Illinois Commercial Men's Assn. v. State Bd. of Equalization

• Citation: 671 P.2d 349,34 Cal.3d 839,196 Cal.Rptr. 198
• Decision Date: 31 October 1983
• Docket Number: S.F. 24557
• Parties: , 671 P.2d 349 ILLINOIS COMMERCIAL MEN'S ASSOCIATION, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent. NATIONAL LIBERTY LIFE INSURANCE COMPANY, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.
• Court: California Supreme Court

Page 198

196 Cal.Rptr. 198

34 Cal.3d 839, 671 P.2d 349

ILLINOIS COMMERCIAL MEN'S ASSOCIATION, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

NATIONAL LIBERTY LIFE INSURANCE COMPANY, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

S.F. 24557.

Supreme Court of California.

Oct. 31, 1983.

John R. Maloney, Peter W. Fisher, Mark O. Rorem, Maloney, Chase, Fisher & Hurst, Franklin C. Latcham, Prentiss Willson, Jr., Anne C. Bloomdahl and Morrison & Foerster, San Francisco, for plaintiff and appellant.

John K. Van de Kamp and George Deukmejian, Attys. Gen., and Timothy G. Laddish, Deputy Atty. Gen., for defendant and respondent.

MOSK, Justice.

We are asked to determine whether California may impose a tax on gross premiums collected by foreign insurers who solicit business in California by mail from outside the state, and who utilize independent contractors in California to perform functions incident to the acceptance of applications and the administration of claims. The significant element in making this determination is whether the contacts between the insurers and the state justify imposition of the tax under the due process clause of the Fourteenth Amendment to the United States Constitution.

Plaintiffs, Illinois Commercial Men's Association (IC) and National Liberty Life Insurance Company (NL) are organized in other states and each has its principal place of business in the state in which it is incorporated. Both companies sold accident health, and life insurance policies in California by advertising in national publications and by direct mail solicitation of prospective customers. NL advertised in local publications as well. Neither plaintiff owned or leased property in California or employed agents or representatives to solicit business in this state. However, independent contractors acting on their behalf did perform certain acts in California in connection with the administration of claims and other matters. These activities will be described in detail below.

In 1965, the State of California for the first time made the assertion that unlicensed foreign insurers were subject to regulation by the state. NL obtained a certificate and license from the Department of Insurance (department) in August 1968. IC has never sought a license or certificate from the department, and has ceased to solicit business in California.

In May 1968, the department notified plaintiffs of its intention to assert their liability for the payment of a gross premium tax for the years 1963 through 1967, pursuant to article XIII, section 14-4/5 of the California Constitution (now § 28), and Revenue and Taxation Code section 12201. These measures impose an annual tax on insurers "doing business in this state." Prior to this time, the state had not attempted to assess against plaintiffs a tax attributable to premiums received for direct mail insurance sold to California residents. The State Board of Equalization (board) assessed gross premium taxes of $23,504.54 against IC for the years 1963 through 1967, and $47,747.50 against NL for the years 1963 through 1965. Plaintiffs paid the tax and filed claims for refund pursuant to sections 12978 and 12979 of the Revenue and Taxation Code. ¹ The claims were denied, and these actions against the board seeking refunds followed. The trial court found in the board's favor, holding that the tax was justified in part on the ground that plaintiffs received a benefit from California by virtue of health and police services provided to their insureds. These services promoted the well-being of the insureds, reasoned the trial court, thereby improving "the odds on which the plaintiff insurers are gambling" by their issuance of policies to California residents. Plaintiffs appeal from the ensuing judgment. ²

The United States Supreme Court has considered the circumstances under which a state may, within the limits of the due process clause, impose a tax on a foreign corporation that conducts its business by mail from outside the taxing state. Generally speaking, the taxing state must have a substantial interest in the transactions in order to justify imposition of the tax. This interest is measured by the extent and nature of the contacts between the state and the foreign corporation (such as the presence of agents of the corporation within the state), and the benefits conferred on the corporation by the state. (National Bellas Hess v. Dept. of Revenue (1967) 386 U.S. 753, 756, 87 S.Ct. 1389, 1391, 18 L.Ed.2d 505 (hereafter National Bellas ).) Plaintiffs vigorously contend that they have insufficient contacts with California and derive no benefits from this state to justify imposition of the tax.

Before discussing in detail the standards which allow a state to tax a foreign corporation and their application to the conduct of plaintiffs' business in California, we consider the board's claim that two cases, one decided by this court and one by the United States Supreme Court, have settled the question at issue. The board asserts that People v. United National Life Insurance Company (1967) 66 Cal.2d 577, 58 Cal.Rptr. 599, 427 P.2d 199 (hereafter United National ) determined that mail order insurers may constitutionally be regulated by California, and that Connecticut General Life Insurance Company v. Johnson (1938) 303 U.S. 77, 58 S.Ct. 436, 82 L.Ed. 673, held a state which has the power to regulate a foreign insurer also has the power to tax it. Thus, the board maintains, it is unnecessary to assess anew the character of plaintiffs' contacts with California to uphold imposition of the tax.

In United National, after an exhaustive discussion of the history of state regulation and taxation of foreign insurers under the due process and the commerce clauses, we held unanimously that three mail order insurers (one of them NL), which solicited and negotiated insurance transactions with California residents exclusively by mail from offices located outside the state, could constitutionally be regulated by California. ³

The board insists that this holding applies not only to state regulation of foreign insurers, but also to taxation of such entities. Plaintiffs claim, on the other hand, that contacts between a state and a foreign insurer which would justify regulation or the service of process would not be sufficient to warrant taxation (citing Jeter v. Austin Trailer Equipment Co. (1953) 122 Cal.App.2d 376, 381, 265 P.2d 130; Aldens, Inc. v. La Follette (7th Cir.1977) 552 F.2d 745, 751, fn. 12), and that a foreign corporation may not be taxed by the state unless the state has conferred some benefits on the corporation and the corporation is present in the state.

The board counters with the United States Supreme Court's opinion in Connecticut General Life Insurance Company v. Johnson, supra, 303 U.S. 77, 58 S.Ct. 436, 82 L.Ed. 673, which, it claims, holds that the power to regulate and tax are congruent. That decision held invalid a California tax on premiums paid pursuant to reinsurance contracts entered into in Connecticut between a Connecticut insurer licensed to do business in California and other insurers also licensed here. However, since no act in the formation, performance or discharge of the contracts occurred in this state, and the contracts did not depend on any privilege or protection granted by the state, imposition of the tax was held to violate due process. In the course of its opinion, the court declared, "As a matter of convenience and certainty, and to secure a practically just operation of the constitutional prohibition, we look to the state power to control the objects of the tax as marking the boundaries of the power to lay it. Hence it is that a state which controls the property and activities within its boundaries of a foreign corporation admitted to do business there may tax them." (At p. 80, 58 S.Ct. at p. 438.) ⁴ Plaintiffs challenge the board's interpretation of this language; they assert that the statement means only that a state which may not regulate a foreign corporation does not have the power to tax it.

We confess some doubt as to the meaning of the language quoted, but we cannot accept the correctness of the board's claim that the power to regulate a foreign insurer is always determinative of the power to tax it. The United States Supreme Court has applied substantially the same test to determine the validity under the due process clause of a tax on a foreign corporation both before and after its decision in Connecticut General. The relationship between the state and the insurer has been examined to determine whether there is " 'some definite link, some minimum connection, between a state and the person, property or transaction [the state] seeks to tax' " and whether the state has " 'given anything for which it can ask return.' " (National Bellas, 386 U.S. 753, at p. 756, 87 S.Ct. 1389, at p. 1391, 18 L.Ed.2d 505.)

Although the formulation of the test has varied to some degree, its substance has remained essentially the same in numerous decisions of the high court. (E.g., Moorman Mfg. Co. v. Bair (1978) 437 U.S. 267, 273, 98 S.Ct. 2340, 2344, 57 L.Ed.2d 197 [tax unjustified "unless there is some minimal connection" between the activities of the interstate business and the taxing state]; Standard Steel Co. v. Wash. Revenue Dept. (1975) 419 U.S. 560, 562, 95 S.Ct. 706, 708, 42 L.Ed.2d 719 [" 'whether the state has given anything for which it can ask return' "]; Scripto v. Carson (1960) 362 U.S. 207, 211-212, 80 S.Ct. 619, 621-622, 4 L.Ed.2d 660 ["the test is simply the nature and extent of the activities of the appellant in Florida"]; Wisconsin v. J.C. Penney Co. (1940) 311 U.S. 435, 444, 61 S.Ct. 246, 249, 85 L.Ed. 267 [the question is whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits afforded by the state].) In the insurance...