Current through Register Vol. 24-06, March 15, 2024
(1)
Introduction. This section explains the taxability of amounts
earned by insurance producers, title insurance agents, and surplus line
brokers, which include persons commonly referred to as insurance agents,
solicitors, representatives, brokers, or dealers.
(a)
Economic nexus. Nonresident
individuals or business entities organized or commercially domiciled outside
the state of Washington and Washington businesses conducting business for
customers receiving benefits outside Washington should refer to WAC
458-20-19401, Minimum nexus
thresholds for apportionable activities, which include engaging in business as
an insurance producer, title insurance agent, or a surplus line broker, to
determine if they meet the minimum thresholds for apportionable
activities.
(b)
Examples. This section contains examples which identify a number
of facts and then state a conclusion. The examples should be used only as a
general guide. Tax results must be determined after a review of all the facts
and circumstances.
(2)
Definitions.
Insurance producer. An insurance producer is a person required
to be licensed under the laws of this state to sell, solicit, or negotiate
insurance. An insurance producer may receive a license to sell insurance
products including, but not limited to, life, disability, property, and/or
casualty. "Insurance producer" does not include title insurance agents or
surplus line brokers.
RCW
48.17.010 and
48.17.170.
Title insurance agent. A title insurance agent is a business
entity licensed under the laws of this state and appointed by an authorized
title insurance company to sell, solicit, or negotiate insurance on behalf of
the title insurance company.
Surplus line broker. A surplus line broker is a person
specially licensed under chapter 48.15 RCW to procure policies from an insurer
not licensed in Washington.
(3)
Business and occupation (B&O)
tax. Persons engaging in business in this state as an insurance producer
or a title insurance agent licensed under
chapter
48.17 RCW, or a surplus
line broker licensed under chapter 48.15 RCW are taxable on gross income earned
from such licensed activities, including commissions, fees, and renewals, under
the insurance producers/title insurance agents/surplus line broker commissions
B&O tax classification. (See WAC
458-20-156, Abstract, title
insurance and escrow businesses for taxability of fees/premiums charged to
consumers for title insurance.)
Persons engaging in this state as an agent, broker,
representative, or solicitor licensed under
chapter
48.18A RCW are taxable on
gross income earned from such licensed activities under the service and other
activities B&O tax classification.
(a)
How is gross income
determined? The gross income of the business is determined by the amount
of gross commissions received, not by the gross premiums paid by the insured.
The term "gross income of the business" includes gross receipts from
commissions, fees, renewals, or other amounts which the insurance producer,
title insurance agent, or surplus line broker receives or becomes entitled to
receive. RCW 82.04.080. The gross income of
the business does not include amounts held in trust for the insurer or the
client. (See WAC
458-20-111, Advances and
reimbursements.)
(b)
Are
commissions and expenses deductible? No deduction is allowed for
commissions, fees, or salaries paid to other insurance producers, title
insurance agents, or surplus line brokers or for other expenses of doing
business.
(c)
Examples.(i) ABC Financial
Services (ABC) is a full-service broker-dealer firm with independent
contractors, referred to as "representatives," licensed to sell insurance
products (chapter 48.17
RCW) and securities (chapter 48.18A
RCW). ABC's top selling representative is John. When John sells an insurance
policy to a client, ABC receives a commission from the insurer and pays a
portion of that commission to John, which John reports under the insurance
producers/title insurance agents/surplus line broker commissions B&O tax
classification. When John sells securities, ABC charges the purchaser a fee and
pays a portion of that fee to John as a commission, which John reports under
the service and other activities B&O tax classification. ABC is taxable on
the total commissions received from the sale of insurance products (under the
insurance producers/title insurance agents/surplus line broker commissions
classification) and fees charged for security transactions, (under the service
and other activities classification), including the amount in commissions paid
to John.
(ii) Tom is an independent
contractor with agency agreements with several insurance companies that
authorize him to accept applications for insurance. Tom also has an agreement
with William, who will market insurance policies for Tom. When William sells a
policy for Tom, William collects the entire gross premium from the customer.
William deposits the entire amount, and sends Tom a check for the balance
remaining after William deducts his commission. Tom deposits the check and
writes a check to the insurance company for the net premium. As Tom, not
William, has the contractual relationship with the insurance company, Tom owes
B&O tax on the gross commission income including the amount retained by
William. Tom cannot deduct the amount William kept as it is a cost of doing
business for Tom. He will report under the insurance producers/title insurance
agent/surplus line broker commissions B&O tax classification. William will
also report his commission income on his excise tax return under the insurance
producers/title insurance agent/surplus line broker commissions B&O tax
classification.
(iii) Lisa sells
life insurance and variable annuities. Lisa is not an employee of the insurance
company and is taxable under the insurance producers/title insurance
agent/surplus line broker commissions B&O tax classification on the
commissions she earns from selling insurance. Commissions earned from selling
variable annuities are taxable under the service and other business activities
B&O tax classification. See
RCW
48.18A.030.
(d)
Engaging in business. Every
person acting in the capacity of an insurance producer, title insurance agent,
or surplus line broker is presumed to be engaging in business and subject to
the B&O tax unless the person can demonstrate he or she is a bona fide
employee. The burden is on the person to establish the fact of his or her
status as an employee. (See WAC
458-20-105, Employees
distinguished from persons engaging in business.)
(e)
How do I apportion my
income? Income earned from engaging in business as insurance producers,
title insurance agents, and surplus line brokers is apportionable income. The
portion that is taxable income for B&O tax purposes must be determined by
using the apportionment method provided in WAC
458-20-19402, Single factor
receipts apportionment -- Generally.
(4)
Full-time life insurance
salespersons. Persons who sell life insurance on a full-time basis, as
provided in section 3121(d)(3)(B) of the Internal Revenue Code (statutory
employee), will be considered employees. These persons will not be subject to
the B&O tax on amounts received in their capacity as statutory employees.
(a)
What are the criteria for full-time
life insurance salespersons? For purposes of this subsection (4), a
full-time life insurance salesperson is an individual who meets all of the
following criteria:
(i) The person's principal
business activity is devoted to the solicitation of life insurance or annuity
contracts, or both, primarily for one insurance company;
(ii) The contract between the individual and
the primary life insurance company contemplates that substantially all of such
services are to be performed personally by such individual;
(iii) The individual does not have a
substantial investment in facilities used in connection with the sale of life
insurance or annuity contracts (other than in facilities for transportation);
and
(iv) The sale of life insurance
by such individual occurs in the course of a continuing relationship with the
primary life insurance company.
(b)
What is a principal business
activity? A person's principal business activity is the activity from
which he or she generally receives the greatest remuneration. All business
activities, including acting as an employee, will be considered in determining
a person's principal business activity.
(c)
What is considered a
facility? The facilities referred to in (a)(iii) of this subsection
include such things as office space, office equipment, and secretarial
services. The term facilities does not include tools, instruments, or clothing
as are commonly furnished by employees. An investment is substantial if a
deduction for the item is taken in calculating the person's federal income tax
liability.
(d)
What will
disqualify a person? Failure to satisfy any one of the criteria listed
in (a) of this subsection will disqualify a person from treatment as an
employee under this subsection.
(e)
You can be an employee for only one life insurance company. A
person will be considered an employee under this subsection (4):
(i) With only one company, even if selling on
behalf of more than one insurance company; and
(ii) Only as to amounts received as
compensation for the sale of life insurance or annuity contracts, or both from
one life insurance company.
(f)
Receiving a Form W-2 as a statutory
employee. A person will be presumed to be a full-time life insurance
salesperson within the meaning of section 3121(d)(3)(B) of the Internal Revenue
Code if they receive a Form W-2 (federal income tax wage and tax statement)
indicating that they are a statutory employee. A person receiving a W-2 as a
statutory employee will be presumed to be an employee under this subsection
only as to amounts reported on the W-2 as compensation for the sale of life
insurance.
A person who does not receive a properly marked W-2 has the
burden of establishing that they are a full-time life insurance salesperson as
provided in (a) of this subsection.
(g)
Examples.
(i) A person sells life insurance on a
full-time basis on behalf of one company. The company issues a Form W-2 which
indicates that the person is a statutory employee. Under these circumstances,
the person will be presumed an employee as to amounts reported on the Form W-2
as compensation for the sale of life insurance and will not be taxable under
the B&O tax on these amounts.
(ii) A person sells insurance on behalf of
several insurance companies two of which are life insurance companies and the
others are casualty insurance companies. The person sells both life insurance
and casualty insurance. One of the life insurance companies issues a Form W-2
indicating that the person is a statutory employee. The person will be presumed
an employee as to amounts reported on the Form W-2 as compensation for the sale
of life insurance and will not be taxable under the B&O tax on these
amounts.
(iii) A person sells life
insurance on behalf of several life insurance companies and does not engage in
any other business activity. Most of the policies sold by the person are
written with one company. The person does not receive a Form W-2 from any of
the companies for which life insurance is sold. The person's sales activities
are conducted from an office which he or she leases. The office lease payments
are deducted by the salesperson in computing his or her federal income tax
liability. In addition, the salesperson has an employee whose salary is also
deducted for federal income tax purposes. Because the person does not receive a
Form W-2, he or she will not be presumed to be an employee. Instead, the person
has the burden of proving the existence of each of the criteria listed in
subsection (4)(a) of this section. In this example, the salesperson will not be
considered an employee under this subsection (4) of this section because they
have a substantial investment in facilities.
(5)
Licensed producer appointed as a
managing general agent. A person representing and performing services
for fire or casualty insurance companies as an independent resident managing
general agent is subject to tax on the gross income of such business activities
and will report under the insurance producers/title insurance agents/surplus
line broker commissions B&O tax classification.
Any person claiming to fall within this tax classification must
demonstrate:
(a) That the person is
licensed as a resident producer by the insurance commissioner; and
(b) That the person performs the following
independent manager functions:
(i) Pays all
sales and/or production expense; including salaries of special field
representatives, underwriters, and inspectors as well as all office expenses of
rent, supplies, secretarial help, etc.
(ii) Bills all premiums for the company so
represented.
(iii) Directly
contracts for or hires all selling agents.
(iv) Exercises final responsibility with
respect to selecting risks and underwriting matters.
(v) Makes all arrangements for
reinsurance.
(vi) Handles all
claims adjustments directly with the insured (by his own staff or through
hiring an independent adjuster).
(6)
Insurance adjusters. For the
purpose of this section, adjuster means a person licensed as such under the
provisions of
chapter
48.17 RCW. Persons engaged
in business as insurance adjusters are taxable under the service and other
business activities classification upon the gross income of the business.
Gross income includes all fees received for services rendered,
and all charges recovered for expenses incurred in performing services, such as
transportation costs, hotel, restaurant, and telephone charges, etc.
In computing tax liability, there may be deducted from the
gross income (if included therein) money or credits received as reimbursement
of advances made for:
Towing;
Storage of damaged automobiles;
Repairs to damaged automobiles;
Advances for doctor, hospital, and ambulance fees and charges;
and
Other such expenditures made with respect to damaged property
or injured persons.
The words "advance" and "reimbursement" apply only when the
insurer or the insured alone is liable for the payment of the fees or costs and
when the adjuster making the payment has no personal liability therefore,
either primarily or secondarily, other than as agent for the insurer or the
insured. Refer to WAC
458-20-111, Advances and
reimbursements.
(7)
Purchases
subject to retail sales tax. Retail sales tax is owed on purchases of:
Tangible personal property such as office equipment, supplies,
furnishings, computers, prewritten software;
Digital products, unless specifically exempt; and
Retail services, such as telephone service, construction
services, landscape services, repair services.
If retail sales tax is not paid at the time of purchase,
deferred sales tax or use tax is owed by the purchaser. See WAC
458-20-178, Use
tax.
Statutory Authority:
RCW
82.32.300 and
82.01.060(2).
12-11-006, § 458-20-164, filed 5/3/12, effective 6/3/12. Statutory
Authority:
RCW
82.32.300. 92-19-004, § 458-20-164,
filed 9/3/92, effective 10/4/92; 83-17-099 (Order ET 83-6), § 458-20-164,
filed 8/23/83; Order 70-5, § 458-20-164 (Rule 164), filed
6/22/70.