NAPSLO Applauds California Legislators Plan to Drop Open-Ended Surplus Lines Tax Compact Authorization in NRRA Compliance Legislation

The expected removal by California legislators of a provision that would have authorized the state’s Board of Equalization and Franchise Tax Board to enter into an open-ended surplus line premium tax compact, or agreement, is a positive step toward having the state define how it will allocate surplus lines taxes in the future, according to NAPSLO officials.

"We didn’t believe it was appropriate to pass a law providing broad authority for agencies to enter into a compact or agreement where the exact nature, terms and financial impact of the agreement are not yet known," said NAPSLO Executive Director Richard Bouhan. "NAPSLO, and California brokers, worked with legislators to explain the need for any compact legislation to include specifics on how it would operate and are pleased to hear the compact provision in question will be dropped."

The compact provision was part of legislation (AB315) currently being considered by California legislators to bring the state into compliance with the NonAdmitted and Reinsurance Reform Act (NRRA), which goes into effect in July.

The NRRA mandates that beginning July 21 the insured's home state will be the only state with jurisdiction over surplus lines transactions and the only state that can require a tax be paid by the broker. To comply, states are revising their laws and many states are also considering forming a tax compact to handle allocation of surplus lines premium taxes.

Under the compact provision of AB315 that is expected to be dropped this week, the California Board of Equalization and the Franchise Tax Board, with the approval of the Department of Finance, could have become a party to a reciprocal surplus line premium tax compact providing for the administration, collection, and enforcement of the taxes imposed on multistate risks. However the details of establishing the compact (or agreement) would have been developed by state agencies rather than by the state legislature.

"NAPSLO believed that it was important for the state legislature to debate and approve the specific details of establishing a compact," said NAPSLO President Letha Heaton. "We are pleased that it appears the California legislators concur."