Friday, June 17, 2011

NAPSLO Questions Long-Term Viability of NAIC's NIMA Multistate Tax Compact

Representatives of NAPSLO questioned the long-term viability of the Nonadmitted Insurance Multistate Agreement (NIMA) to collect and distribute surplus lines premium taxes in light of the announcement by the Florida Office of Insurance Regulation (Office) that Florida has entered into an agreement with Mississippi and Hawaii to start NIMA.

"Signing the contract doesn't mean that the NIMA clearinghouse will become operational or that states will ultimately share revenue," said Richard Bouhan, Executive Director of NAPSLO. "It is not clear why any state, much less a large state, would stay in the NIMA system if it would cause a loss of revenue to the state. If the NIMA clearinghouse becomes operational, some states will lose tax revenue and some states will gain revenue. NIMA failed to create a revenue-neutral allocation system so its long-term viability is in question."

Under the Nonadmitted and Reinsurance Reform Act passed last year NRRA mandates that beginning July 21, 2011 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. As a result states have been working to bring their laws into compliance. 

"Many issues need to be resolved before states could begin sharing revenue. For example, the creation of a clearinghouse for the states to share tax revenue will require compliance with state procurement laws," said Mr. Bouhan. "This could prevent some states from joining NIMA or force some to withdraw before the clearinghouse becomes operational. NIMA only requires 60 days notice to withdraw."

In addition to concerns about the viability of NIMA, NAPSLO officials questioned how NIMA would operate and whether it would be a burden on surplus lines brokers.

"NAPSLO is concerned that NIMA imposes a burdensome data reporting system on policyholders and brokers, since much of the required data would have to be created outside of the normal course of business. NIMA reinstates the type of tax system that the Dodd-Frank bill tried to eliminate. Instead of relying upon the home-state tax rate, NIMA attempts to impose the taxes, fees and assessments of multiple states on a single policy based upon dozens of different allocation formulas such as sales, receipts, employees etc. NIMA is basically the same system that Congress was seeking to reform."

As of June 16, 33 states have enacted NRRA related compliance laws and legislation is under review by Governors in Alaska, Connecticut and Missouri. Nine other states have bills under consideration by their legislatures; two states and the District of Columbia are not currently considering legislation, and three state legislatures adjourned without taking action. Of the 36 state legislatures taking action, 18 have passed laws allowing the state to join a multistate tax sharing agreement, nine passed bills allowing the state to specifically join SLIMPACT, eight states passed compliance legislation without addressing a tax sharing agreement and one state (Nebraska) passed legislation allowing the state to only join the NAIC’s NIMA tax compact.

Many of the largest states have elected not to join NIMA at this time. New York, California, Illinois, Ohio, Maryland, Missouri, Virginia, Washington, and others have declined to authorize the state to enter into the NIMA system. Pennsylvania has a bill pending to conform the state code to the NRRA, but it fails to authorize the state to join NIMA. Nine other states authorized their state to enter into SLIMPACT an alternative compact model. The state where the principal place of business resides is the only state that may tax a nonadmitted policy under the NRRA. It is possible that NIMA is failing to attract the states with the most corporate headquarters because those states may lose revenue if they join. Some of the states that are not joining NIMA appear to be states that have a concentration of corporate headquarters.

"Another potential obstacle to the long term viability of the NIMA clearinghouse is that some states will avoid the NIMA system if their policyholders experience a tax increase after they join NIMA," said NAPSLO Director of Government Relations Steve Stephan. "For example, joining the NIMA tax compact could represent a tax increase for some Hawaiian policyholders because they would face paying the higher assessments charged by Florida and Mississippi. Many states are simply unwilling to impose a tax increase of any size."

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