insurance, policy, or
other initial confirmation of coverage is a violation of Insurance
Code, Article 1.14-2, §12.
(e) Prepayment of taxes. Beginning January 1, 2000,
licensed surplus lines agents are required to remit tax prepayments.
(1) A surplus lines agent must remit a premium tax
prepayment by the 15th day of the month that follows any month in
which accrued taxes equal or exceed $70,000, based on the tax base
elected by the agent under subsection (d) of this section. The prepayment
amount must equal the accrued liability at the end of the month.
(2) Failure to make the required prepayments will result
in the application of penalty and interest.
(f) Bad debts. Any portion of the policy premium that
is not collectible is considered to be a bad debt.
(1) An agent is not required to report tax on any amount
that has been entered in the agent's books as a bad debt during the
reporting period in which the contract was made, provided that the
agent has deducted such amount on the agent's federal income tax return
for that period.
(2) An agent is entitled to a credit for tax reported
and paid on an account that is later determined to be a bad debt.
The agent may take a deduction on the surplus lines tax report form,
or obtain a refund from the comptroller, in the reporting period in
which the agent's books reflect the bad debt. Deductions and refunds
due to bad debts are limited to four years from the date on which
the account is entered in the agent's books as a bad debt.
(3) A deduction may only be claimed on that portion
of the bad debt that represents the amount reported subject to tax.
In determination of that amount, all payments and credits to the policy
may be applied ratably against the various charges that comprise the
bad debt, except as paragraph (4) of this subsection provides.
(4) An agent may not deduct the expense of collection
of bad debt, or the amount that the agent pays to a third party or
that the third party retains for the service of collection of bad
debt, from the amount subject to tax.
(5) To claim bad debt deductions, an agent's records
(A) the date of the original or renewal insurance policy;
(B) the name and address of the insured;
(C) the amount that the insured contracted to pay;
(D) taxable and nontaxable charges;
(E) the amount on which the agent paid tax;
(F) all payments or other credits that are applied
to the account of the insured; and
(G) evidence that the uncollected amount has been
designated as a bad debt in the agent's books and records and was
claimed as a bad debt deduction for income tax purposes.
(6) If an agent later collects all or part of an account
for which a bad debt deduction was claimed, the amount collected must
be reported as taxable premium in the reporting period in which such
collection was made and taxed at the rate originally assessed.
(7) Installment policies may not be labeled as bad
debts merely for the purpose of delay of payment of the premium tax.
(g) Financed or periodic payment transactions. Financed
or periodic payment transactions include all policies in which the
terms of the contract provide for deferred payments of the premium.
These transactions include installment policies, conditional contracts,
and premium-financed policies.
(1) Tax is due on the premium, interest charges, finance
charges, and all other service charges incurred as a part of the policy
issuance, unless these charges are stated separately to the insured
by such means as an invoice, billing, ticket, or contract.
(2) An agent must report and pay tax on financed or
periodic payment transactions based on one of the reporting methods
that subsection (d) of this section describes.
(A) If the agent has elected to pay tax based on a
premium-written basis, the entire amount of tax is due on the premium
for the policy period and must be reported during the initial year
in which the policy is effective.
(B) If the agent has elected to pay tax on a premium-receipts
basis, tax must be reported based on the actual premium collected
during the reporting period, excluding separately stated finance charges.
(h) Multiple agent transaction. Each agent of record
in a multiple agent transaction is responsible for filing the policy
that covers such agent's portion of the premium with the Surplus Lines
Stamping Office of Texas, for filing an annual tax report with the
comptroller on such business, and for payment of premium taxes on
such premium or portion of such premium.
(i) Absorption of tax. As stated in Insurance Code,
Article 1.14-2, §12, surplus lines agents are prohibited from
absorption of the surplus lines premium tax. The assessment of tax
due but not collected from insureds does not constitute absorption
of taxes. Agents who are found to be absorbing tax through practices
such as rebating or failing to bill for tax, or through violation
of any subsection of this section, will be reported to the Texas Department
of Insurance for regulatory action.