Metropolitan Life Ins. Co. v. Kinsman

Decision Date26 March 2008
Docket NumberNo. 24704.,24704.
Citation747 N.W.2d 653,2008 SD 24
PartiesMETROPOLITAN LIFE INSURANCE COMPANY; Metropolitan Insurance and Annuity Company; New England Life Insurance Company; Metlife Investors USA Insurance Company; General American Life Insurance Company; Paragon Life Insurance Company; Metlife Investors Insurance Company; Metropolitan Property and Casualty Insurance Company; Metropolitan Group Property and Casualty Insurance Company; Economy Premier Assurance Company; Metropolitan Tower Life Insurance Company; and Metropolitan Direct Property and Casualty Insurance Company, Plaintiffs and Appellees, v. Paul KINSMAN, Secretary, South Dakota Department of Revenue; Merle Scheiber, Director, Division of Insurance; and the State of South Dakota, Defendants and Appellants.
CourtSouth Dakota Supreme Court

Ronald G. Schmidt of Schmidt, Schroyer, Moreno, Lee & Bachand, Rapid City, South Dakota, Attorneys for plaintiffs and appellees.

Timothy M. Gebhart, Eric R. Johnson of Davenport, Evans, Hurwitz and Smith, Sioux Falls, South Dakota, Attorneys for defendants and appellants.

KONENKAMP, Justice.

[¶ 1.] An out-of-state insurance company brought suit against South Dakota asserting that its taxing method in SDCL Chapter 10-44 unconstitutionally favors domestic insurers. According to the company, from 1970 to the present, the State imposed a higher tax on foreign insurers solely because they are nonresidents. In light of a United States Supreme Court decision prohibiting discrimination based on residence alone, the insurance company sought relief. After a trial to the circuit court, SDCL 10-44-2 and SDCL 10-44-4 through SDCL 10-44-6 were declared unconstitutional from 1970 to the present. The State appeals, and we reverse.

Background

[¶ 2.] Metropolitan Life Insurance Company, et al. (MetLife) brought suit against the Secretary of the South Dakota Department of Revenue and Regulation, the Director of the South Dakota Division of Insurance, and the State of South Dakota (collectively the State or South Dakota), asserting that the State's tax structure on insurance premiums and annuity considerations has been and is unconstitutional. According to MetLife, from 1970 to the present, SDCL 10-44-2 and SDCL 10-44-4 through SDCL 10-44-6 violate the equal protection clause of the United States and South Dakota constitutions.

[¶ 3.] In 1981, MetLife filed an administrative claim for a refund of its premium taxes paid. The claim was denied because of MetLife's failure to comply with certain statutory requirements. The parties agreed to stay all appeals while the United States Supreme Court considered the constitutionality of state insurance tax structures. The Supreme Court answered the question in 1982, but the parties continued to agree to stay all appeals. Ultimately, in 2004, on appeal to the circuit court, MetLife's administrative claim was consolidated with its constitutional challenge. The State and MetLife stipulated that the circuit court should only consider whether South Dakota's insurance premium and annuity tax structure violated the equal protection clause in the constitutions of the United States and South Dakota. After a trial to the court in 2007, findings of fact and conclusions of law and a judgment were entered declaring SDCL 10-44-2, and SDCL 10-44-4 through SDCL 10-44-6 unconstitutional from 1970 to the present. The court also awarded disbursements to MetLife of $8,871.62. The State appeals asserting that the premium and annuity tax structure is and has always been constitutional and that the court abused its discretion when it imposed certain costs against the State.1

Analysis and Decision

[¶ 4.] A tax has been imposed on insurance company business here since before statehood. See Cutting v. Taylor, 3 S.D. 11, 51 N.W. 949 (1892) (discussing the Territory's tax on insurance companies). To facilitate its tax scheme, South Dakota, like many other states, places insurance companies into one of three classifications: domestic, foreign, and those not licensed to do in-state business. See SDCL 10-44-2 (2007). A domestic insurance company is "any company organized under the laws of South Dakota[.]" SDCL 10-44-1(3) (2007). A foreign company is one organized under the laws of a different jurisdiction. Id. (4). Unlicensed companies include those not licensed in South Dakota, as well as those not authorized to do business here. See SDCL 10-44-2(3).

[¶ 5.] Until 1982, the State taxed each classification at a different rate. SDCL 10-44-2 (1981). In the 1980s, however, the United States Supreme Court began to scrutinize disparate tax treatment of insurance companies. See Western & Southern Life Ins. Co. v. State Bd. of Equalization, 451 U.S. 648, 101 S.Ct. 2070, 68 L.Ed.2d 514 (1981) (upholding a state's retaliatory tax against foreign insurance companies because it was rationally related to a legitimate state interest); Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 105 S.Ct. 1676, 84 L.Ed.2d 751 (1985) (invalidating a tax that discriminated against a foreign insurer based on its residence). In 1982, South Dakota amended its tax structure and imposed an identical tax on all insurers, regardless of their classification. See SDCL 10-44-2 (2007).

[¶ 6.] Nevertheless, MetLife argues that South Dakota's tax structure from 1970 to the present continues to violate the United States and South Dakota constitutions. It contends that the tax structure discriminates against foreign insurers based on residence, similar to the scheme invalidated in Ward. Because South Dakota substantially revised its insurance tax statutes in 1982, we divide the issues in this appeal into: Tax Structure from 1970-1981; Tax Structure from 1982-Present.

1. Tax Structure from 1970-1981

[¶ 7.] From 1970 to 1981, South Dakota taxed insurance companies at different rates depending on the classification of the company and the type of insurance transaction.2 SDCL 10-44-2 (1981). The following table shows the tax rates for each classification from 1970-1981:3

                ---------------------------------------------------------------------------
                                          1970-1978 1979-1981
                ---------------------------------------------------------------------------
                   Domestic     0.5% (Premiums)                0.75% (Premiums)
                                0.5% (Annuity Consideration)   0.5% (Ann. Cons.)
                ---------------------------------------------------------------------------
                   Foreign      2.5% (Premiums)                2.5% (Premiums)
                                1.25% (Ann. Cons.)             1.25% (Ann. Cons.)
                ---------------------------------------------------------------------------
                   Unlicensed   1.5% the Foreign rate or 4%,   1.5% the Foreign rate or 4%
                                whichever is higher            whichever is higher
                ---------------------------------------------------------------------------
                

Id. Also during the same time, a foreign insurer was offered a credit on its tax obligation if it "owns and substantially occupies any building in this state as a regional home office. . . ."4 SDCL 10-44-4 (1981). The available credit was a maximum of fifty percent of the tax levied and a deduction for all ad valorem taxes paid on the building and adjacent land and any taxes paid for property used in the operation and maintenance of the regional home office.5 Id.

[¶ 8.] On February 26, 1981, the South Dakota Division of Insurance received from MetLife a claim for refund of all premium taxes paid for the years 1970 through 1979. It later made a similar claim for taxes paid in 1980. In March 1982, the Director of Insurance ruled on these claims. He concluded that the tax was constitutional, and, in addition, he ruled that Met Life's claims for taxes paid from 1970 through 1980 were barred by its failure to comply with SDCL 10-27-2 and SDCL Chapter 10-55. By stipulation, no appeals were taken until this present action.

[¶ 9.] Notwithstanding the stipulation to stay all appeals, the record is not clear why MetLife's refund claims for an alleged discriminatory tax beginning in 1970 have been left in suspense for so long, especially after 1985, when the Supreme Court struck down taxing arrangements of the type MetLife here complains. Now we are asked, some twenty-six years after SDCL 10-44-2 (1981) was repealed, to rule on its constitutionality. Deciding the constitutionality of a legislative enactment is a solemn and momentous occasion. We do not approach such tasks lightly; nor do we engage these questions as a matter of first resort. Indeed, we refrain from hasty ventures into constitutional analysis until after any preliminary obstacles have been surmounted and judgment is unavoidable.

[¶ 10.] That the parties have stipulated that we treat the constitutional challenge first in no way obviates our duty to refrain from premature decision making.6 We do not answer hypothetical questions or dispense advisory opinions. Boever v. South Dakota Bd. of Accountancy, 526 N.W.2d 747, 750 (S.D.1995). If MetLife fails to overcome all preliminary issues yet to be decided by the circuit court, its constitutional challenge may never come before us. Justiciability — the conception that an actual and substantial controversy must be at hand before a decision can be rendered — cannot be conferred by stipulation or consent of the parties. Danforth v. City of Yankton, 71 S.D. 406, 412, 25 N.W.2d 50, 53 (1946). In our tripartite form of government, where legislative enactments are entitled to every presumption of legitimacy, erosion of our system of separation of powers might result from the indiscriminate passing on the constitutionality of those enactments through anticipatory opinions. Thus, we conclude that the constitutionality of the former 1970-1981 statutes is not properly before us, and we decline to decide the question until such time as the matter is fully justiciable.

2. Tax Structure from 1982-Present

[¶ 11.] In 1982, the...

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