Legislation aimed at simplifying the collection and allocation of surplus lines premium taxes so far has created more uncertainty than guidance for brokers and raises questions about potential new costs for insurance buyers.

The Nonadmitted and Reinsurance Reform Act, which became part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, took effect July 21. The NRRA provision stipulates that only the home state of a policyholder can collect the premium taxes and requires state legislatures to approve a method to allocate them.

So far, 43 states and Puerto Rico have passed laws allowing for the creation of a system to collect and allocate such taxes, according to the National Assn. of Professional Surplus Lines Offices Ltd. Few, though, have stipulated in legislation whether they are going to do so through one of two competing “compacts” being backed by industry groups or in another fashion.

NAPSLO is among the supporters of the Surplus Lines Insurance Multi-State Compliance Compact, while the National Assn. of Insurance Commissioners is backing the clearinghouse approach known as the Nonadmitted Insurance Multi-State Agreement.

As of late last week, nine states had agreed to adopt the SLIMPACT approach, one short of the number needed to implement the clearinghouse. Eleven states had authorized the NIMA compact, which will take the cooperation of regulators in all states to agree on uniformity under the approach.

Because neither compact had gained approval in enough states to begin operating, and many states have yet to decide on what sort of approach they will take in collecting and allocating taxes, brokers are left waiting for guidance on their responsibilities.

“There is a lot of uncertainty,” said Tony Gresham, president of Gresham & Associates Inc., a Stockbridge, Ga.-based wholesaler.

While the NRRA simplifies taxpaying responsibilities by requiring brokers to make payments only to the home state of the policyholder, it has created uncertainty by leaving open the question of how those payments will be distributed to satisfy tax obligations in other states, Mr. Gresham said.

“In some ways, it simplifies things,” he said. “The problem is, we don't have any idea who will consolidate the tax proceeds and distribute them.”

“The states have been slow to respond to how they are going to conform to the federal law,” said Michael Gonthier, senior vp-operations, at Crump Insurance Services Inc. in Boston

Crump is following the rules proscribed by the NRRA to determine the home state of policyholders, Mr. Gonthier said, while tracking premium allocations in other states on each risk so that taxes can be sorted out as states decide how to conform to the legislation.

“It's complicated,” Mr. Gonthier said, “because there is still a lot of uncertainty.”

Crump has a compliance team monitoring NRRA legislation in all states, and developments are communicated to the brokerage's producers as quickly as possible, he said.

States have missed an opportunity to make premium tax payments easier for brokers, the Council of Insurance Agents & Brokers contends.

In testimony at a July 28 hearing before a subcommittee of the House Financial Services Committee, the CIAB submitted a written statement saying that since the NRRA's effective date, states “have done everything but create any such harmonious and rational regulatory system.”

Given that the legislation went into effect a year after it was passed, “one would think the states would be well-prepared for implementation of the NRRA's reforms and a smooth transition to the new rules. Unfortunately, that is far from the case,” the CIAB said.

Brokers are waiting for states to adopt their approaches to collecting the taxes before making too many administrative or technological changes, which could create expenses that ultimately will be passed along to policyholders.

“There may be new data requirements and expenses associated with that,” said Mr. Gresham. Procedures for filings will have to be developed, he said. “Those are all unknowns. Some of that can be passed to the consumer, but some of it may not be able to be passed on.”

Risk managers, meanwhile, are largely waiting to learn how the new rules ultimately may affect them.

“I've heard about it from my broker,” said Bradley R. Wood, senior vp-risk management at Marriott International Inc. in Bethesda, Md. “It's certainly causing some havoc on their end.”

Leslie Lamb, global risk manager for San Jose-based Cisco Systems Inc., said she also has heard little about the potential impact on her operation. “I expect my broker to watch out for that sort of thing,” she said.

Ms. Lamb acknowledged that although it has not been an issue she has closely followed, surplus lines premium tax allocation could become a problem if an efficient method is not worked out. Cisco operates in every state, she said, which means “it could get complex” if a clearinghouse arrangement isn't implemented, Ms. Lamb said.

Confusion over the NRRA provisions already has cost some buyers, according to the CIAB.

Florida passed a law that went into effect July 1, before the NRRA was effective, the group said in its testimony. Policyholders based in Florida therefore were required to pay 100% of their premium taxes there, the CIAB said.

“Because the NRRA was not yet in effect, however, other states still imposed tax on the portion of nonresidents' risks located in their states,” the group said. “As a result, brokers and insureds were subjected to double taxation on those policies.”