The two legal authorities spoke during a late August webinar arranged by NAPSLO to explain the basics of NRRA, as well as to outline what broker and carrier members can expect to happen when the provisions of the Act take effect in late July next year.

NAPSLO Executive Director Dick Bouhan moderated the webinar, and Steve Stephan, NAPSLO's director of government relations, detailed the key provisions one after the other during the 90-minute educational session.

The NAPSLO executives have also provided guidance on the NAPSLO website.

State legislators now "have a high-level decision to make," they wrote in one website document about the payment of taxes on multi-state risks. The lawmakers "can opt for a tax allocation procedure consistent with the Congressional statement of intent, such as a compact, or they can allow the single-state tax system to become effective."

During the webinar, Mr. Stephan explained that NRRA's "statement of intent" offers the promise of uniform state tax rules, but does not require them.

Specifically, NRRA says, "Congress intends that each state adopt nationwide uniform requirements, forms and procedures, such as an interstate compact, that provide for the reporting, collection and allocation of premium taxes for nonadmitted insurance."

"So you have this clear statement from Congress for a more streamlined tax allocation system using uniform forms, processes and procedures," Mr. Stephan said, noting that he believes the statement will spark reforms at the state level. The National Association of Insurance Commissioners is already focused on this, he reported. (See related article, page 10.)

As things stand now, under the language of NRRA, E&S brokers no longer have to comply with the tax provisions of laws in all states where portions of a multi-state risk reside. Instead, the brokers will make a single tax payment to the home state of the insured.

And if that home state's law taxes only an allocated share, then the E&S broker making that single premium tax payment to the home state will pay taxes on only the portion of the risk residing in the home state.

"SUCH AS A COMPACT"
That means that a lot of states "stand to lose millions in tax revenue," according to Dan Maher, Executive Director, Excess Line Association of New York, supplying some figures from his home state.

Mr. Maher said the out-of-state portions of premiums that are home-stated in New York amount to roughly $1 billion each year. Applying a typical 3.5 percent surplus lines premium tax rate, he said this amounts to $35 million per year of tax revenues that could arguably be shared among other states, if an interstate compact is adopted.

"But if it doesn't get adopted, no state other than the home state will be able to require a tax. As a result, it would appear that a lot of tax revenues would be going missing to a lot of states," he said.

So far, Texas is one of few states has done anything to address the impact of the NRRA, Mr. Maher said, noting that the Lone Star state passed a law allowing it to participate in a compact should one be developed. But in the event that no system of allocation and uniform distribution is adopted by the states, then Texas can revert to charging on 100 percent of premium.

During the webinar, Mr. Maher described one proposal for an interstate compact, known as SLIMPACT, an acronym for Surplus Lines Insurance Multi-State Interstate Compliance compact. NAPSLO and ELANY representatives were among 60 interested insurance professionals that developed SLIMPACT in advance of NRRA--back in 2007.

Generally, he said that an interstate compact is "a contract between two or more states creating an agreement on a particular issue, adopting a certain standard, or cooperating on regional or national matters. The Port Authority of New York and New Jersey dealing with common waterways and posts is one example, he said.

As for SLIMPACT in particular, he said, "the big purpose was to create an efficient electronic state-of-the-art system where brokers could go, and essentially by inputting data, create a billing sheet that they could use to collect the taxes from the insured." (Taxes are generally billed back to the insured, he explained.)

That system would also sort and maintain the data, periodically reporting to the states and to each broker what amounts each broker owed each state.

Essentially, "the data base would be...a very transparent mechanism so states would be able to realize, in an efficient way, receipt of all the taxes due on multi-state surplus lines risks," Mr. Maher said in summary.

He said the cost for compact and the electronic database, or clearinghouse, would be funded by a charge on each policy--similar to the way stamping fees are charged by various stamping offices today. "The cost to the states would be nothing."

Mr. Maher listed SLIMPACT's goals of transparency and efficiency (above), noting that one feature is still under discussion--how to allow each state to collect its own tax rate on the portion of a multi-state risk allocated to that state using the uniform allocation formulas prescribed by the compact's provisions.

"There are different schools of thought about what right tax rate should be," he said. Some believe the home state's tax rate should be charged for all allocated portions, while another proposal would have the states adopt a special uniform tax rate for multi-state risks, Mr. Maher reported.

If SLIMPACT is adopted by enough states, then every member state would be entitled to one vote on a commission--a governing body like a board of directors--that would set policies for compact. The commission would decide, for example, who will be hired to develop software and to run the clearinghouse on a day-to-day basis.

Among other things, the commission would set up four tax payment dates. "The idea would be to eliminate what goes on today. We often say that every day is tax payment day in the United States," he said, noting that under SLIMPACT states could elect to use any one, two or all four dates for tax remittance.

In other words, a state could have one annual tax payment date, two semiannual dates, or quarterly tax payments. "But the brokers would only have to pay taxes four days per year at most."

WHAT IF THERE'S NO COMPACT?
Mr. Maher views SLIMPACT as the best option to enable states to adopt uniform procedures as Congress intended by next July. "With less than a year to go, the only proposal...that has been released and shared with the entire insurance community is SLIMPACT."

"I think you have to ask the question, will anything else be able to be done in the next nine months other than SLIMPACT," Mr. Maher said.

The ELANY executive raised the prospect of a dire consequence beyond states losing tax revenue if SLIMPACT isn't adopted, suggesting that the failure to adopt some kind of compact could mean that the states lose their exclusive power to regulate the business of insurance also.

"A failure to do what this federal bill calls upon the states to do is something that it could engender the federal government to get more involved--either through the FIO or through some other federal mechanism to address the issue," he asserted.

"If states fail to do what Congress has called upon them to do, it would seem that there might be a vacuum that needs to be filled. I think that's a downside to state sovereignty over the regulation of insurance in the long run," he said.

Mr. Maher specifically suggested that beyond prompting federal intervention by the FIO, Congress could react to the lack of state action toward the goal of uniformity with Optional Federal Charter legislation or even mandatory insurance regulation.

Tom Mulligan, co-chair of NAPSLO's Legislative committee disagrees. "I don't think that is a view we necessarily share," he said, when asked about Mr. Maher's prophecy. The statement that federal insurance regulation is looming down the road "is way too far reaching," he said.

Separately, Ms. Baney told the NAPSLO Daily News that she understood the concern reflected in Mr. Maher's remarks.

"There is a Congressional intent--expressed rather clearly--to have a nationwide uniform allocation system adopted," she said.

"It's not a mandate. So there's not going to be an injunction or a court action. But it very well could raise additional scrutiny at the federal level to say that we had an expectation you were going to make this easier for everybody to comply with and that is or isn't working."

"If it is working, great. If it isn't working, then why not?"

"It will raise those types of questions: Why isn't it working? What else can be done? How can we fix it?"

"The traditional response" from the federal government is "if something has got to be done, then we should do it. We should fix it," she said. "That is what's causing angst. That is the fear you're hearing."

Mr. Mulligan and NAPSLO Legislative Committee Co-Chair Hank Haldeman stressed that even if the states don't act to create a uniform tax allocation system, brokers still clearly benefit from NRRA's passage.

"In July 2011, the provisions of the federal legislation take over and supercede the current state of affairs. The brokers will have guidance," Mr. Mulligan said.

"The two principal benefits of NRRA will be realized irrespective of what happens next," Mr. Haldeman added. "There will be one state's regulations that apply to [each] transaction, and there can be only one state that can require the tax. We can't lose sight of those benefits," he said.

"Regardless of anything else in the structure that then surrounds it--allocations or anything else--those are the two principal objectives in there, and they go into effect no matter what," he said.

Uniformity, of course, would produce the fullest benefits for NAPSLO members, Mr. Haldeman said, noting that without it taxes will be collected at different dates with different forms.

"Now that NRRA has passed, NAPSLO's work is not done. The work to see that it is implemented at the state level in the way that Congress intended is just beginning," Mr. Mulligan said. "The legislative committee and the board of NAPLSO are working very hard on that."