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RULE §3.822Basis and Reporting of Surplus Lines Premium Tax, the Allocation of Premium for Surplus Lines and Independently Procured Premium Tax, and Multiple Agent Transactions for Surplus Lines Insurance

  (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 must show:

    (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.

Source Note: The provisions of this §3.822 adopted to be effective March 20, 2001, 26 TexReg 2199

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