President Barack Obama signed the NRRA into law on July 21, 2010, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The bill includes language to standardize the reporting, allocation, and payment of non-admitted insurance premium tax on multi-state risks. The NRRA grants the insured’s home state exclusive authority to regulate and tax surplus lines insurance that includes multi-jurisdictional boundaries. Additionally, the bill provides states the ability to enter into an agreement to collect and share premium taxes for these multi-state risks.
States that fail to adopt some means of tax allocation system will be subject to a single-state taxation that allows the home state to retain 100 percent of the tax on the gross premium effective July 21. (Without an agreement, Florida stood to lose an estimated $15 to $20 million per year in premium tax.)
The federal legislation launched much debate about how to implement the interstate tax sharing component. Two competing agreements quickly took center stage: NIMA and the Surplus Lines Insurance Multi-State Compliance Compact (SLIMPACT-Lite). The National Association of Professional Surplus Lines Offices and the National Association of Insurance Commissioners came out in support of SLIMPACT. The National Association of Insurance Commissioners (NAIC) supports NIMA. (Insurance Commissioner Kevin McCarty is president-elect of NAIC and is slated to become its president in 2012.)
States that elect to participate must choose one of the plans. However, some states, like Florida, do not have the option to select SLIMPACT, as it represents an unconstitutional delegation of regulatory authority to a compact. The fact that NIMA is an agreement, not a compact, passes constitutional muster in Florida, and may be a consideration for other states. Critics of NIMA say that it lacks guidance on eligibility standards. Supporters counter that it provides the most transparent approach to the NRRA tax sharing provision because it includes specific premium allocation formulas, detailed data elements, and the process for which taxes would be collected and allocated among participating states.
The announcement from OIR on the selection of NIMA noted that, “Florida, Mississippi, and Hawaii are the lead states in forming this agreement, but other states are expected to join.” If so, then the next questions are: when and who? Although a number of states have passed NRRA-related legislation, many have not yet chosen a side, including most of the big players. Five states—New York, California, Texas, Florida, and Louisiana—comprise approximately 55.4 percent of the nation’s non-admitted revenues. With Florida’s declaration, perhaps the other large states will jump off the fence.
SLIMPACT is steadily adding supporters to its column with election by some of the smaller revenue states. Just days before Florida’s announcement, Tennessee became the ninth state to adopt SLIMPACT. The others previously signed on were Alabama, Rhode Island, Kansas, Indiana, North Dakota, Kentucky, New Mexico, and Ohio. Ten states must select the plan for it to become operational.
While SLIMPACT requires a minimum of 10 states, NIMA only needed two and therefore is now in effect. However, being “in effect” and being operational are two different things. The NIMA compact provides for the creation of a yet-to-be-established clearinghouse that will collect premium taxes and distribute them to participating states according to a defined formula. The clearinghouse does not have to be up and running on July 21; states will simply work under the new “home state” tax rules until new processes are in place. (SLIMPACT has yet to develop the definitions and standards for its tax distribution formula, so the process of creating an operational clearinghouse would appear to be further in the future for that agreement.)
For an effort designed to simplify multi-state transactions, this sure is getting complicated. Perhaps one program will ultimately take over and we will end up with a single national plan. Does anybody remember the American Football League?