In other words, to write a manufacturing plant in Missouri with additional operations in the remaining 49 states, the E&S broker needs a Missouri E&S license only, not more than 100 licenses as may now be the case (when 50 surplus lines licenses, 50 property-casualty license and 35 entity licenses could be required).

License Registry. Section 523 describes a national producer registry for surplus lines that will further alleviate the licensing burden. States have two years to accomplish the objective of setting up the database and passing laws to participate, but this issue was "front-and-center" at the summer NAIC meeting, NAPSLO reported.

Where is the home state?
NRRA defines the home state as the "principal place of business" or "principal residence" of the insured.

Mr. Stephan reported that the Supreme Court tackled the meaning of the language "principal place of business" in a February court ruling unrelated to NRRA. In Hertz vs. Friend, the organization at the center of the case had 48 percent of its business in California, but a New Jersey headquarters. The High Court ruled that it would use the "nerve center test" to identify the "principal place of business"--looking to the place where high-level officers direct, control, coordinate corporate activities.

Since Congress used exactly the same terminology--"principal place of business" in NRRA months later, Mr. Stephan believes there's a good chance that courts interpreting NRRA will apply the same test.

As for "principal residence," numerous courts have interpreted the term because it is also used in the bankruptcy and tax codes. Courts typically look at voting records, tax records, driver's licenses, and physical occupancy.

What if 100 percent of the risk is outside the home state?
The classic example involves insurance for a Florida condo owned by a New York snowbird. With a special exception to the home state definition, Congress decided that Florida should be the state regulating and taxing that transaction. The exception language says that if a 100 percent of the risk is located out of the principal residence, then the home state is the state where "the largest percent of the taxable premium for that insurance contract is allocated."

What else does Section 521 say about premium tax payments on E&S transactions for multi-state risks?
An insured's home state may require E&S brokers to annually file tax allocation reports detailing the portion of premium attributable to exposures located within the state.

"Congress intends that each state adopt nationwide uniform requirements, forms, and procedures, such as an interstate compact, that provide for the reporting, collection and allocation of premium taxes for nonadmitted insurance."

The prospect of filing one annual tax allocation form contrasts the current regime where in many states--on a policy-by-policy basis--brokers have to allocate the taxes 30 days after the policy is written.

The prospect of uniformity expressed in the Congressional "statement of intent" of part (b)(4) of Section 521 is not a reality yet, although state regulators are currently reviewing various ways to get to uniformity.

One proposal, developed and supported by 60 interested insurance professionals back in 2007, including NAPSLO, is known as SLIMPACT, an acronym for Surplus Lines Insurance Multi-State Interstate Compliance compact. (Look for more on SLIMPACT in Wednesday's edition.)

Explaining the language of Section 521 in simple terms, Mr. Stephan, speaking during an hour-and-a-half webinar repeatedly said that "the broker's only job is to pay the tax and to file an allocation report. Beyond that it becomes the states job to figure out how to get the taxes allocated."

Why did tax rules need to change?
In the 1980s, the states started adopting allocation rules, but 11 states never did. The result was a confusing environment with many states requiring allocation, some collecting taxes on total gross premiums, and a lack of clarity among the allocation states as to whether revenue, square footage, number of employees or some other exposure measure should be used as a basis for allocation.

Can states other than the home state collect their tax rates on multi-state exposures?
Under the rules effective July 21, 2011, if there is no interstate compact, then the broker pays the tax rate at the home state, files a tax allocation form in that state if it's required, and that's it. The broker does not have to figure out applicable tax rates for portions of risk outside the home state.

Mr. Stephan noted that the SLIMPACT model for a compact envisions a system in which a broker sits down at a web-based system, keys in the risk characteristics, and the system shows how much tax needs to be collected on out-of-state portions of risk--tax revenues that will otherwise be lost to states beyond the home state if no such uniform nationwide mechanism is devised.

Will states need to change their codes to reflect the NRRA?
It is very likely, Mr. Stephan believes. While noting that some current state laws are vague, by his count only 11 states now tax 100 percent of the gross premium, allowing them to allocate taxes on out-of-state exposures if some uniform mechanism is adopted as Congress intends.

That leaves 39 states that tax only the portion of premium related to exposures in their states. If one of those 39 states were the home state, then "they would have nothing to allocate." Unless their laws are changed before the NRRA effective date, the broker will comply with the home state law--collecting and remitting tax only on the portion of premium for a multi-state risk related to exposures residing in the home state. The states would have to change their laws to enable them to allocate taxes back to other states.

Do agents still have to file for nonresident surplus lines licenses?
Yes. "If it is the insureds home state, you have to have a nonresident license in that state to conduct an E&S brokerage business," explained Dan Maher, executive director of the Excess Lines Association of New York.

"What has really changed is that a broker only needs one license for any given risk" or policy, he said.

Mr. Maher gave two examples to clarify the response.

A New York-licensed E&S broker, placing a lot of resident risks, and a few risks that are multi-state but the home state is in New York, would only need the New York license. If the multi-state risks have insureds that have principal places of business--home states--outside New York, then the broker needs a license in each state where those insureds are home-stated.

Special Reports /

Dodd-Frank Delivers Single-State Tax, Single-State Regs For Multi-State Risks

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