Surplus Lines Tax: A Comprehensive Guide to Laws and Compliance

Surplus lines tax can be a complex and often misunderstood topic, but it's essential for insurance companies and policyholders to understand the laws and compliance requirements.

The surplus lines tax is a tax levied on non-admitted insurance policies, which are typically written by surplus lines insurers. These insurers operate outside of the traditional insurance market and are often used for high-risk or specialty policies.

In the United States, the surplus lines tax is governed by the McCarran-Ferguson Act, which allows states to regulate insurance within their borders. The act also grants states the authority to tax non-admitted insurance policies.

Each state has its own unique surplus lines tax laws and regulations, which can be confusing for insurance companies and policyholders.

Surplus lines insurance policies placed by licensed Texas surplus lines agents are not subject to the insurance premium tax if an exemption applies. These exemptions are based on Texas statutory exemptions or federal preemptions of state law.

Policies that cover risks or exposures properly allocated to federal or international waters are exempt, as specified in the Texas Insurance Code, Section 225.004(e).

Policies that cover risks or exposures under the jurisdiction of a foreign government are also exempt, according to the same section of the Texas Insurance Code.

Policies that cover risks or exposures under ocean marine insurance coverage of stored or in-transit baled cotton for export are exempt, as outlined in the Texas Insurance Code, Section 225.004(g).

Here are some specific examples of exempt surplus lines insurance policies in Texas:

Texas Law Exemptions can be a bit complex, but I'll break it down for you. In Texas, certain surplus lines insurance policies are exempt from insurance premium tax. These exemptions are based on Texas statutory exemptions or federal preemptions of state law.

If you're dealing with policies that cover risks or exposures properly allocated to federal or international waters, you're in luck. These policies are exempt under Texas Insurance Code, Section 225.004(e). You can also breathe a sigh of relief if you're working with policies that cover risks or exposures under the jurisdiction of a foreign government - these are also exempt under the same section.

Another exemption applies to ocean marine insurance coverage of stored or in-transit baled cotton for export. This is covered under Texas Insurance Code, Section 225.004(g).

If you're dealing with insurance tax returns, there are some classes that are exempt from the usual filing requirements. Insurance tax return forms are available for all classes, except Ocean Marine, Life, Title, and Home Protection.

These classes have their own specific tax return forms, which can be found in the CDI FS-001 MS-Excel, revised in November 2022. The instructions for these forms are also available in MS-Word, revised in the same month.

The exemptions apply to all classes of insurance, which means you'll need to review the specific requirements for your type of insurance. The CDI FS-001 MS-Excel form is the one to use, and it's been revised to reflect the latest changes in insurance tax laws.

Worth a look: What Is a Tax Return

To file a surplus lines tax return, you must have had an active surplus line broker license during the tax year. All surplus line broker business entities are required to file, even if no business was transacted.

Related reading: Surplus Lines Brokers

This includes individuals who hold a surplus line broker license and are not affiliated with a business entity, who must also file, even if no business was conducted.

Business entities with an active license must file a premium tax return, regardless of whether they had any business transactions during the tax year.

Check this out: Surplus Lines Licensing

Prior to 2011, states could require carriers and brokers to pay surplus lines premium taxes and fees in any state the business touched.

The Nonadmitted and Reinsurance Reform Act, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, greatly simplified life for carriers and brokers on the nonadmitted market.

Thanks to this law, no state other than the home state of an insured may require any premium tax payment for nonadmitted insurance.

Before 2011, paying surplus lines premium taxes and fees was a complex and time-consuming process, especially for businesses operating in multiple states.

Discover more: State Business Taxes

States have different requirements for what must be reported by surplus carriers and brokers, making it a complex process.

Some states require brokers to file an attestation that they fulfilled a "diligent search requirement", which adds to the complexity.

Brokers are also responsible for reporting data on the kinds of policies they sold, or their premium taxes, but the specifics vary by state.

States have different processes for how data points must be reported, which can be frustrating for those trying to navigate the system.

Brokers or carriers are responsible for reporting, depending on the state, which adds another layer of complexity.

States have varying requirements for who is responsible for reporting, the broker or the carrier, which can be confusing.