Why am I Being Audited?

You just received notification that your business has been selected for a Texas Comptroller state tax examination. Unless you have been through the audit process before, you probably have lots of questions and concerns. Of course one of the first questions most business owners ask is, “Why my business?” Although it’s common to think you did something wrong, this usually isn’t the case. However, if you have been selected for audit, Texas Tax Group has a team of 15 former Texas Comptroller State Tax Auditors who can help you save time and money. (more…)

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Maintenance Taxes on Health Maintenance Organizations

The Texas Department of Insurance (TDI) sets maintenance tax rates each year. Maintenance taxes are used to fund the TDI, including the Division of Workers’ Compensation and the Workers’ Compensation Research and Evaluation Group. The maintenance taxes also fund the Office of Injured Employee Counsel, another state agency that is attached administratively to the TDI and is funded by that agency’s operating account. The Comptroller’s office collects the maintenance tax on the Texas Annual Insurance Maintenance, Assessment and Retaliatory Report (Form 25-102). (more…)

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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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Tax-Exempt Insurance Premium for Certain Groups of Public Employees

The Insurance Code exempts from any state tax, regulatory fee or surcharge (including a premium or maintenance tax or fee) the life and accident and health premiums received from certain groups of public employees. Broadly speaking, the groups are:

  • state employees and retirees;
  • state college and university employees and retirees;
  • active public school employees;
  • retired public school employees;
  • employees of municipal, county or hospital districts in Texas where the group covered by the policy consists of a single nonprofit trust established to provide coverage; and
  • employees of the federal government.

The Employees Retirement System of Texas administers insurance benefits for state employees and retirees. The premiums received are exempt from tax by the Insurance Code, Chapter 1551 (PDF, 204KB), under the Texas Employees Group Benefits Act. Included in this Act are appointed and elected officers and employees of the state of Texas, employees of state institutions of higher education and retirees under the state’s Employee Retirement System. An “institution of higher education” is any public junior college or senior college or university, except those in the University of Texas System or the Texas A&M University System, which are covered by a separate act as explained below.

Employees and retirees of the University of Texas System or the Texas A&M University System obtain their insurance through those systems. The premiums received for coverage are exempt from tax by the Insurance Code, Chapter 1601 (PDF, 95KB), under the Uniform Insurance Benefits Act for Employees of the University of Texas System and the Texas A&M University System.

The premiums received for those who participate in the Teacher Retirement System of Texas (TRS) are exempt from tax under the Insurance Code, Chapter 1579 (PDF, 73KB), Texas School Employees Uniform Group Health Coverage. This program is referred to as “TRS-ActiveCare.” This group includes employees of school districts, regional education service centers and charter schools that open their records to inspection and audit relating to participation in the program. School districts with 500 or fewer employees are required to participate under this chapter unless the district was self-funded on Jan. 1, 2001; school districts having greater than 500 employees may elect to participate.

Insurance Code Chapter 1575 (PDF, 114KB) covers retirees of the TRS who are not eligible for coverage under either Chapter 1551 or Chapter 1601. Premiums or contributions on a policy, insurance contract, or agreement under this chapter are exempt from tax. This program is referred to as “TRS-Care””.

Under the Insurance Code, Chapter 1576 (PDF, 46KB), both active employees contributing to the TRS as well as TRS retirees (including spouses, surviving spouses, parents, grandparents, fathers-in-law and mothers-in-law) may purchase long-term care insurance at their own expense, the premiums for which are also exempt from tax. The premiums received from a single non-profit trust established for the benefit of certain municipal, county or hospital district employees are exempt under Insurance Code, Chapter 222 (PDF, 47KB), Section 222.002(c)(5). See the October 2011 Tax Policy News for more information.

Premiums received from the Employees Health Benefits Fund, which is administered by the Office of Personnel Management, for enrollees of the Federal Employees Health Benefit Plan are pre-empted from tax as well, under Section 8909, Title 5, United States Code.

*Originally published in the June edition of Tax Policy News a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1206.html

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Unauthorized Insurance

Every unauthorized insurer must file the Texas Annual Insurance Tax Report (Form 25-108) (PDF) and its supplement (Form 25-123) (PDF). The form is due on or before March 1 following the calendar year in which the insurance was effectuated, continued or renewed. If the due date falls on a Saturday, Sunday or legal holiday, the next business day is the due date.

All insurance activities in Texas outside of the licensed market are unauthorized insurance unless they fall within the legislative safe harbors of surplus lines or independently procured insurance.

An unauthorized insurance transaction is an activity performed in Texas by an insurer or person not holding a valid certificate of authority to do an insurance business in this state; or transacting business not authorized by a valid certificate. While not an exhaustive list, the following activities in Texas are examples of acts that constitute the business of insurance:

  • issuing or delivering contracts of insurance to residents of Texas;
  • soliciting applications for such contracts; or
  • collecting premiums, membership fees, assessments or other consideration for such contracts.

Activities performed in Texas by a nonadmitted captive insurance company (insuring only its parent or affiliates) are unauthorized transactions, as the captive insurer is not authorized by the Department of Insurance. The regulatory prohibitions and sanctions applicable to unauthorized insurance transactions do not apply to the nonadmitted captive insurance company. There is still unauthorized insurance premium tax due on this business.

Exceptions and exclusions from tax include premiums on risks or exposures properly allocated to federal waters, international waters, or under the jurisdiction of a foreign government. In addition, there are certain federal preemptions from state taxation for the Federal Deposit Insurance Corporation (FDIC) when it is the receiver of a failed financial institution that holds the property being insured, a federally chartered credit union, the National Credit Union Administration (NCUA) when it is the conservator or liquidating agent for a federally chartered credit union and risks or exposures of Indian Tribal Nations that are located within the borders of Tribal Lands. Refer to Surplus Lines Tax Exemptions/Preemptions (Pub. 94-142) for more information.

*Originally published in the May edition of Tax Policy News – a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2012/tpn1205.html

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