Were optional monthly credit-insurance premiums included in a mortgage note's taxable principal for documentary stamp and nonrecurring intangible tax?

Plain-English summary

Florida excluded the bank's optional monthly credit-insurance premiums from the taxable principal of its mortgage notes. The premiums were not financed or added to principal, and the borrower could cancel the coverage at any time without penalty.

One payment did not make the premium principal

Borrowers made a level monthly payment combining principal, interest, and the current insurance premium. The bank applied the payment first to interest, then insurance, then principal. That collection method slowed early principal repayment and slightly increased total finance charges, but it did not transform the premiums into financed indebtedness.

The premium obligation was contingent

Premiums were calculated monthly as a percentage of the outstanding principal. Because borrowers could cancel coverage and owed no unaccrued premium after cancellation or prepayment, the obligation was not fixed and absolute when the note was executed.

Florida therefore imposed neither documentary stamp tax under section 201.08 nor the historical nonrecurring intangible tax under section 199.133 on those premiums.

What this means for you

Lenders should make the insurance election, cancellation right, premium calculation, note principal, and payment application explicit. A combined monthly payment alone did not control; the ruling focused on whether the premium was actually financed and fixed at closing.

Common questions

Q: Did the combined payment put premiums into principal?
A: No. The note and payment mechanics kept them separate from principal.

Q: Why were the premiums contingent?
A: Coverage was voluntary, could be canceled without penalty, and future premiums did not accrue after cancellation or prepayment.

Q: Did the slightly higher finance charge change the answer?
A: No. Florida attributed it to slower early principal repayment, not to financing the premium.

Q: Would financed or mandatory premiums have the same result?
A: The ruling did not decide that different arrangement; its conclusion depended on premiums being optional, cancelable, and outside principal.

Citations and references

• Fla. Stat. § 201.08 — documentary stamp tax on notes and obligations
• Fla. Stat. § 199.133 — historical nonrecurring intangible tax
• Fla. Admin. Code rr. 12B-4.051, 12B-4.052, and 12B-4.054 — notes and contingent obligations
• Fla. Admin. Code r. 12C-2.010 — secured-obligation valuation
• Department of Revenue v. North Port Bank, 354 So. 2d 463 (Fla. 1st DCA 1978)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03M-002

Original ruling text

SUMMARY

QUESTION: Are documentary stamp taxes and intangible
personal property taxes due on insurance premiums charged
in connection with loans issued to borrowers where the
premiums are included in the amount collected?

ANSWER - Based on Facts Below: No, the insurance premiums
are not part of the amount financed, therefore no
documentary stamp tax would be due on the insurance
premiums. Similarly, no intangible tax is due on the
insurance premiums, since the principal amount of the notes
does not include the insurance premiums.

Oct 09, 2003

Re: Technical Assistance Advisement No. 03M-002
Documentary Stamp Tax and Intangible Tax
Notes - Items Included in Amount Financed
Sections 201.08 and 199.133, F.S.
Rules 12B-4.051, 12B-4.052, 12B-4.054, and 12C-2.010,
F.A.C.
XXX ("Taxpayer")

Dear :

This is in response to your request for a Technical
Assistance Advisement regarding whether documentary stamp tax
and nonrecurring intangible tax will apply to credit life
insurance premiums collected by Taxpayer in connection with
Taxpayer's loans to customers.

FACTS PRESENTED BY PETITIONER

Taxpayer is a banking institution that offers credit life
and credit accident insurance and health insurance ("Insurance")
in connection with customers' loans. The loans are closedended, and secured by a mortgage typically on the loan

customer's primary residence. Loan documentation includes a
promissory note ("Note") in the form of Exhibit A attached to
your request.

Insurance is voluntary; Taxpayer does not require the loan
customer ("Customer") to purchase insurance as a prerequisite to
obtaining the loan. Customer may terminate Insurance at any
time during the loan without penalty.

Customer pays monthly insurance premiums ("Insurance
Premiums"), which are calculated based on a percentage of the
outstanding principal balance of the loan. The premiums are not
part of loan principal, and are not financed by Taxpayer. Per
the payment section of the Note, Customer promises to pay
Taxpayer a single monthly payment that is an aggregate of the
monthly Insurance Premium payment and the monthly loan principal
and interest payment. As provided in the Note, payments will be
applied first to accrued unpaid interest, then to any unpaid
Insurance Premiums, then to principal, and any remaining amount
to any unpaid collection costs and late charges.

Customer may prepay the outstanding loan balance at any
time during the loan term without penalty. In the event of
prepayment, Customer will not be liable for Insurance Premiums
that have not accrued.

Taxpayer intends to facilitate the collection and
remittance of documentary stamp tax and intangible tax based on
the original principal amount stated in the Note. The original
principal amount excludes Insurance Premiums.

REQUESTED RULING

Your letter requests an opinion whether documentary stamp
tax and nonrecurring intangible tax will apply to the Insurance
Premiums collected by Taxpayer.

LAW AND DISCUSSION

Section 201.08, F.S., imposes documentary stamp tax on
promissory notes or nonnegotiable notes, written obligations to

pay money, or assignments of wages or other compensation at the
rate of $.35 per $100 or fraction thereof based on the
indebtedness evidenced thereby. The maximum tax due for a
written obligation to pay money via a note or other document
evidencing indebtedness may not exceed $2450, unless a mortgage,
trust deed, security agreement or other evidence of indebtedness
is filed or recorded in the state.

Rule 12B-4.051(2), F.A.C., amended effective May 4, 2003,
specifies in part: "The $2450 limit placed on a note or other
written obligation to pay money, executed in Florida or approved
and accepted in Florida, does not apply to a mortgage, security
agreement, or other lien filed or recorded in Florida. A
mortgage, security agreement, or other lien filed or recorded in
Florida is subject to documentary stamp tax on the full amount
of the obligation secured thereby...."

Rule 12B-4.054(4), F.A.C., titled "Contingent Obligations",
provides: "A written promise to pay money which is not fixed and
absolute at the time of execution is not subject to tax."

Rule 12B-4.052(1)(a), F.A.C., provides: "The amount on
which the tax is measured, when the documents provide for a
discount of unearned interest or finance charges in exchange for
early payment, is the amount financed or principal indebtedness.
The payment of interest or finance charges is a contingent
obligation and is not taxable. (Department of Revenue v. North
Port Bank, 354 So.2d 463 (Fla. 1st DCA 1978). Miscellaneous
charges, such as credit life insurance, which are included in
the amount financed or principal indebtedness are not contingent
obligations at the time the note is executed and are taxable."

Section 199.133(1), F.S., imposes a one-time nonrecurring
tax of 2 mills on each dollar of the just valuation of all
notes, bonds, and other obligations for payment of money that
are secured by mortgage, deed of trust, or other lien upon real
property in this state. Rule 12C-2.010(2)(a), F.A.C., provides
"All obligations for the payment of money, evidenced by note,
bond, or deed of trust secured by a written specific lien on
real property located in this state shall have a value equal to
the principal amount of indebtedness at the time of execution."

Upon examination of the documents sent with your request,
it is clear that although the Customer promises to pay Taxpayer
for Insurance Premiums, payment of the premiums is a contingent
obligation, since the customer may cancel the Insurance at any
time during the loan. The Customer's obligation to pay
Insurance Premiums is not fixed and absolute at the time the
note is executed.

As to whether the premiums are included in the amount
financed and therefore subject to tax under Rule 12B4.052(1)(a), F.A.C., per the back-up documentation provided,
Federal Regulation Z, Section 226(d) specifies that if the
purchase of credit life insurance is optional, the associated
premiums are not considered part of the finance charge.

As described in the supplemental information provided at
the conference held July 24, 2003, the method of computing the
monthly payment on a simple-interest loan is to use the simpleinterest rate whereby the payment is calculated so that the loan
will amortize to -0- at the end of the loan term. At the end of
the loan, the principal has been fully repaid to the lender.

A simple-interest loan payment, including monthlyoutstanding balance (MOB) insurance, is calculated in the same
manner, with the addition of the credit insurance premium. Each
month, the lender calculates the credit insurance premium due
for the month, and, after reducing the payment by the total of
the premium and interest charges, applies the remainder to
reduce the principal balance.

In either scenario, each month the borrower is charged the
same rate of interest as a percentage of the principal balance.
A slightly higher finance charge results when MOB insurance is
included in the loan, and the total payment the borrower makes
is level throughout the loan. This is caused by the fact that
the insurance premium payments are larger at the start of the
loan and decrease as the loan amortizes. By taking the premium
payment out of the total payment the borrower makes, the amount
left to service the debt is reduced during the earlier part of
the loan compared to the same loan without MOB insurance. This

delays the repayment of principal, resulting in a slightly
higher finance charge.

DEPARTMENT'S RESPONSE

In response to your request for a determination, upon
careful review of the pertinent facts, it has been determined
that the MOB insurance premiums are not part of the loan
principal and are not financed by the Taxpayer. The only reason
the finance charge is slightly higher with a loan with MOB
insurance is because the lender has allowed the borrower to make
smaller principal payments during the first part of the loan and
larger ones during the last (compared to the same loan with no
insurance). Therefore, the increase in the finance charge when
MOB insurance is taken out by the borrower occurs because of the
slower principal repayment.

Since the MOB premiums are not part of the amount financed,
no documentary stamp tax under s. 201.08, F.S., is due on such
loans. Similarly, no non-recurring intangible tax under s.
199.133, F.S., and Rule 12C-2.010(2)(a), F.A.C., is due on the
MOB insurance premiums, since the principal amount of the note
does not include the premiums.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response, your request
and related backup documents are public records under Chapter
119, F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an

edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Joy. B. Eldred, CPA
Tax Law Specialist
Technical Assistance and Dispute Resolution
Office of the General Counsel

JBE/