Filing Requirements

1
Comptroller of Public Accounts
Surplus Lines Audit Considerations and
Legislative Changes November, 2003
Gary JohnsonInsurance Tax Policy
2
Filing Requirements

• Tax Report Due Date
• Prepayments Due Dates Penalty and Interest
• EFT Payments
• EFT Penalties

3
Basis of Taxation

• Premium-written

• Premium Received

No Election - Premium Written ALL BUSINESS must
be reported! All premium DEEMED to be Texas
unless properly allocated AND REPORTED to any
other state or states.
4
Who pays surplus lines taxes?

• AGENT OF RECORDTexas-licensed surplus lines
  agent who places a policy with an eligible
  surplus lines insurer, or who transacts business
  with a non-licensed out-of-state agent to obtain
  coverage with an eligible surplus lines insurer.

5
Auditing of Surplus Lines Agents

• Determine quality of internal controls
• The better the controls, less time for audit
• Good internal controls, sampling method used
• Poor internal controls, detailed audit required

6
Audit Considerations

• Were prepayments timely filed?
• What basis of taxation was elected?
• Does the agent maintain records as required by
  rule 28 TAC 15.14?
• Is all business on Texas risks?
• Are there allocations to other states?
• Are there written procedures for reporting of
  business, booking of premium and taxes, and
  filing tax reports?

7
Maintaining Records28 TAC 15.14

• Policy register
• Contract file
• General Books of Account
• Other insurance and accounting records necessary
  for proper and prompt service to policyholders
  and to provide required information to the
  Department of Insurance.

8
Audit Items Requested

• General ledger
• General journal
• Cash records and other items necessary to reflect
  financial solvency of the agent/agency (28 TAC
  15.17)
• Month-end and fiscal or calendar year-to-date
  summary of operations in accordance with GAAP.

9
Audit Procedures

• Run database reports using Stamping Office data
  for all activity of the agent.
• Reconcile from database reports to data reported
  to the Comptrollers office.
• Identify basis of taxation elected.
• Determine if 100 of premium is reported to the
  Comptroller.

10
Audit Procedures continued

• Determine allocation method and if appropriate.
• Determine non-taxable premiums.
• Determine how policyholders are billed.
• Reconcile from invoices to policy registers.
• Verify that all considerations for insurance were
  reported as premium unless properly allocated.

11
Summary of Audit Process

• Determine how premium and tax amounts are
  compiled for reporting.
• Trace tax collections/billings through accounting
  system to ensure all taxes are accounted for.
• Insure that tax for all endorsements or other
  changes in premium are accounted for.

12
Audit Process continued

• Trace Stamping Office batch transmittals through
  the agents records.
• Reconcile from period-to-date register runs to
  the reported data.
• Use policy/contract files to trace from detailed
  records to summary records.

13
Legislative Changes 2003

• HB 2425 Effective 10-1-03Unauthorized
  insurance tax is a liability of
• Insurer
• Agent
• Insured
• Does not apply to
• Surplus lines insurance in accordance with
  1.14-2
• Independently procured insurance on which tax
  is paid
• Insurance written by a licensed insurer that is
  authorized to write the type of coverage.

14
Tax Refund Provisions

• Codifies existing policyOnly entities or
  individuals that actually paid the tax to the
  state are entitled to seek a refund from the
  state.
• Legal grounds for a refund must be stated in
  writing.

15
Refund Rider to HB 1

• Limits refunds for any taxpayer to 250,000 per
  biennium, per tax type. 250,000 insurance
  tax 250,000 sales tax 250,000 franchise tax
• Amounts in excess of 250,000 must be
  appropriated by the Legislature during the next
  regular session.

16
Refund Rider continued

• Exclusions on Limitations Prepayments on
  estimated liabilities Refund up to the limit on
  another tax type Credits taken on
  returns Excess refunds may offset Audit
  assessments
• STAR system document 200306964T
• Proposed rule to be published in the Texas
  Register on September 12. (34 TAC 3.2)

17
Contact us

• Comptrollers websitewww.window.state.tx.us
• Tax Assistance 1-800-252-1387
• Gary Johnson 800-531-5441 ext 3-4068
  gary.johnson_at_cpa.state.tx.us
• Karen Snyder 800-531-5441 ext 3-4074
  karen.snyder_at_cpa.state.tx.us