Fees Relating to Insurance

Many different kinds of insurance companies operate in Texas to provide residents and businesses with the coverage they need. These companies can be classified into two categories: admitted insurers and non-admitted insurers.

The admitted insurance market is composed of all licensed insurance companies that have received a certificate of authority from the Texas Department of Insurance (TDI) to conduct the business of insurance in Texas. The premium associated with the issuance of a policy of insurance by an admitted insurance company is subject to a premium tax that insurers are required to pay.

The non-admitted insurance market refers to insurers who are not licensed by the TDI, including insurers who have met eligibility requirements to write coverage in the surplus lines market. This market also includes insurance placed as “independently procured” or as “unauthorized” insurance. In the non-admitted market, the premium tax is a transaction tax that is either collected from the policyholder and remitted by the surplus lines agent, or is paid directly by the policyholder, the agent or the insurer.

Insurance Code Chapters 221, 222, 225 and 226 define premium for tax reporting purposes to include premiums, membership fees, assessments, dues, and any other consideration for insurance. In addition, Rule 3.822(a)(4) defines premium to include “agent fees that are charged in addition to, or in lieu of, a commission.” Therefore, “fees in lieu of commission” are considered premium in the admitted and non-admitted insurance markets and as such are subject to premium tax.

An insurance agent or broker who did not include these fees in the taxable premium base, collect, report and pay the surplus lines or other non-admitted insurance premium tax for “fees in lieu of commission” or an insurer who failed to include these fees in the tax base should amend prior premium tax returns in order to correct this reporting error.

Fees charged that are not related to procuring a policy of insurance are not considered premium, and an agent or broker is not required to report and pay premium tax on these fees. The fees could, however, be subject to sales tax if charged for the performance of taxable insurance services. Insurance agents and brokers often provide services that may or may not be in connection with selling or placing an insurance policy, such as loss prevention services that minimize the occurrence of accidents, losses or damage. Other examples of taxable insurance services include loss and damage appraisal, inspection, investigation, actuarial analysis and research and claims adjustment and processing.

See Rule 3.355 for additional information on sales tax on insurance services and STAR document 200603647L for information regarding sales tax on fees in lieu of commission.

*Originally published in the July edition of Tax Policy News – a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1207.html

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