Penn Mut. Life Ins. Co. v. Department of Licensing and Regulation, Docket No. 90490

• Decision Date: 30 October 1987
• Docket Number: Docket No. 90490
• Citation: 412 N.W.2d 668,162 Mich.App. 123
• Court: Court of Appeal of Michigan — District of US
• Parties: PENN MUTUAL LIFE INSURANCE COMPANY, Prudential General Insurance Company, Mutual Life Insurance Company of New York, Metropolitan Property and Liability Insurance Company, Prudential Property and Casualty Insurance Company, Prudential Insurance Company of America, North River Insurance Company, New York Life Insurance Company, Westchester Fire Insurance Company, United States Fire Insurance Company, Metropolitan Life Insurance Company, Industrial Indemnity Company, International Indemnity Company, International Insurance Company, John Hancock Mutual Life Insurance Company, and Equitable Assurance Society of the United States, Plaintiffs-Appellees, v. DEPARTMENT OF LICENSING AND REGULATION of the State of Michigan, Defendant- Appellant. 162 Mich.App. 123, 412 N.W.2d 668

Page 668

412 N.W.2d 668

PENN MUTUAL LIFE INSURANCE COMPANY, Prudential General Insurance Company, Mutual Life Insurance Company of New York, Metropolitan Property and Liability Insurance Company Prudential Property and Casualty Insurance Company Prudential Insurance Company of America, North River Insurance Company, New York Life Insurance Company Westchester Fire Insurance Company, United States Fire Insurance Company, Metropolitan Life Insurance Company Industrial Indemnity Company, International Indemnity Company, International Insurance Company, John Hancock Mutual Life Insurance Company, and Equitable Assurance Society of the United States, Plaintiffs-Appellees, v. DEPARTMENT OF LICENSING AND REGULATION of the State of Michigan, Defendant- Appellant.

Docket No. 90490.

162 Mich.App. 123, 412 N.W.2d 668

Court of Appeals of Michigan.

Submitted April 16, 1987.

Decided Aug. 3, 1987.

Released for Publication Oct. 1, 1987.

Leave to Appeal Denied Oct. 30, 1987.

[162 MICHAPP 124] Miller, Canfield, Paddock & Stone by Carl H. von Ende, Kevin J. Lesinski, and Lynn Stevens Naoum, Bloomfield Hills, for plaintiffs-appellees.

Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., and Harry G. Iwasko, Jr., and William A. Chenoweth, Asst. Attys. Gen., for defendant-appellant.

Before CYNAR, P.J., and SHEPHERD and JASPER, ^* JJ.

CYNAR, Presiding Judge.

This case involves the consolidated claims of foreign insurance companies doing business in Michigan to recover premium taxes paid under Sec. 440 of the Insurance Code of 1956, M.C.L. Sec. 500.100 et seq.; M.S.A. Sec. 24.1100 et seq. Defendant appeals by leave granted from a Court of Claims denial of its motion for summary disposition under MCR 2.116(C)(4) and (8), premised on sovereign immunity. This Court directed the parties to brief the following issues: (1) sovereign immunity and (2) the constitutionality of Sec. 440 of the Insurance Code. The Supreme Court denied defendant's bypass application for leave to appeal.

Between February 28, 1983, and March 29, 1985, fifteen foreign insurers (plaintiffs) filed fifty-nine complaints in the Court of Claims to recover premium tax payments totaling about $147,000,000 for various tax years between 1965 and 1982.

[162 MICHAPP 125] Premium taxes are imposed upon the business written or renewed by the foreign insurer in this state. Payment of the tax is a condition precedent to the privilege of doing business here. Depending on the type of insurance sold, the tax amount is two percent or three percent of gross premium collections. M.C.L. Sec. 500.440; M.S.A. Sec. 24.1440; M.C.L. Sec. 500.441; M.S.A. Sec. 24.1441.

By comparison, domestic insurers presently pay a single business tax pursuant to the Single Business Tax Act (SBTA), M.C.L. Sec. 208.1 et seq.; M.S.A. Sec. 7.558(1) et seq. The vast majority of the tax years in dispute cover the periods subsequent to the enactment of the SBTA, which became effective on January 1, 1976. The single business tax is imposed on the "privilege of doing business and not upon income." M.C.L. Sec. 208.31(4); M.S.A. Sec. 7.558(31)(4). The tax base of a domestic insurer is the sum of business income and certain adjustments contained in Sec. 9 of the SBTA. M.C.L. Sec. 208.22; M.S.A. Sec. 7.558(22) and M.C.L. Sec. 208.9; M.S.A. Sec. 7.558(9). The tax rate is 2.35 percent of the adjusted tax base, which is allocated or apportioned to this state. M.C.L. Sec. 208.31(1); M.S.A. Sec. 7.558(31)(1).

Plaintiffs alleged in their separate complaints that the effect of these two distinct tax systems was to impose a greater tax burden on foreign insurers. Relying on Western & Southern Life Ins Co v. State Bd of Equalization of California, 451 U.S. 648, 101 S.Ct. 2070, 68 L.Ed.2d 514 (1981), plaintiffs asserted that the premium tax is unconstitutional because it violates the equal protection clause of the United States Constitution, Am. XIV, and the Michigan Const.1963, art. 1, Sec. 2. Plaintiffs' requests to obtain premium tax refunds were denied by the Insurance Bureau in standard form letters.

Defendant's affirmative defenses to the complaints[162 MICHAPP 126] included the following three defenses: (1) even if the premium tax was unconstitutional, any judicial decision involving the tax should be applied prospectively; (2) plaintiffs' claims are barred by the statute of limitations; and (3) even if the premium tax is invalid, any refunds should be reduced by the retaliatory tax imposed on foreign insurers, M.C.L. Sec. 500.476; M.S.A. Sec. 24.1476, or the amount of tax which plaintiffs would have been subject to had they been taxed as domestic insurers.

Plaintiffs' fifty-nine complaints were consolidated in separate Court of Claims orders, pursuant to the parties' stipulations. On October 8, 1985, defendant filed a motion for summary disposition under MCR 2.116, contending that (1) the Court of Claims lacked subject matter jurisdiction because the defendant had not waived sovereign immunity from suit and (2) the complaints failed to state a claim because defendant had not waived sovereign immunity from liability. In an opinion and order dated January 16, 1986, the Court of Claims found that it had jurisdiction and that plaintiffs had stated a claim by characterizing their claims as contractual in nature. Defendant's motion for summary disposition was denied. This Court granted defendant's application for leave to appeal. On May 28, 1986, the Court of Claims ordered that fifty-nine additional complaints filed by plaintiffs and other foreign insurers be consolidated, subject to the court's order staying the proceedings pending this appeal.

In October 1986, the Court of Claims ordered that three additional complaints be consolidated in this action, bringing the number of parties plaintiff and complaints to forty-two and 121, respectively. According to defendant's "first amended Exhibit A," filed November 19, 1986, with this [162 MICHAPP 127] Court, forty-two plaintiffs have now filed 123 complaints, requesting premium tax refunds of $255,497,647.82, plus interest and attorney fees.

This Court sua sponte directed the parties to brief the constitutionality of the statutory premium tax. In its appellate brief the state concedes that because of the premium tax imposed, those coming within the definition of a foreign insurer have a greater tax burden than those taxed under the SBTA. The issue, then, is whether the admittedly discriminatory tax treatment of foreign insurers violates equal protection.

The presumption of a statute's constitutionality is especially strong where tax legislation is concerned. Kostyu v. Dep't of Treasury, 147 Mich.App. 89, 93, 382 N.W.2d 739 (1985). The party challenging the tax classification must negate every conceivable basis which might support it. American Amusement Co, Inc. v. Dep't of Treasury, 91 Mich.App. 573, 578, 283 N.W.2d 803 (1979), lv. den. 407 Mich. 942 (1979), appeal dismissed for want of a substantial federal question 446 U.S. 931, 100 S.Ct. 2145, 64 L.Ed.2d 783 (1980). American Amusement sets forth the equal protection principles applicable to tax legislation. In that case, this Court stated:

"However, this [presumption] is not to say that the states are exempt from the requirements of the equal protection clause of the Fourteenth Amendment when enacting taxation legislation. As stated in Allied Stores of Ohio, Inc v. Bowers, 358 US 522, 527-528; 79 S Ct 437; 3 L Ed 2d 480 (1959):

" '[T]here is a point beyond which the State cannot go without violating the Equal Protection Clause. The State must proceed upon a rational basis and may not resort to a classification that is palpably arbitrary. The rule often has been stated [162 MICHAPP 128] to be that the classification "must rest upon some ground of difference having a fair and substantial relation to the object of the legislation." * * * That [a] statute may discriminate in favor of a certain class does not render it arbitrary if the discrimination is founded upon a reasonable distinction, or difference in state policy.' " American Amusement Co, Inc, supra, 91 Mich.App. p. 577, 283 N.W.2d 803.

The standard of reasonableness under the rational basis test is whether any set of facts may reasonably be conceived to justify the legislative discrimination. In re Contempt of Stone, 154 Mich.App. 121, 128, 397 N.W.2d 244 (1986). The controlling principle with respect to tax legislation seems to be one of equal treatment for similarly situated taxpayers. Some rational basis for a disputed classification must be shown. Armco Steel Corp. v. Dep't of Treasury, 419 Mich. 582, 591-592, 358 N.W.2d 839 (1984).

The premium tax applicable to foreign insurers has been described not as a "gross profits" tax, but rather as a tax on gross premiums. It is levied as a condition precedent to and in exchange for the privilege enjoyed by a foreign insurer engaging in insurance business. The tax relates directly to the exercise of that privilege in the taxing state. Mutual Life Ins. Co. of New York v. Ins. Bureau, 424 Mich. 656, 662-664, 384 N.W.2d 25 (1986). In Michigan, different versions of the premium tax date back to 1869. See for example People v. American Central Ins Co, 179 Mich. 371, 146 N.W. 235 (1914).

By comparison, domestic insurers have been taxed under various taxing statutes. Under the Income Tax Act of 1967 (repealed by 1975 P.A. 233), domestic insurers were subject to a tax on income, as defined in the act, M.C.L. Sec. 206.61 et seq.; M.S.A. Sec. 7.557(161) et seq. Effective January 1, 1976, domestic insurers were taxed under the SBTA. The single [162 MICHAPP 129] business tax is imposed on the privilege of doing business and not upon income. It is best understood as a value-added tax, although it is not a pure value-added tax. Town & Country Dodge, Inc. v. Dep't of Treasury, 420 Mich. 226, 234, 362 N.W.2d 618 (1984). In conceding that a tax preference is given to domestic insurers, the state addressed...