The $50,000 Premium and the Invented Stamping Fee
Great Lakes Marine Repair buys a surplus lines marine liability policy effective March 1. The annual premium is $48,000. The insurer also charges a $1,200 policy fee and a $800 survey/inspection fee; the producer collects $50,000 total and remits $48,000 to the insurer, keeping the $2,000 as 'fees.' The producer's invoice separately lists a $150 'Michigan stamping fee' that the producer retains for processing. The producer files the surplus lines tax return late, remitting 2% of $48,000 ($960) and no tax on the fees. The producer says, 'Fees aren't premium, and the stamping fee is customary.' The insurer is an eligible unauthorized insurer, and the producer is a Michigan surplus lines licensee with no written fee agreement with the insured. The policy has been in force for seven months.
1. Calculate the Michigan surplus lines premium tax that should have been reported and explain which charges are included in the taxable premium base.
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Michigan's surplus lines premium tax is imposed on the gross premium charged for the surplus lines insurance. The starting point is the $48,000 annual premium. The $1,200 policy fee is part of the consideration for the insurance and should be included unless the producer can show it is a bona fide separate service not required to obtain coverage. The $800 survey/inspection fee may be excluded only if it is a genuine, separately stated charge for a service that is not a condition of coverage and is not retained as premium; the file must support that. Assuming the policy fee is included and the inspection fee is a separate service, the taxable base is $49,200. At Michigan's 2% rate, the tax is $984. If the inspection fee is also treated as premium, the base is $50,000 and the tax is $1,000. The producer reported only $960 on $48,000, so the return understated the tax by at least $24 and possibly $40. The producer should not simply assume fees are nontaxable; the burden is on the licensee to document the treatment.
2. Evaluate the $150 'Michigan stamping fee' and the late filing. What are the consequences?
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The $150 charge is problematic. A surplus lines producer may charge only fees that are authorized by law or regulation and disclosed to the insured. Calling a charge a 'stamping fee' does not make it lawful. If Michigan has no stamping office fee applicable to this transaction, the producer cannot invent one and retain it. If a stamping fee is authorized, it must be separately stated, reasonable, and remitted to the proper entity; it is not producer compensation. The producer should refund the $150 unless it can identify a specific legal basis and proper recipient. The late filing is a separate violation. The producer is responsible for filing the surplus lines tax return and paying the tax when due, even if the insurer or another party was late in reporting the premium. Late payment can trigger penalties and interest, and repeated late filing can jeopardize the license. The producer should file an amended return, pay the additional tax, and disclose the fee correction to the insured.
3. What records and corrections are needed?
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The producer should reconstruct the transaction: the policy, the invoice, the $48,000 premium, the $1,200 policy fee, the $800 inspection fee, and the $150 charge. The file should show what was remitted to the insurer and what was retained. The producer should prepare an amended surplus lines tax return using the correct taxable base, pay the difference, and keep proof of payment. The producer should also issue a corrected invoice or refund the unauthorized $150 fee and document the insured's receipt. If the $800 inspection fee was actually required for coverage, it should be added to the taxable base and the tax adjusted. The producer should retain the declinations, the surplus lines notice, the policy, and all tax records for the statutory retention period. Finally, the producer should review its fee-disclosure and tax procedures so future invoices separate premium, authorized fees, and taxes. A file that cannot explain the $2,000 retained as 'fees' is an examination risk.