Atlantic Ins. Co. v. State Bd. of Equalization
| Decision Date | 05 October 1967 |
| Citation | 255 Cal.App.2d 1,62 Cal.Rptr. 784 |
| Court | California Court of Appeals Court of Appeals |
| Parties | ATLANTIC INSURANCE CO. et al., Plaintiffs and Appellants, v. STATE BOARD OF EQUALIZATION of the State of California, Defendant andRespondent. Civ. 23675. |
Bert W. Levit, Victor B. Levit, Long & Levit, San Francisco, for appellants.
Thomas C. Lynch, Atty. Gen., of the State of California, Harold B. Haas, Asst. Atty. Gen., San Francisco, for State Bd. of Equalization.
Plaintiffs, who are 18 Texas fire and casualty insurance companies, appeal from a judgment denying recovery of retaliatory taxes in the aggregate amount of $929,833.42 imposed on them for the years 1959 and 1960. The levy had been made by respondent Board of Equalization, pursuant to Insurance Code section 685 et seq., upon the Board's determination that the insurance tax laws of the State of Texas discriminate against California-based insurance companies and hence, under the California statute, call for a retaliatory levy.
Almost every state imposes some kind of retaliatory tax upon insurance companies domiciled in any other state which does not extend reciprocity of tax treatment to out-of-state insurance companies. (See Pelletier, Insurance Retaliatory Laws (1964) 39 Notre Dame Law. 243, for a survey of these statutes.) The Constitution of California has for many years authorized retaliatory taxation of foreign insurance companies (art. XIII, § 14 4/5, subd. (f)(3)) and legislation providing for such levies has been in effect since 1873. (Stats.1873, ch. 610, § 18.) The common purpose of such legislation in the several states has been to discourage any state from imposing discriminatory taxes or other burdens upon out-of-state companies. The effort seems to have been very largely successful; in any event taxes on insurance premiums have stayed close to 2 per cent in most states, for both domestic and out-of-state insurers. (39 Notre Dame Law., supra, at 247.)
This situation of equilibrium was disturbed when the United States Supreme Court in United States v. South-Eastern Underwriters Assn. (1944) 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440, held that the business of insurance could be the subject of interstate commerce. The decision was believed to invalidate retaliatory taxation (4 Assembly Interim Comm. Reports on Revenue & Taxation 1964) No. 15, p. 59) and the California Legislature the following year repealed 1 Insurance Code sections 1560 and 1561, the implementing legislation which was then in effect. This action was too hasty; Congress the same year enacted the McCarran-Ferguson Act (59 Stat. 33; 15 U.S.C. §§ 1011--1015) returning to the states authority to regulate and tax the insurance industry. (Also see Prudential Ins. Co. v. Benjamin (1946) 328 U.S. 408, 66 S.Ct. 1142, 90 L.Ed. 1342.)
The California constitutional provision authorizing the imposition of retaliatory taxes had remained in effect, but it was not self-executing. Accordingly, in 1959 the Legislature enacted Insurance Code section 685 et seq., imposing retaliatory taxes upon foreign insurance companies whose home states impose taxes on similar California companies that are higher than California's levies upon those states' companies. 2 A troublesome difficulty emerged article 13, section 14 4/5, subdivision (f)(3) of the Constitution at that time authorized retaliatory taxation only when the foreign state imposed upon California insurers burdens exceeding those which it imposed upon its domestic insurers, whereas Insurance Code section 685 purported to require retaliation by California whenever a foreign state charged California companies more than California charged the companies of that state. The type of retaliatory tax contemplated by the California constitutional provision may be termed a Discriminatory tax while the tax imposed by the legislation is of a type known as a Comparative retaliatory tax. In Franklin Life Ins. Co. v. State Board of Equalization (1965) 63 Cal.2d 222, 45 Cal.Rptr. 869, 404 P.2d 477, the Supreme Court held (adopting a position already taken by the Attorney General in 35 Ops.Cal.Atty.Gen. 182) that although the new statute would be unconstitutional if applied to a case where the discrimination contemplated by article XIII, section 14 4/5, subdivision (f)(3), is not present, no constitutional defect exists in any case which meets both the discriminatory test of the constitutional provision and the comparative test of Insurance Code section 685. (63 Cal.2d 222, 227, 45 Cal.Rptr. 869, 404 P.2d 477.)
By an amendment adopted November 3, 1964, Constitution article XIII, section 14 4/5, subdivision (f)(3), was made to conform to the 'comparative' test of Insurance Code section 685. Thus the Franklin Life problem will not be seen in future cases. However, during the years 1959 and 1960 which we are concerned with in the present appeal, the Franklin Life approach was still required. We must therefore rule upon appellants' attack on the trial court's determinations that Texas law discriminates against California insurers doing business in Texas and that the burdens placed by Texas upon California insurers doing business in Texas are greater than the burdens placed by California upon Texas insurers doing business in California. Appellants also contend that the California statute violates the commerce and equal protection clauses of the U.S. Constitution and that in any event the tax imposed in this case was erroneously computed.
The facts are not disputed; the parties cooperated in submitting to the trial court detailed stipulations which incorporated extensive documentary exhibits. These stipulations were adopted by the court in its findings of fact.
California's gross premiums tax rate is 2.35 per cent. (Cal.Const., art. XIII, § 14 4/5, subd. (d).) Texas imposes a tax of 3.85 per cent on the gross premiums of all fire and casualty insurers from policies written on property or risks located in Texas. (Tex.Rev.Civ.Stat., art. 7064.) But the rate may be reduced to as little as 1.1 per cent depending on the company's rate of investment in Texas securities, as defined in the statute. The company is to determine the amount it has invested in the state in which it has the highest percentage of its admitted assets invested. Then it calculates the relationship, as a percentage, between the value of its Texas securities and the amount invested in securities of the state of its highest investment. That percentage determines the rate of the company's gross premium tax according to the following scale:
For example, assume that a California insurer has $100,000 invested in California, $75,000 in Oregon, and $80,000 in Texas. Its highest percentage of investment is in California. Therefore, it calculates that its Texas securities are 80 per cent of its securities in the state of highest investment. The Texas tax rate is then 2.75 per cent. That comparatively unfavorable rate would be applied even if a disproportionately smaller share of the insurer's premium revenue came from Texas business.
The evidence established that Texas investments of the type considered good and prudent investments for California fire and casualty companies were available at all times since 1957. Texas municipal bonds, for instance, are widely held by Texas and non-Texas insurers.
Evidence was received showing the actual effect of the statutory scheme in the year 1960 for premiums earned in 1959. All insurers domiciled in Texas paid at the minimum rate of 1.1 per cent. Only 26 of the 458 foreign insurers which did business in Texas paid at the 1.1 per cent rate and a total of only 39 paid at any rate below the maximum. Only 9 per cent of all California insurers doing business in Texas in the years 1959 and 1960 qualified for any rate below the maximum. Upon this evidence the trial court concluded, adopting the view expressed earlier by the Attorney General (39 Ops.Cal.Atty.Gen., 98), that California insurers doing business in Texas were subjected to both discrimination and comparative disadvantage and that a retaliatory levy was called for by Insurance Code section 685.
Appellants contend that the Texas statute is not discriminatory because the scale of gross premium tax rates merely compensates for state and federal taxes paid on Texas investments. It is argued that all insurers therefore pay the equivalent of the maximum rate and that if Texas did not attempt so to equalize tax burdens there would be a greater burden placed upon insurers owning Texas securities. Consistent with this theory, a Texas court has held for purposes of applying the Texas retaliatory statute that the normal Texas rate must be calculated at the maximum provided in the schedule because payment at the lower rates plus taxes on Texas investments equals payment at the maximum rate. (Board of Insurance Com'rs v. Prudential Fire Ins. Co. (Ct.Civ.Apls. of Texas, 1942) 167 S.W.2d 578, 579.) But the Texas courts have recognized that the purpose of the statute is to provide a market for securities issued by Texas governmental entities. (Ibid; Kansas City Title Ins. Co. v. Butler (Ct.Civ.Apls. of Texas, 1952) 253 S.W.2d 318, 320, 321.) No evidence was presented in the present case of any actual relationship between the gross premiums rate schedule and other taxes levied upon the holders of Texas securities.
The evidence reviewed above demonstrates the discriminatory effect of the Texas statute. The...
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