United States: USA Illinois Fire Marshal Tax Regime For Surplus Lines Business

Last Updated: February 9 2016
Article by Ying Chen

The US state of Illinois' Fire Marshal Tax calculation involves proportioning the premium, especially for a combined policy or a multi-perils policy.

Fire Marshal Tax (FMT) is charged on Surplus Lines transactions in Illinois when insurance policies cover fire and property risks. The tax rate has always been 1% of the taxable premium. However, effective tax rates exist and vary in relation to the percentage of the premium to which the tax applies. In turn, the proportioning of the premium is determined by the nature of the line of business or the arrangement of insurance products. As a result, the tax calculation involves proportioning the premium, especially for a combined policy or a multi-perils policy.

For Property & Fire insurance

On 22 December 2015 the authority published a bulletin listing lines of business that are subject to FMT with the eligible percentage of taxable premium. Not surprisingly, a Fire policy applies the 1% FMT to the entire premium; and a Terrorism policy that only covers property damage also applies FMT to 100% of the premium. The percentage of premium applied to tax starts changing when it is a non-fire policy or fire related policy. For example, Allied Lines, which is any type of property-casualty insurance that is closely related to fire coverage, sees 25% of the premium as taxable, bringing the effective tax rate to 0.25%. Following suit, a policy covering the risk of earthquakes has an effective FMT of 0.25%; and an Excess of Loss policy is subject to 0.55% tax. Previously chargeable to FMT, Flood and Windstorm policies are now exempt.

For Business Interruption and combined insurance

Understandably, a stand-alone Business Interruption policy is not subject to FMT, which is the same as other liability lines of business including a Terrorism policy that covers liability only. However, if the risk of business interruption is included in an All Risk policy or a Special Perils policy where all fortuitous causes of loss are covered except for those that are specifically excluded, the 1% FMT is charged on 50% of the premium. Namely, the effective tax rate is 0.5% instead of 1%. In fact, any All Risk Property policy or any coverage using an "all risk" or "special" form is subject to the rate of 0.5%. To spice up the complexity, when the business interruption risk is included but in a Multi-Peril policy, only 40% of the premium is taxable, bringing the effective tax rate to 0.4%.

For other physical damage insurance

Any policies covering risks relating to Inland Marine are subject to 0.15% FMT, with 15% of premium taxable. For other insurance classes, when it is simply physical damage cover, the full 1% FMT is due. For Aviation Physical Damage, 10% of the premium is taxable (giving an effective 0.1% FMT rate); whereas 5% of premium is taxable for Auto Physical Damage insurances (giving an effective 0.05% FMT rate).

Updates in IPT Quote

When creating a quote for USA Illinois surplus lines business in IPT Quote, TMF Group's online tax calculation tool, users need not worry about the complexity of the calculation such as proportioning the premium. IPT Quote runs the calculation automatically with the effective FMT rate as long as the relevant line of business is selected. In addition, on the tax output schedule a new feature configured into the system will display the percentage of premium that is subject to the nominal tax rate (1%). In this way, users are able to verify the process of the calculation. Users will also find more subclasses being added under one line of business, with a help statement attached to subclasses to assist the users in selecting the right subclass for a correct and effective tax rate. Overall, IPT Quote will help the users through a complex calculation of the Illinois' Fire Marshal Tax.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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