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American Fire & Casualty Co. v. New Jersey Division of Taxation

October 19, 2006

AMERICAN FIRE AND CASUALTY COMPANY, PLAINTIFF-RESPONDENT,
v.
NEW JERSEY DIVISION OF TAXATION, DEFENDANT-APPELLANT.
AMERICAN FIRE AND CASUALTY COMPANY, PLAINTIFF-RESPONDENT,
v.
NEW JERSEY DIVISION OF TAXATION, DEFENDANT-APPELLANT.
AMERICAN FIRE AND CASUALTY COMPANY, PLAINTIFF-RESPONDENT,
v.
NEW JERSEY DIVISION OF TAXATION, DEFENDANT-APPELLANT.
THE OHIO CASUALTY INSURANCE COMPANY PLAINTIFF-RESPONDENT,
v.
NEW JERSEY DIVISION OF TAXATION, DEFENDANT-APPELLANT.
THE OHIO CASUALTY INSURANCE COMPANY, PLAINTIFF-RESPONDENT,
v.
NEW JERSEY DIVISION OF TAXATION, DEFENDANT-APPELLANT.
THE OHIO CASUALTY INSURANCE COMPANY, PLAINTIFF-RESPONDENT,
v.
NEW JERSEY DIVISION OF TAXATION, DEFENDANT-APPELLANT.
OHIO CASUALTY OF NEW JERSEY, INC., PLAINTIFF-RESPONDENT,
v.
NEW JERSEY DIVISION OF TAXATION, DEFENDANT-APPELLANT.
OHIO CASUALTY OF NEW JERSEY, INC., PLAINTIFF-RESPONDENT,
v.
NEW JERSEY DIVISION OF TAXATION, DEFENDANT-APPELLANT.
OHIO CASUALTY OF NEW JERSEY, INC., PLAINTIFF-RESPONDENT,
v.
NEW JERSEY DIVISION OF TAXATION, DEFENDANT-APPELLANT.
WEST AMERICAN INSURANCE COMPANY, PLAINTIFF-RESPONDENT,
v.
NEW JERSEY DIVISION OF TAXATION, DEFENDANT-APPELLANT.
WEST AMERICAN INSURANCE COMPANY, PLAINTIFF-RESPONDENT,
v.
NEW JERSEY DIVISION OF TAXATION, DEFENDANT-APPELLANT.
OHIO CASUALTY OF NEW JERSEY, INC., PLAINTIFF-RESPONDENT,
v.
NEW JERSEY DIVISION OF TAXATION, DEFENDANT-APPELLANT.
PRUCO LIFE INSURANCE COMPANY, PLAINTIFF-RESPONDENT,
v.
DIRECTOR, DIVISION OF TAXATION, DEFENDANT-APPELLANT.



On certification to the Superior Court, Appellate Division, whose opinion has been reported at 375 N.J. Super. 434 (2005).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

The issue before the Court is the proper method of calculating a foreign insurer's retaliatory tax obligation under N.J.S.A. 17:32-15 when the premium tax cap statute, N.J.S.A. 54:18A-6, applies to the insurer.

The New Jersey premium tax, N.J.S.A. 54:18A-1 to -11, requires all foreign and domestic insurance companies conducting business in the State to pay an annual tax based on net premiums on contracts of insurance covering property and risks located within New Jersey during the calendar year. Pursuant to the premium tax, the tax rate for non-life insurers as well as life and health insurers is currently 2.1% of taxable premiums. The premium tax cap statute, N.J.S.A. 54:18A-6, creates a cap on taxable premiums for foreign and domestic insurers whose receipt of New Jersey premiums accounts for more than 12.5% of their total worldwide premiums. This statute is unique to New Jersey and was enacted to encourage insurance companies to conduct more business in the State because, once the 12.5% threshold is met, an insurer pays premium tax on only 12.5% of its worldwide premiums, regardless of any premiums that it writes in this State in excess of that amount.

In addition to the premium tax, foreign insurers operating in this State are subject to a retaliatory tax if their home state's rate of taxation is higher than New Jersey's 2.1% tax rate. Under this statute, an insurer pays retaliatory tax in an amount equal to the difference between the two rates. The purpose of the retaliatory tax is to protect domestic insurance companies from the imposition by a sister state of taxes or other costs of doing business that exceed the costs of doing business in the domiciliary state.

This appeal arises from tax returns filed by plaintiffs American Fire & Casualty Company, Pruco Life Insurance Company, and West American Insurance Company (hereinafter referred to collectively as "plaintiffs"). Because the facts concerning these plaintiffs are not in dispute and are sufficiently similar, the Court discusses, for the sake of brevity, the facts as they relate to American Fire.

American Fire is incorporated in Ohio and is a member of the Ohio Casualty Corporation. In 2000, American Fire filed its initial 1999 tax return in which it listed an amount due of $228,890, including $14,405 in retaliatory tax. The return did not apply the premium tax cap and the return indicated that the insurer was not entitled to a refund. About a year later, American Fire filed an amended return in which it applied the premium tax cap. American Fire restated its total tax due as $201,285, including the $14,405 retaliatory tax, and claimed a refund of the difference between the amount American Fire originally paid in initial taxes and its restated tax obligation. In both its original and amended returns, American Fire reported that its home state of Ohio would impose taxes amounting to $262,767.

The Director of the Division of Taxation (Director) and the Commissioner of Banking and Insurance (Commissioner) oversee the taxation of insurance companies operating in the State. The Commissioner and the Division of Taxation (Division) conducted a joint audit and thereafter informed American Fire that they could not reduce their tax due below that of their home state basis. It was the Director's view that each statute must be applied independently. Accordingly, after applying the premium tax cap, the Division rejected American Fire's claimed refund and determined that it owed $241,161. The Division also determined that American Fire was responsible for $27,606 in retaliatory taxes.

American Fire filed a complaint with the Tax Court, challenging the Division's interpretation of the premium tax cap and the retaliatory tax. The Tax Court consolidated American Fire's complaint with other related appeals, including those of Pruco and West American. Plaintiffs and the Division moved for summary judgment, challenging the Director's interpretation of the two statutes, alleging that the Director's interpretation is unsupported by the text and purposes of the statutes. One of the insurers also claimed that the Director's interpretation violates their equal protection under the laws and constitutes a de facto rulemaking by an agency that is subject to the rulemaking requirements of the Administrative Procedures Act (APA).

The Tax Court granted the Division's motion for summary judgment, upholding the Director's interpretation of the statutes. All three insurers appealed to the Appellate Division and the matters were consolidated. The Appellate Division reversed the decision of the Tax Court, finding that the Director's interpretation failed to properly give effect to both statutes and that it was unconstitutional under the Equal Protection Clause. The appellate panel did not address the APA claim.

The Supreme Court granted the Director's petition for certification.

HELD: The tax benefits of the premium tax cap afforded to foreign insurers should not be included in calculating the retaliatory tax. Both the retaliatory tax and the premium tax cap must be harmonized to effectuate their respective purposes; therefore, the Court adopts the methodology proposed by the plaintiff/foreign insurers, which preserves the benefit of the premium tax cap and properly furthers the purposes of both statutes.

1. In this appeal the core question is one of statutory interpretation. An appellate tribunal is not bound by the agency's interpretation of a statute or its determination of a strictly legal issue. Because it is based on a strictly legal issue, the Director's interpretation is not binding on this Court. In addition, all rules of statutory construction are relevant and the goal is to harmonize the statutes in light of their purpose. (Pp. 20-23)

2. In looking at the plain language of the statutes, it must be determined whether the premium tax cap statute is part of the "taxes, fees, fines, penalties, licenses, deposit requirements or other obligations.imposed upon insurance companies.doing business in New Jersey" pursuant to the retaliatory tax statute. The Court declines to adopt the Director's plain reading interpretation of the retaliatory tax statute that applies the two statutes independently of one another. That interpretation leads to an unreasonable result that the Legislature could not have intended. (Pp. 23-24)

3. When construing two statutory provisions relating to the same subject matter, the Court must reconcile them so as to give effect to both expressions of the lawmakers' will. In addition, statutes must be construed in a manner that avoids unreasonable results unintended by the Legislature. The proper interpretation of the two statutes must ensure both that the premium tax cap statute encourages insurers to conduct more business in this State and that the retaliatory tax statute operates to promote "even-handed treatment" from sister states in their application of tax laws to New Jersey insurers. The Director's interpretation does not achieve those results. (Pp. 24-26)

4. The Director's interpretation of the premium tax cap provides no incentive for foreign insurers to conduct business in New Jersey because the retaliatory tax fully recaptures any benefit provided by the premium tax cap. The Director's interpretation also fails to promote the retaliatory tax statute's purpose of encouraging "even-handed treatment" of insurers between states. Because the Director uses an effective rate of taxation in calculating retaliatory tax, foreign insurers benefiting from the cap who come from states with a lower tax rate than New Jersey's 2.1% rate would still pay retaliatory tax if New Jersey's effective tax rate is lower than the insurer's home state tax rate. It appears that the Director's approach is not intended to apply pressure to other states to maintain low taxes on New Jersey insurers but rather to generate revenue. (Pp. 26-28)

5. The Court's analysis of the statutes and their respective legislative underpinnings persuades it that the tax benefits of the premium tax cap afforded to foreign insurers should not be included in calculating the retaliatory tax. In reaching that conclusion, the Court reiterates its obligation to harmonize, if possible, different statutory provisions. Therefore, plaintiffs' methodology (fully explained through the use of a hypothetical on pages 11 through 16 of this opinion), which preserves the benefit of the premium tax cap, properly furthers the purpose of both statutes. That interpretation effectuates the intent of the retaliatory tax statute by deterring other states from enacting discriminatory taxes that are above New Jersey's rate of 2.1%. To the extent that a state imposes a higher tax rate, foreign insurers from that state must pay a retaliatory tax based on the rate difference. Moreover, plaintiffs' interpretation furthers the purpose of the premium tax cap statute because the retaliatory tax does not fully recapture the benefits afforded by the cap, thereby, encouraging foreign insurers to conduct more business in New Jersey. (Pp. 28-29)

6. If the Legislature disagrees with the Courts harmonization of the two statutes, it may examine and amend as it finds necessary. (P. 29)

Judgment of the Appellate Division is AFFIRMED on statutory grounds and the matter is REMANDED to the Tax Court for recalculation of refunds due to plaintiffs in accordance with the principles set forth in this opinion.

JUSTICE RIVERA-SOTO, DISSENTING, in which JUSTICES ALBIN and WALLACE join, is of the view that the better and more balanced approach is the one so ably adopted by the Tax Court judge, who held that the history of the two taxes suggest that neither statute should affect the interpretation of the other.

CHIEF JUSTICE PORITZ and JUSTICES LONG, and LaVECCHIA join in JUSTICE ZAZZALI's opinion. JUSTICE RIVERA-SOTO filed a separate dissenting opinion in which JUSTICES ALBIN and WALLACE join.

The opinion of the court was delivered by: Justice Zazzali

Argued November 30, 2005

In this matter, the Court must determine the proper relationship between the State's retaliatory tax statute, N.J.S.A. 17:32-15, 17B:23-5, and its premium tax cap statute, N.J.S.A. 54:18A-6. Plaintiffs, three foreign insurance companies conducting business in New Jersey, challenge the Director of the Division of Taxation's (Director) interpretation of those statutes and allege that the Director's interpretation is unsupported by the text and purposes of the statutes. They also claim that the Director's interpretation violates their right to equal protection under the laws and constitutes a de facto rulemaking by an agency that is subject to the rulemaking requirements of the Administrative Procedure Act (APA), N.J.S.A. 52:14B-1 to -25. The Tax Court found in favor of the Director. On appeal, the Appellate Division reversed, concluding that the Director's interpretation failed to properly give effect to both statutes and that it was unconstitutional under the Equal Protection Clause. We affirm on statutory grounds and hold that the statutes must be harmonized and interpreted as set forth by plaintiffs.

We begin with an identification of the tax statutes at issue and the parties' conflicting positions on the relationship between those statutes. Next, we summarize the factual and procedural history of this appeal. Finally, we determine the proper method for calculating a foreign insurer's retaliatory tax obligation under N.J.S.A. 17:32-15, in circumstances where the premium tax cap statute, N.J.S.A. 54:18A-6, is also applicable.

I.

A.

The New Jersey premium tax, N.J.S.A. 54:18A-1 to -11, requires all domestic and foreign insurance companies conducting business in the State to pay an annual tax "based on net premiums on contracts of insurance covering property and risks ...


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