National Ass'n of Independent Insurers v. State

Decision Date27 December 1994
Citation620 N.Y.S.2d 448,207 A.D.2d 191
PartiesNATIONAL ASSOCIATION OF INDEPENDENT INSURERS, et al., Respondents, v. STATE of New York, et al., Appellants.
CourtNew York Supreme Court — Appellate Division

G. Oliver Koppell, Atty. Gen., New York City (Frederic L. Lieberman, Rosalie Hronsky, and August L. Fietkau, of counsel), for appellants.

Stroock & Stroock & Lavan, New York City (Alvin K. Hellerstein, Martin Minkowitz, Edward P. Grosz, Mark Cheffo, and Amanda Shechter, of counsel, Howard Horowitz, on the brief), for respondents.

Before BRACKEN, J.P., and O'BRIEN, RITTER and PIZZUTO, JJ.

O'BRIEN, Justice.

This appeal concerns a challenge to the constitutionality of Tax Law § 341 (hereinafter the statute), which changes the manner in which motor vehicle damage insurance awards are paid. The Supreme Court granted a preliminary injunction staying implementation of the statute based on a determination, inter alia, that its provisions would result in the double taxation of insurance claimants. We find that the claims regarding double taxation, when subjected to scrutiny, are largely speculative and do not overcome the strong presumption of constitutionality that attaches to a tax statute. After consideration of the plaintiffs' remaining challenges to the statute, we conclude that the defendants are entitled to summary judgment and a declaration that the statute is constitutional.

I. The Statute

With the enactment of Tax Law article 15 ( § 341 [L.1991, ch. 166]), entitled "Tax on Transfer of Certain Insurance Awards", an insurance carrier that issues an award for damage to or theft of a motor vehicle is required to calculate the "tax component" of the award and to remit that amount to the State Commissioner of Taxation and Finance (hereinafter the Commissioner) (Tax Law § 341[b], [c][1]. The "tax component" is defined as the amount equal to the state and local sales and use taxes which the claimant would be required to pay if the claimant used the entire amount of the damage award to purchase taxable property or services (Tax Law § 341[a][2]. It is calculated based on the higher of the sales tax rate of the locale where the claimant resides or where the vehicle is to be repaired (Tax Law § 341[a][2][A]. Section 341 of the Tax Law changed the former practice of the insurance carriers, dictated by prior Insurance Department regulations and their own contracts, by which they were required to send an amount equal to the sales tax on the damage award directly to the claimant. Rather than receiving the sales tax in cash, the claimant is now to receive a credit voucher from the insurance carrier indicating the amount of the tax component which may then be used in lieu of paying sales tax if the vehicle is repaired or replaced within a year (Tax Law § 341[d][1], [2]. The statute, however, does not require a motor vehicle repair shop or dealer to accept the voucher (Tax Law § 341[d][2]; Tax Law § 1132[j], and this alleged deficiency in the statute lies at the heart of the controversy.

Under certain circumstances, the tax component is not deducted from the damage award or, if initially deducted, may be refunded to the claimant. The tax component is not deducted from the damage award when the claimant is a non-New York resident and does not have the vehicle repaired or replaced in New York (Tax Law § 341[c][2] or when the claimant repairs or replaces the vehicle before the carrier issues the damage award (Tax Law § 341[c][3]. A claimant is entitled to a refund of the tax component from the Commissioner if the vehicle is repaired or replaced in another state and sales tax is paid in that state (Tax Law § 341[e][1] or if the claimant certifies to the Commissioner that the vehicle will not be repaired or replaced within one year (Tax Law § 341[e][2].

All carriers which issue motor vehicle damage or theft insurance must register as sales tax vendors (Tax Law § 341[f][1], and the provisions of Tax Law article 28 (sales and use taxes) apply to Tax Law article 15 to the extent that they are not inconsistent (Tax Law § 341[f][2]. Carriers are required to produce credit vouchers according to specifications issued by the Commissioner (Tax Law § 341[d], to keep and maintain records, and to file returns in the form required by the Commissioner (Tax Law § 341[f][3], [4]. In order to implement the statute and its record-keeping provisions, the Commissioner issued emergency regulations pursuant to the State Administrative Procedure Act § 202(6). Those regulations subsequently expired (see, 20 NYCRR Part 750). In addition, the Commissioner issued Publication 82 (credit voucher specifications) which included a sample form for the credit voucher and printing and security requirements.

II. Preliminary Proceedings

The plaintiffs, 13 insurance carriers authorized to do business in New York and their trade association, commenced this action in 1991 against the State and the State Department of Taxation and Finance (hereinafter collectively the State) for a declaration that the statute is unconstitutional and for an injunction to prevent its implementation. More specifically, the plaintiffs contended that the statute interfered with their contractual rights vis-a-vis their insureds, effected a taking of private property for a public purpose, and violated the due process rights of claimants. In addition, they contended that the credit voucher specifications issued by the State (Publication 82) were promulgated in violation of the State Administrative Procedure Act.

The plaintiffs were granted a temporary injunction enjoining the State from implementing the statute pending determination of their motion for a preliminary injunction. The State cross-moved for summary judgment dismissing the complaint and for a declaration that the statute is constitutional and that the credit voucher specifications are valid. Upon consideration of the parties' respective motions, the Supreme Court rejected the majority of the plaintiffs' challenges to the statute's constitutionality. However, it determined that they were entitled to a preliminary injunction on the ground that the statute resulted in the impermissible double taxation of claimants and in the overpayment of taxes by carriers on behalf of claimants without the possibility of a refund.

In support of its determination that the statute resulted in double taxation, the Supreme Court concluded that since the statute did not require vendors to accept the credit vouchers, a claimant who used such a vendor would then have to pay the sales tax, even though the tax had already been remitted to the Commissioner by the carrier. Relying on the rule that the legislative intent to impose double taxation must be clear and will not be presumed (see, Sage Realty Corp. v. O'Cleireacain, 85 A.D.2d 188, 586 N.Y.S.2d 118; Socony-Vacuum Oil Co. v. City of New York, 247 App.Div. 163, 287 N.Y.S. 288, affd. 272 N.Y. 668, 5 N.E.2d 385), and finding no clear intent here, the Supreme Court concluded that such double taxation was unlawful. Moreover, the court noted that the refund provisions in the statute did not specifically apply to circumstances where a vendor refused to accept the voucher and further concluded that the general refund provision in Tax Law § 1139(a) would not apply. In view of the absence of a refund mechanism, the court found that the plaintiffs were likely to succeed on their claim that the statute violated substantive due process.

The Supreme Court also agreed with the plaintiffs' related argument that the statute would result in the excess payment of sales taxes by the carriers without the possibility of a refund. Because the statute requires the carrier, when remitting the tax component to the Commissioner, to calculate that amount based on the higher of the sales tax in the locale where the claimant resides or where the vehicle is to be repaired, the carriers might in some cases remit to the Commissioner a greater amount of tax than they would have been required to pay to the claimant for the actual repair.

Finally, the Supreme Court concluded that the credit voucher specifications were promulgated in violation of the State Administrative Procedure Act and were therefore invalid. The State was enjoined from implementing or enforcing the provisions of the statute, its regulations and specifications, and the State's cross motion for summary judgment was denied.

III. Standing

Preliminarily, before reaching the merits of the plaintiffs' contentions, we note that the State argued in its cross-motion papers that the plaintiffs did not have standing to raise contentions on behalf of claimants who are not parties to this action. We find that the State waived this argument by failing to raise it in its answer or in a pre-answer motion to dismiss (see, Dougherty v. City of Rye, 63 N.Y.2d 989, 483 N.Y.S.2d 999, 473 N.E.2d 249; Matter of Prudco Realty Corp. v. Palermo, 60 N.Y.2d 656, 467 N.Y.S.2d 830, 455 N.E.2d 483; CPLR 3211[e]. In any event, the plaintiffs, as collectors of the tax and as the parties allegedly faced with overpayments, have a sufficient cognizable stake in the outcome of the action to contest the constitutionality of the statute (see, Society of Plastics Indus. v. County of Suffolk, 77 N.Y.2d 761, 570 N.Y.S.2d 778, 573 N.E.2d 1034; see also, Matter of Roosevelt Raceway v. County of Nassau, 18 N.Y.2d 30, 41, 271 N.Y.S.2d 662, 218 N.E.2d 539, appeal dismissed 385 U.S. 453, 87 S.Ct. 614, 17 L.Ed.2d 510).

IV. Double Taxation/Overpayments

In reaching its conclusion that the statute results in double taxation and overpayments, the Supreme Court adopted the plaintiffs' view that the statute provided, in effect, for the prepayment of the sales tax. The State does not, however, concede this point. Rather, the parties have a fundamental disagreement as to the nature of the tax imposed by the statute which, if resolved in the State's favor, would eliminate any need to...

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