On appeal from the Tax Court of New Jersey, Docket Nos. 2357-01, 2365-01, 2366-01, 2934-01, 4711-01, 4712-01, 4713-01, 4714-01, 4715-01, 4716-01, 4721-01, 4464-02 and 4058-03.
Before Judges Fall, Payne*fn1 and C.S. Fisher.
The opinion of the court was delivered by: Payne, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
In American Fire and Casualty Co. v. Director, Div. of Taxation, 21 N.J. Tax 155 (Tax 2003), a judge of the Tax Court affirmed, against challenges by foreign domiciled insurers, the methodology utilized by the Director, New Jersey Division of Taxation (Director) for calculating the State's retaliatory insurance tax*fn2 so as to recapture the benefits to foreign insurers that otherwise would be provided by the State's premium tax cap. The decision, applied in principle in thirteen actions, was appealed in the actions before us, which we decide together. We reverse.
New Jersey imposes two taxes of relevance to this appeal: a premium tax and a retaliatory tax. The premium tax statute, codified at N.J.S.A. 54:18A-1 to -11, requires that all domestic and foreign insurance companies pay an annual tax"based on net premiums on contracts of insurance covering property and risks located within this State written during the calendar year ending December 31 next preceding." N.J.S.A. 54:18A-1(a). The tax for non-life insurers is presently set at 2.1% of taxable premiums in this State. N.J.S.A. 54:18A-2(a). The same rate applies to life and health insurance companies. N.J.S.A. 54:18A-3(a).
However, the premium tax statute contains a premium cap provision, applicable both to property and casualty and to life and health insurers, that is unique to New Jersey. See N.J.S.A. 54:18A-6. That statute, enacted in 1945 (L. 1945, c. 132, § 6) provides in essence that if the premiums collected by a company and its affiliates that are taxable in New Jersey exceed twelve and one-half percent of the"total premiums collected by the company and all of its affiliates during the same year on all policies and contracts of insurance, whenever and wherever issued," then the premiums taxable in New Jersey"shall not exceed" twelve and one-half percent of the company's total premiums. The manifest intent of the cap is to attract capital and"provide insurance companies with incentive to voluntarily write significant amounts of business in New Jersey." Senate Committee on Labor, Industry and Professions Statement to Senate Bill No. 2395 - L. 1985, c. 294. Because the statute, which creates a tax incentive, is not limited to New Jersey companies, it does not constitute a preference that, as we will explain in Part IV of this opinion, would be constitutionally prohibited on equal protection grounds.
In 1985, when the statute was amended to require that an insurer include not only its own taxable premiums wherever earned, but also those of its affiliates, so as to prevent the recent phenomenon of centralization of New Jersey business in a single New Jersey domiciled affiliate that would technically qualify for the cap, the true purpose of the statute was expressed in the following terms:
The limitation on the maximum amount of premium tax payable was intended to be available to those insurance companies, domestic or foreign, which made a substantial commitment to New Jersey and contribution to its economy as evidenced by the percentages of overall business written in this State compared to elsewhere. Typically, insurance companies qualifying for the limitation had significant numbers of New Jersey employees providing service to policyholders and claimants residing here, paid substantial sums of real property taxes, maintained deposits in local banks, invested considerable funds in local securities and companies and generally contributed to the economy by utilizing other local services and businesses. [Ibid.]
New Jersey's retaliatory tax, enacted in 1950 and codified at N.J.S.A. 17:32-15, has a wholly different purpose. That statute, stripped to its essentials, provides:
When by the laws of any other state... any premium or income or other taxes... are imposed upon New Jersey insurance companies... doing business in such other state... which are in excess of such taxes... imposed upon insurance companies... of such other state... doing business in New Jersey... so long as such laws continue in force the same premium or income or other taxes... shall be imposed upon insurance companies... of such other state... doing business in New Jersey.*fn3 This retaliatory tax applies solely to foreign (out-of-state) or alien (out-of-U.S.) insurers.
Although the manner of implementation of the statute is not entirely clear from its language, what the statute in effect is intended to do is to permit the imposition of an additional taX upon foreign insurers domiciled in states whose premium tax rate exceeds that of New Jersey in an amount equivalent to the difference between the foreign and the New Jersey tax rate. Thus if, for instance, Ohio imposed a premium tax at a rate of 2.5% and New Jersey imposed a premium tax at a rate of 2.1%, Ohio domiciled insurers writing business in New Jersey would be subject to an additional retaliatory tax at a rate of 0.4%.
Such retaliatory taxes have now been enacted in all states except Hawaii, and their constitutionality has been affirmed by the United States Supreme Court. See Western and Southern Life Ins. Co. v. State Bd. of Equalization of California, 451 U.S. 648, 101 S.Ct. 2070, 68 L.Ed. 2d 514 (1981). As explained by Justice Brennan in that decision, the retaliatory tax at issue (as here) was based upon a model statute drafted by the insurance industry and adopted in similar form elsewhere. Id. at 669, 101 S.Ct. at 2083, 68 L.Ed. 2d at 531.
Although variously expressed, the principal purpose of retaliatory tax laws is to promote the interstate business of domestic insurers by deterring other States from enacting discriminatory or excessive taxes. A survey of state retaliatory tax laws summarized:"[W]hatever their character, it is obvious... that their ultimate object is not to punish foreign corporations doing business in the state, or retort the action of the foreign state in placing upon corporations of the enacting state doing business therein burdens heavier than those imposed upon corporations of such foreign state doing business in the enacting state, but to induce such foreign state to show the same consideration to corporations of the enacting state doing business therein as is shown to corporations of such foreign state doing business in the enacting state." Annot., 91 A.L.R. 795 (1934).
[Id. at 668-69, 101 S.Ct. at 2083, 68 L.Ed. 2d at 531.]
In essence, the purpose of retaliatory taxes is to alleviate tax burdens for those companies conducting interstate insurance business by placing pressure upon states to lower their tax rates to levels encountered elsewhere, thereby promoting interstate commerce. Their purpose is not to raise revenue. Id. at 669-70, 101 S.Ct. at 2083-84, 68 L.Ed. 2d at 531. As we stated in Employers' Fire Ins. Co. v. Director, Division of Taxation, 6 N.J. Tax 613 (App. Div. 1984):
Retaliatory tax laws are a fact of life in the existence of any insurance company that does business on a national level.... Although such statutes may incidentally produce revenue, the primary purpose sought to be achieved is to compel the foreign state imposing greater costs to lower the"premium or income or other taxes,... fees, fines, penalties, licenses, deposit requirements or other obligations," or to remove any"prohibitions or restrictions... imposed upon" the insurance companies of the domiciliary state.
[Id. at 615-16 (citations omitted).]
The State's retaliatory tax and premium cap provisions thus have different goals: the former is designed to operate so as to level the playing field for insurance companies engaged in interstate business thus encouraging that business; the latter, to give New Jersey a competitive advantage in attracting foreign insurer investment and increased insurance capacity.
New Jersey's premium tax cap and retaliatory tax statutes do not provide an explicit mechanism for their implementation in instances in which both are applicable, and nothing in the legislative history suggests that the Legislature considered the issues potentially arising from possible variations in the method of their dual implementation. This litigation has brought those issues into focus.
To illustrate them, we adopt the numerically simplified examples set forth in the brief submitted on behalf of plaintiffs American Fire and Casualty Company and West American Insurance Company, since their essential accuracy has not been disputed.
If a foreign insurer received premiums of $500,000 on its New Jersey business and was ineligible for the premium tax cap, its premium taxes would be $10,500 (2.1% x $500,000).
If a foreign insurer received New Jersey premiums of $500,000 and nationwide premiums of $1,000,000, thereby qualifying it for New Jersey's premium tax cap, its taxes would be reduced by $7,875. (12.5% of $1,000,000 = 125,000 x 2.1% = $2,625; $10,500 - $2,625 = $7,875.)
If a foreign insurer, eligible for the benefits of the premium tax cap, is domiciled in a state with a higher premium tax rate than that of New Jersey (assume 2.5%), then that insurer should be subject to New Jersey's retaliatory tax. ...