Allocating Premium Tax on a Three-State Restaurant Program
A Denver-based restaurant group with 40 locations - 28 in Colorado, 7 in Wyoming, and 5 in New Mexico - buys a $60,000 surplus lines property program through a Colorado surplus lines broker. The broker allocates the premium 70 percent to Colorado, 18 percent to Wyoming, and 12 percent to New Mexico. A $3,000 broker fee is stated separately on the invoice. The carrier also charges a $250 policy fee that is included in the premium shown on the policy. The group's headquarters and principal place of business are in Denver, its executives and risk manager work there, and no other state can claim to be its home state. The broker plans to pay Colorado premium tax on the 70 percent Colorado allocation only and remit the balance directly to Wyoming and New Mexico.
1. Where is the home state, and how should the tax be handled? Evaluate the broker's 70/18/12 plan.
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Home state: Colorado. The group's principal place of business is Denver, so Colorado is the home state for this multistate risk. Under the home state rule, only the home state may require the surplus lines broker to pay premium tax on the placement, and the broker may not unilaterally carve the premium into state shares and remit to each jurisdiction.
Therefore the plan is wrong on its face:
- The taxable premium is the full $60,000, not the 70 percent Colorado slice.
- Remitting Wyoming and New Mexico tax directly, unsupported by an allocation mechanism recognized between the states, creates a double-taxation risk without discharging the Colorado obligation.
- Any credit for tax paid to another state is available only through a recognized allocation/compact process with the required supporting filing - not by the broker's own arithmetic.
- Colorado has no stamping office, so no stamping fee is added to the transaction; the broker should not invent one.
The file should contain a written allocation schedule explaining the derivation of the 70/18/12 split and the basis for the home-state determination, even though the Colorado return is computed on 100 percent of the premium.
2. Compute the Colorado surplus lines premium tax at the 3 percent rate. Which components are in the base?
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Tax = 3% x $60,000 = $1,800.
Base analysis:
| Item | Amount | In the taxable base? |
|---|---|---|
| Policy premium | $59,750 | Yes - premium |
| Carrier policy fee | $250 | Yes - it is part of the premium shown on the policy |
| Separately stated broker fee | $3,000 | No - it is a fee for the broker's services, not premium, provided it is separately disclosed and not a disguised carrier charge |
So the gross premium of $60,000 (including the $250 policy fee) is taxed at 3 percent; the $3,000 broker fee is excluded. The broker must be able to show the fee was genuinely separate: if the $3,000 had been bundled into the premium figure on the policy or retained as a percentage of premium charged by the carrier, it would be inside the base and the tax would be $1,890. Getting this wrong in either direction is a finding - underpayment is an assessment plus penalty, and over-collecting tax on fees is an overcharge to the insured.
3. What must the broker retain to support the return if the Division examines it two years later?
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A defensible file contains:
- The policy and declarations, showing the premium and the carrier's $250 policy fee.
- The invoice, showing the separately stated $3,000 broker fee.
- The allocation schedule with the 70/18/12 derivation and the home-state analysis.
- The tax return and proof of payment for the period, reconciled to the premium ledger.
- The ECP or diligent search documentation, eligibility check, and non-admitted/guaranty-fund disclosures for each insured.
- The transaction ledger tying every bound policy to a reported premium figure.
The reconciliation is the point: an examiner will total the premium ledger for the year and compare it to the tax paid. A return that cannot be tied back to the ledger line by line is treated as unreported premium.