Rejection of Tax Compact Authorization in NY NRRA Compliance Legislation May Signal Difficulties for Establishing National Compact

New York's decision to reject authorizing the state to join a surplus lines tax allocation compact may indicate that forming such a national tax sharing arrangement for surplus lines is not feasible, according to NAPSLO officials. In passing the legislation, signed into law on Thursday by Gov. Andrew Cuomo, the state Legislature removed provisions that would have authorized the state to join a tax compact.

The legislation, which brings state laws into compliance with the Nonadmitted and Reinsurance Reform Act  (NRRA), provides for the state to tax 100% of each surplus line policy's written premium when New York is the "Home State of the insured.

“Along with California’s expected decision not to include compact language in their NRRA compliance legislation, New York’s action brings into question whether large states are willing to participate in an allocation compact,” said NAPSLO Executive Director Richard Bouhan. “Without the large states a compact might not be practical.”

In 2009, the four largest states (Florida, California, Texas and New York) reported approximately $16 billion of the $32 billion in surplus lines premiums. The Florida legislature has not approved legislation to allow the state to join a compact. In Texas, the Comptroller already has authority to have the state join a compact however the legislature is considering a proposal to join the revised Surplus Lines Insurance Multi-State Compliance Compact, referred to as SLIMPACT-Lite.

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. Many states are also considering forming a tax compact to share surplus lines premium taxes, however they are not required to join a compact under the NRRA legislation.

“Starting July 21 surplus lines brokers will benefit from the NRRA by only having to pay premium taxes to the home state of the insured and states will then be responsible for any allocation of taxes,” said Mr. Bouhan. “The NRRA legislation noted that states may allocate taxes among the states through a compact however there was neither a mandate for a compact nor a deadline to establish one. It is up to the states whether and how to allocate these taxes."