8.1 The 4.85% Surplus Lines Premium Tax: What Is Taxed, Who Collects It, and How It Is Calculated

8.1 The 4.85% Surplus Lines Premium Tax: What Is Taxed, Who Collects It, and How It Is Calculated

The outline's "premium taxes" item cites TIC §§ 225.004 and 225.006 and the Comptroller's rule, 34 TAC § 3.822. The tax is administered by the Texas Comptroller of Public Accounts, not TDI. The surplus lines agent is the one who collects it, holds it in trust, and pays it.

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1. The Tax and When It Applies

• Rate: "A tax is imposed on gross premiums for surplus lines insurance. The rate of the tax is 4.85 percent of the gross premiums" (TIC § 225.004(a)). SLTX's historical table shows 4.85% for policies incepting since July 1989.
• Home state only: The tax applies to a surplus lines agent who collects gross premiums for any risk where Texas is the insured's home state (TIC § 225.002). Consistent with the NRRA, Texas may not tax nonadmitted premiums when Texas is not the home state (§ 225.004(a-1)).
• Tax base: Gross premiums written or received for surplus lines insurance during a calendar year (§ 225.004(b)).
• Transaction tax: It is a transaction tax collected by the surplus lines agent of record, in lieu of any other transaction taxes on those premiums (§ 225.005).
• Domestic surplus lines insurers: DSLI policies are also subject to the tax (TIC § 981.075).

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2. What Is Taxable Premium?

Statute (TIC § 225.001(5)): "Premium" means any payment made in consideration for insurance and includes premium, premium deposits, membership fees, registration fees, assessments, dues, and any other compensation given in consideration for surplus lines insurance.

Comptroller rule (34 TAC § 3.822(a)(4)-(5)): Premium written or received includes premiums, membership fees, assessments, dues, policy fees, and any other consideration for insurance, including agent fees charged in addition to, or in lieu of, a commission. It excludes any separately billed finance charge associated with financing the premium.

Exempt and Preempted Premium

• Exempt (TIC § 225.004(e), (g)): Premium on risks properly allocated to federal waters, international waters, or a foreign government's jurisdiction, and ocean marine coverage of stored or in-transit baled cotton for export. Risks in Texas waters, within nine nautical miles of the Texas coast, are taxable (34 TAC § 3.822(a)(10), (b)).
• Federally preempted (34 TAC § 3.822(a)(2)): Policies for the FDIC acting as receiver of a failed institution that holds the insured property, the National Credit Union Administration, and federally chartered credit unions. SLTX also lists activities on tribal lands.
• Exempt and preempted policies are still filed with SLTX and still pay the stamping fee.

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3. Who Collects and Pays

• Collection at delivery: The surplus lines agent must collect from the insured the tax, and the full gross premium charged by the insurer, at the time of delivery of the cover note, certificate, policy, or other initial confirmation (TIC § 225.006(a)). Failing to bill and collect the tax at delivery violates the Comptroller's rule (34 TAC § 3.822(d)(3)).
• Managing underwriters: If a surplus lines agent places the policy with a managing underwriter, the managing underwriter collects, reports, and pays the tax. A written agreement made at or before binding may shift those duties, and the filing duties, to the surplus lines agent (§ 225.006(b)-(c)).
• Multiple agents: In a multiple-agent transaction, each agent of record files and pays tax on its own portion (34 TAC § 3.822(h)).
• Trust: A surplus lines agent holds collected taxes in trust (§ 225.007).
• No absorption or rebates: The agent may not absorb the tax and may not rebate any part of the tax or its commission (§ 225.010). Agents found absorbing tax, for example by not billing it, are reported to TDI (34 TAC § 3.822(i)).
• Criminal and priority rules: An agent who does not pay the tax by the due date, or who fraudulently withholds or uses any part of it, commits theft (§ 225.013). If an agent's property is seized or its business goes to a receiver, the state is a preferred creditor for the tax and penalties (§ 225.012).

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4. Tax Base Election: Premium Written or Premium Received (34 TAC § 3.822(d))

Each agent elects, on a Comptroller form, to report on a premium-written or premium-received basis, and all premiums are taxed on the same basis. An agent that does not elect reports on the premium-written basis. With Comptroller approval, the election may be changed prospectively every four years.

• Premium written: Tax is owed on all premium written in the period whether or not it has been collected.
• Premium received: Tax is owed on all premium received in the period.

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5. Special Timing Rules

• Multi-year policies with annual premiums: The first year is taxed when the policy takes effect, and later years are taxed on each anniversary when the premium becomes due (34 TAC § 3.822(b)(1)).
• Retrospective rating: Premium deposits are taxed as of the effective date. Additional retrospective premium is taxed at the rate originally charged, and a retrospective return premium is handled by a tax refund at the original rate (§ 3.822(b)(2)-(3)).
• Cancel and rewrite: Only the premium that exceeds the canceled policy's unearned premium is additional taxable premium (TIC § 225.011).
• Bad debts: An agent need not report tax on amounts written off as bad debt and deducted on its federal income tax return, and may take a credit or refund for tax previously paid on a later bad debt, within four years. Later recoveries are taxable when collected (34 TAC § 3.822(f)).

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6. Worked Calculation

A Beaumont commercial property placement bills: base premium $10,000.00; insurer policy fee $250.00; required inspection fee $150.00. Texas is the home state and no premium is exempt.

If the agent also charged a $300 agent fee in addition to its commission, taxable premium would rise to $10,700.00 and the tax to $518.95.