Texas Surplus Lines Taxes and Required Disclosures

Surplus lines insurance gives a Texas insured access to an eligible nonadmitted insurer when coverage cannot be obtained from the authorized market under applicable law. This route comes with distinct placement, disclosure, stamping, and tax duties. Agents should keep those steps separate: a carrier’s eligibility does not complete the placement; a completed placement does not automatically settle tax reporting; and charging the premium tax does not make the carrier admitted or create guaranty-fund protection.

The Texas Comptroller’s current insurance-tax guidance lists a 4.85% tax rate for surplus-lines policies. The rate is applied to the taxable premium under the applicable Texas rules and the home-state framework. Because multi-state allocation, return premiums, endorsements, and exemptions can affect the tax base, a producer should not calculate every invoice by multiplying the full policy premium by 4.85% without first confirming what premium is taxable to Texas.

How to calculate the basic premium tax

For a straightforward Texas-only placement with $10,000 of taxable premium, the basic calculation is $10,000 × 0.0485 = $485 in surplus-lines premium tax. If the placement is subject to an authorized stamping fee, that may be a separate charge and should not be confused with the tax. Likewise, a broker service fee, inspection charge, policy fee, or other amount should be classified according to the current tax law and filing guidance rather than automatically treated as premium or exempted by label.

The tax is a premium tax, not a sales tax and not the insurer’s ordinary Texas gross-premium tax treatment for an admitted policy. The Comptroller explains that surplus-lines agents report the tax on eligible placements. If the tax is charged to the insured, show it transparently on the invoice and reconcile it to the return. Do not describe it as an insurer surcharge unless the contractual and regulatory basis supports that description.

Annual reporting and due dates

The Comptroller says the annual surplus-lines insurance premium tax report is due March 1 based on policies placed in the prior year. It allows agents to report on a written-premium or received-premium basis under its stated rules. The written method generally recognizes new or renewal premium based on the policy effective date; the received method follows when premium is collected. The chosen method affects which tax year includes a transaction, so an agency must apply its method consistently and follow the instructions for endorsements, audits, cancellations, and returned premium.

The Comptroller warns agents not to use the annual transaction summary from the Surplus Lines Stamping Office of Texas (SLSOT) as the tax report itself. The stamping-office record is a compilation of processed transactions and may not reflect the agent’s selected tax accounting basis. Reconcile the SLSOT record against the agency’s policy ledger, premium accounting, tax method, and prior-year adjustments before preparing the annual return.

The Comptroller provides electronic filing through Webfile and identifies Form 25-104 as the annual insurance report when paper filing is allowed. The official due-date calendar and current form instructions control. Retain placement documents, invoices, evidence of coverage, tax calculations, transaction records, and proof of filing/payment. A filed stamping record does not substitute for the annual tax return, and filing a tax return does not cure a missing policy disclosure or an ineligible insurer placement.

If accrued tax reaches $70,000, the Comptroller says a prepayment is required. The current FAQ explains that the payment is due by the 15th of the month following the month in which the threshold is reached, using the selected reporting basis. For example, if the threshold is reached at the end of March, the prepayment is due April 15. This is an operational threshold worth monitoring throughout the year; do not wait for the March 1 annual return to discover that interim prepayment duties arose.

If an agency did not place surplus-lines business, the Comptroller says a tax report is not required for that year. Confirm the current account and filing instructions rather than assuming that an inactive license automatically ends reporting duties. Late or insufficient tax payment can trigger penalty and interest. Keep a calendar for annual filing, prepayments, policy reporting, and reconciliation responsibilities, and assign a named staff owner for each task.

The insured’s home state and multistate premiums

The federal Nonadmitted and Reinsurance Reform Act generally assigns regulation and taxation of nonadmitted insurance to the insured’s home state. The Texas Comptroller says if Texas is the insured’s home state for a multistate policy, 100% of the premium is reportable to Texas regardless of where the policy’s risks are located, subject to the stated rules and any applicable exception. If Texas is not the home state, the agent generally follows the home state’s requirements. The insured’s principal residence or principal place of business is central to identifying home state; large-company cases can require careful analysis.

Do not equate “Texas location appears on the schedule” with “Texas is necessarily entitled to tax the whole premium,” and do not assume that a multistate policy can be divided by location without regard to federal home-state rules. For a Texas-home-state insured, the Comptroller also addresses situations involving risks entirely outside Texas and uses the largest premium allocation rule in specified circumstances. Review the current Comptroller FAQ and NRRA guidance when a corporate group has subsidiaries, a headquarters, a nerve center, or exposures across states.

Diligent effort and exemptions

Texas Insurance Code Chapter 981 establishes an orderly surplus-lines market for coverage that is not available from authorized and regulated insurers. Before placement, an agent generally must make a diligent effort to find a Texas-authorized insurer that will write the coverage. The law and TDI rules include exceptions and special pathways, including provisions for certain exempt commercial purchasers and lines subject to specific statutory treatment. Apply the exception’s exact conditions; a sophisticated insured, a large premium, or a hard-to-place risk does not by itself erase statutory documentation requirements.

A diligent effort is a meaningful market search, not a formality checked after the sale. The producer should document the insurers approached, the coverage and terms requested, response dates, declinations or restrictions, and why admitted-market coverage was unavailable. If the placement uses a statutory exception, document the factual requirements and each required disclosure or acknowledgment. A file that only says “market unavailable” is weak evidence of the process.

An exempt commercial purchaser pathway can change the diligent-search process when statutory conditions are satisfied and the purchaser receives specified disclosures and requests the placement through a qualified insurance buyer. Do not present it as a blanket waiver for every large commercial account. Confirm the legal definition, purchaser request, broker role, written disclosure, and any other current statutory elements. If the conditions are not met, use the ordinary diligent-effort requirements.

Insurer eligibility and what the notice means

TDI explains that Texas does not license surplus-lines companies as Texas-authorized insurers, but it approves which insurers may conduct surplus-lines business in the state. Eligible surplus-lines insurers must meet specified financial and home-jurisdiction requirements and appear on TDI’s eligible list. The agent must make a reasonable effort to determine the insurer’s financial condition before placement and may not knowingly place coverage with a financially unsound insurer. Check the current list and any relevant warning or status before binding.

The required notice tells the insured that the insurer is not licensed by TDI as an authorized Texas insurer, the state does not regulate it in the same way as an admitted company, and the Texas Property and Casualty Insurance Guaranty Association does not protect the policy if the insurer becomes insolvent. Exact notice language and placement in the policy documents are governed by current statute and rule. The agent should provide it clearly and retain evidence that it was delivered; a generic verbal statement may not satisfy a written requirement.

The notice does not mean that the insurer is illegal or automatically unreliable. Surplus-lines insurers are eligible for this form of business if they meet TDI’s requirements, but they are not state-licensed and do not share all admitted-market protections. The insured should compare the contract, exclusions, claims process, financial information, and the availability of admitted alternatives. The agent should explain this distinction without promising that TDI has guaranteed the carrier’s future ability to pay claims.

Policy delivery and the SLSOT role

Texas Insurance Code Chapter 981 requires a surplus-lines agent, when placing new or renewal coverage, to promptly deliver the policy or, if the policy is not yet available, a certificate, cover note, or other confirmation of insurance. If the policy is not available, the agent must obtain and deliver it when requested and as soon as reasonably possible. The temporary evidence should accurately state the insurer, insured, coverage, limits, effective dates, and any material restrictions. It should not be mistaken for a change to the insurer’s policy form.

SLSOT administers stamping and related transaction processing for Texas surplus-lines placements. The agent should report the placement within the current office’s rules and preserve the transaction reference. Stamping does not amount to TDI approval of the policy’s substantive terms, a solvency guarantee, or proof that the agent has met every placement requirement. It is one compliance step in a broader process.

Who handles each task

Worked examples

An agent places a $10,000 Texas-only surplus-lines policy. If the full amount is taxable premium and no adjustment applies, the basic tax is $485. The agent separately completes the required placement, stamping, disclosure, policy-delivery, and annual reporting steps. The tax calculation alone does not prove the insurer was eligible or that diligent effort was documented.

A Texas-headquartered company buys a multistate liability policy. The risk locations are in Texas and three other states. The producer should identify the insured’s home state under NRRA and follow the Comptroller’s rules; if Texas is home state, the FAQ says the full policy premium is generally reported to Texas, regardless of location, subject to the specific rules. A simple percentage based only on Texas sales or locations could be wrong.

A commercial buyer receives two admitted-market declinations and seeks a specialized surplus-lines policy. The producer documents the markets and terms, verifies the proposed carrier on TDI’s eligible list, explains the nonadmitted and guaranty-association notice, reports through the stamping process, delivers the policy evidence, and tracks taxable premium for the correct annual return. These duties do not disappear because the insured is experienced.

An agent receives a $75,000 policy premium late in the year, and accrued surplus-lines tax passes $70,000 during the next reporting month. The agent must check the current prepayment rule and due date, not wait until the next March 1 annual filing. The example illustrates the threshold trigger; the exact tax amount and reporting basis still depend on the transactions and Comptroller instructions.

Common mistakes

• Treating the 4.85% tax as a universal invoice multiplier without checking taxable premium and home-state allocation.
• Confusing SLSOT transaction records with the Comptroller’s annual tax report.
• Missing the March 1 annual due date or a midyear prepayment obligation after accrued tax reaches $70,000.
• Assuming the insured’s size automatically waives diligent effort.
• Failing to retain market-search evidence or exempt-commercial-purchaser documentation.
• Calling an eligible surplus-lines insurer a TDI-licensed or admitted carrier.
• Implying TDI guarantees the surplus insurer’s solvency or that guaranty-fund protection applies.
• Treating tax payment or stamping as proof that the coverage terms are approved.
• Forgetting to deliver a policy or temporary evidence of insurance promptly.
• Using the stamping-office annual summary without reconciling the agent’s written or received reporting method.

Prepare for the Texas P&C exam

Surplus-lines questions combine insurer status, agent duties, and premium tax. Sitonce’s Texas Property and Casualty exam prep course helps you review the market structure and apply Texas rules to exam scenarios.

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