Home State, a Mid-Term Cancellation, and a Premium Check That Never Arrived
Harborline Fabrication has its principal place of business in Fort Worth with locations in Texas (60% of exposure), Louisiana (25%), and New Mexico (15%). A nonadmitted carrier issues an annual policy effective March 1 with $120,000 gross premium plus a $2,500 policy fee; the broker's commission is 15%. The broker plans to file only the Texas portion, pay tax on $72,000, and "allocate" the rest to Louisiana and New Mexico later. On September 1 the insured cancels and earns $45,000 of return premium. The insured's check for the final installment also bounced, and the broker has not yet remitted anything to the stamping office for the March policy because, in the broker's words, "I never got paid."
1. What is the correct tax base, and how much tax is due?
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Home state rule. Under the federal nonadmitted insurance framework, only the insured's home state may impose premium tax, and for a business insured that is the state of its principal place of business. Harborline's is Texas, so 100% of the premium is Texas premium. Louisiana and New Mexico cannot tax this policy, and purported allocation to them is both wrong and duplicative.
Tax base. Tax is on gross premium, not premium net of the 15% commission.
- Gross premium: $120,000
- Tax at 4.85%: $120,000 x 0.0485 = $5,820
- Stamping-office fee at 0.04%: $120,000 x 0.0004 = $48
The $2,500 policy fee must be evaluated on its facts: if it is consideration for the insurance, it belongs in the tax base; if it is a separately stated fee retained by the agent, report it as such and document the treatment per stamping-office guidance. Do not silently drop it, and do not net commission out of the base.
2. How is the September 1 cancellation handled, and does the unpaid installment change anything?
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Cancellation. The return premium is a reportable transaction, not an adjustment the broker can net at renewal.
- Return premium: $45,000; tax credit at 4.85% = $45,000 x 0.0485 = $2,182.50.
- Report the cancellation with the return premium and the credit in the period in which it takes effect, so the original filing and the credit tie out on the same policy record.
- Net tax position on this policy: $5,820 - $2,182.50 = $3,637.50.
The bounced check is irrelevant to the remittance obligation. The surplus lines agent is liable for the tax and the filing when they come due, regardless of whether the insured has paid the agent. "I never got paid" is a collection problem, not a tax defense. The broker must remit from its own funds, pursue the insured, and expect late-filing and late-payment consequences on the untimely March filing.
3. The broker's plan to file only the Texas share and "allocate later" - what is the risk and the correct practice?
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The plan creates three separate exposures at once:
- Under-reporting: filing on $72,000 ($3,492 tax) instead of $120,000 ($5,820) is a $2,328 shortfall on a single policy, before the policy fee, and it recurs on every renewal.
- Duplicative taxation risk: if the broker actually pays Louisiana and New Mexico on the allocated shares, the insured pays tax twice on the same premium for a policy only Texas may tax.
- Recordkeeping failure: a file that reports a partial premium with no documented basis is exactly what an examination looks for. The correct file carries the home-state determination (principal place of business evidence), the gross premium and fee treatment, the tax and stamping-fee computation, the cancellation credit, and the filing confirmations.
Correct practice: report the full gross premium in the month of issuance, report the cancellation when it takes effect, pay the tax and fee when due regardless of collection, and keep the entire chain - binder, invoice, home-state documentation, filings, and payments - retrievable for the retention period required by rule.