Quarterly Premiums, Return Premium, and Records
A Honolulu surplus lines broker writes three Hawaii policies in the first quarter. Policy A: $30,000 premium, $250 policy fee, $500 inspection fee. Policy B: $50,000 premium; the insured cancels after four months, generating a $20,000 return premium and a $3,000 return commission. Policy C: $12,000 premium, later endorsed to add $4,000. The broker deposits all premium and fees in a general operating account and pays the surplus lines premium tax annually. On April 1, the broker realizes the prior year's annual premium tax remittance was never made. The broker's records consist of binder copies, deposit slips, and a spreadsheet that lists only the net premium after commission. The broker asks whether the tax can be paid on the net amount and whether the return premium can be deducted from the current quarter.
1. What amounts belong in the taxable premium base, and how should the cancellation, endorsement, and fees be treated?
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Start with gross premium, not net-after-commission. Commissions are compensation to the broker and do not reduce the surplus lines tax base. Policy A: the $30,000 premium is taxable; the $250 policy fee and $500 inspection fee must be included if they are consideration for the insurance, which the broker should confirm from the policy and Hawaii guidance. The labels do not automatically exclude them.
Policy B: the original $50,000 was taxable when written; the $20,000 return premium creates a credit or reduces taxable premium in the period the cancellation is reported. The $3,000 return commission does not reduce the credit-it is the broker's compensation. Policy C: the $4,000 endorsement increases taxable premium. The spreadsheet's net figure is wrong because it nets commission. The broker should reconstruct gross premium, fees, return premium, and endorsements by policy and report the corrected base.
2. What recordkeeping, trust-account, and remittance failures are present, and what corrective steps should the broker take?
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The broker has four problems: (1) no annual remittance, so tax and possibly penalties and interest are due; (2) records that show only net premium, which cannot support a tax audit or prove the tax base; (3) commingling premium and fees in a general operating account rather than handling them under fiduciary or trust requirements; and (4) missing documentation for the return premium and endorsement.
The broker should stop using the net spreadsheet, reconstruct each policy, file the missing annual statement and pay the tax, voluntarily disclose the late payment, and ask about penalty and interest abatement. Records should be retained for at least five years and should include the policy, declarations, endorsements, cancellations, disclosures, declinations, premium and tax calculations, and proof of remittance. The broker should set a calendar for annual filing and reconcile the trust account monthly.