The Multistate Premium Tax Error
A surplus lines licensee places a $48,000 annual premium commercial package policy effective July 1. The policy covers a North Carolina manufacturer's two locations: Charlotte, representing 60% of insured values, and Spartanburg, South Carolina, representing 40%. The surplus lines insurer is eligible. The licensee collects $48,000 premium plus $2,400 'surplus lines tax' from the insured, calculated at 5% on the entire premium. The NCSLA filing shows a $25 stamping fee. The licensee remits the entire $2,400 to NCSLA on October 20 with the quarterly filing. The North Carolina risk premium is $28,800. The South Carolina broker says South Carolina taxes will be handled separately. The licensee's file has no allocation worksheet, only the policy declarations. In November, the DOI asks for the tax filing.
1. Calculate the correct North Carolina surplus lines premium tax and explain the tax base.
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The North Carolina surplus lines premium tax is 5% of the gross premium attributable to the North Carolina risk, not 5% of the entire multistate premium. The policy allocates 60% of values to Charlotte, so the North Carolina premium is $48,000 × 60% = $28,800. The tax is $28,800 × 5% = $1,440.
The tax base should include the premium charged for the North Carolina coverage. It should not include the South Carolina premium, and it should not include the separately stated stamping fee. If the policy has fees or charges that are part of the premium for coverage, the licensee should determine whether they are premium under the applicable rules; a stamping-office charge is not premium tax base.
The file needs an allocation worksheet showing the 60/40 split, the source of the allocation, and the calculation. The declarations alone are not sufficient if they do not show how the premium was apportioned.
2. What is wrong with the $2,400 remittance, and how should the licensee correct it?
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The licensee collected and remitted $2,400, which is 5% of the full $48,000 premium. The correct North Carolina tax is $1,440. The overpayment is $960. The error arises from taxing the South Carolina exposure in North Carolina and from failing to allocate the premium.
The licensee should file a corrected or amended report with the stamping office, explain the allocation error, and request a refund or credit of the $960 under the applicable procedure. The insured should not be left with an overcharge: the licensee should refund the excess tax collected or apply it as the rules permit, and document the insured's authorization if a credit is used. The South Carolina portion should be reported and taxed according to South Carolina rules, not remitted to North Carolina.
The licensee should also check whether the late or corrected filing triggers interest or penalty. Even if the October 20 filing was timely for the quarter, an inaccurate report can still draw examination criticism. The correction should be made promptly, not after the DOI requests it.
3. How should the $25 stamping fee be treated, and what recordkeeping and reporting practices should the licensee adopt?
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The $25 stamping fee is a separate stamping-office charge, not premium and not part of the premium tax base. It should be recorded separately in the file and on the accounting records so it is not swept into the 5% tax calculation. If the fee was collected from the insured, the licensee should show it as a separate charge and not describe it as premium tax.
The licensee should maintain a placement file with the policy, declarations, allocation worksheet, tax calculation, stamping-office filing confirmation, proof of payment, and any refund or credit documentation. Records should be retained for the required retention period, generally at least five years, and should be available for DOI examination.
Operationally, the licensee should use a closing checklist that requires the allocation and tax calculation before the policy is delivered. Multistate policies should be reviewed for state-specific allocation and tax rules. Quarterly filings should reconcile gross premium, allocated premium, tax collected, tax remitted, and stamping fees. A second reviewer should check any policy where the insured has out-of-state locations.