State v. Alabama Mun. Ins. Corp.

• Decision Date: 22 May 1998
• Citation: 730 So.2d 107
• Parties: STATE of Alabama, et al. v. ALABAMA MUNICIPAL INSURANCE CORPORATION, et al.
• Court: Alabama Supreme Court

730 So.2d 107

STATE of Alabama, et al. v. ALABAMA MUNICIPAL INSURANCE CORPORATION, et al.

1961555.

Supreme Court of Alabama.

May 22, 1998.

Rehearing Denied February 19, 1999.

Jeff Long, asst. atty. gen.; and John M. Johnson, Madeline H. Haikala, and Robin H. Graves of Lightfoot, Franklin & White, L.L.C., Birmingham, for appellants.

Richard A. Ball, Jr., and Fred B. Matthews of Ball, Ball, Matthews & Novak, P.A., Montgomery, for appellees.

MADDOX, Justice.

This appeal involves a question of the constitutionality of Alabama statutes that create tax credits in favor of insurance companies that issue property and casualty insurance policies. Eight insurance companies contend that §§ 27-4A-3(a)(3)d.1. and d.2., Ala.Code 1975, which create tax credits that result in a reduction of the insurance premium tax, are discriminatory when applied and that they, therefore, violate §§ 1 and 35 of the Alabama Constitution of 1901 and/or the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution.

The parties raise the following specific questions:

(1) Did the trial court apply the appropriate principles of law in ruling on the constitutionality of the tax credits?

(2) Does the State's granting of the tax credits violate either the Alabama Constitution or the United States Constitution?

(3) If the tax credit statutes are held to be unconstitutional, should they be severed from the premium tax statute? and

(4) Whether the trial court, upon determining that the tax credits were unconstitutional, erred in applying that determination quasi-prospectively?

Facts and Procedural History

In the early 1980s, a group of foreign insurance companies challenged the constitutionality of the insurance premium tax then in effect, on the grounds that it violated the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution. The tax scheme then in effect imposed either a 3% or a 4% premium tax on an out-of-state insurer, depending on the kind of insurance the company sold, but only a 1% tax on a domestic insurer, without regard to the kinds of insurance the domestic company sold. Although the Alabama statutes then applicable allowed for the reduction of the tax rate on foreign insurers if those companies met certain requirements (e.g., investing a percentage of their assets in Alabama), there was no method under the old taxing scheme for a foreign insurer to achieve parity with a domestic insurer on the tax rate charged on premium collections.

Alabama's old taxing scheme was challenged on constitutional grounds in Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 105 S.Ct. 1676, 84 L.Ed.2d 751 (1985). The United States Supreme Court held that Alabama's insurance premium taxing scheme was unconstitutional, on the ground that it discriminated against foreign insurers.

After the Supreme Court rendered its decision in Ward, the out-of-state insurance companies involved in that case entered into a settlement with the State. Under the terms of the settlement agreement, the out-of-state companies, as plaintiffs, consented to the dismissal of their action in exchange for legislation that would redesign the tax system relating to the insurance premium tax. Accordingly, the Legislature enacted the Insurance Premium Tax Reform Act of 1993 (the "Act") (Act No. 93-679, Ala. Acts 1993; codified at Ala.Code 1975, § 27-4A-1 to -7); that Act contains the sections that the eight plaintiffs in this case now challenge as violating both the State Constitution and the Federal Constitution.

Because the Act made major revisions to the State's premium taxing scheme, we briefly describe how it was designed to be applied. The Act first provided that every insurer, whether foreign or domestic, is taxed at a rate of 3.6% on property and casualty insurance premium income. Despite the equalization of the basic premium tax rates under the new system, the plaintiffs filed this action in the Montgomery Circuit Court in March 1995, against the State and Michael DeBellis, insurance commissioner for the State of Alabama (collectively the "State"), charging that the new tax system violates the Fourteenth Amendment to the United States Constitution and §§ 1 and 35 of the Alabama Constitution. Specifically, they charged that two tax credits included in the premium tax statute are discriminatory and, therefore, unconstitutional.

The plaintiffs first challenged the tax credit designated as the "Alabama Insurance Office Facilities Credit" (the "Office Credit"), which provides for incremental reductions in an insurer's tax rate for each office that it operates within the state, with the amount of the reduction per office dependent on the number of employees working in that office.¹ The plaintiffs also challenged the tax credit designated as the "Alabama Real Property Investment Credit" (the "Property Credit"), which provides for incremental reductions in an insurer's tax rate based on the amount of investment in real property the insurer has made within Alabama.²

The trial court held that the tax credit formula was unconstitutionally discriminatory because it was easier for larger companies with more offices and more employees to take advantage of the tax credit. The trial court specifically held:

"The [statutory] section under scrutiny taxes property and casualty premium income (with certain exceptions) at 3.6%. Section 27-4A-3(a)(3)d.1. provides incremental credit up to 1% for a specified number of offices staffed by a specified number of employees. Section 27-4A-3(a)(3)d.2. provides a credit of .1% for each one million dollars invested in real estate in Alabama up to an investment of ten million dollars or a maximum credit of 1%.

". . . .

"Under the taxing statute, it is easier for a large company to take advantage of the [Property Credit] than a small one. A company with less than one hundred million dollars in assets is effectively prohibited from investing as much as ten million dollars in real estate by § 27-41-34.... Similarly, it is easier for a company doing a large amount of business in Alabama through employees to take advantage of the [Office Credit], than a small one doing business through independent agents. The minimum number of offices a company must have to achieve the full credit is 100, staffed by 51 employees each, or a total of 5,100 employees.... The taxing classification thus favors larger companies and concurrently burdens smaller ones.

". . . .

"This Court finds and concludes that the subject tax discriminates in favor of large companies and burdens small ones.... The State suggests that if anything is held unconstitutional, it should be the credits.... The Court finds that the credits are an integral part of the section taxing property and casualty companies and cannot be severed from it."

Because the trial court held that the two credits were integral to the premium taxation scheme, it held the entire premium tax unconstitutional and ordered refunds for the plaintiffs; it did not order refunds for similarly situated insurance companies, holding instead that its judgment was to be prospectively applied to all other such companies. The trial court held that the challenged tax credits violated what it called the "equal protection" provisions of the Alabama Constitution, i.e., §§ 1 and 35, and accordingly did not reach the question whether they also violated the United States Constitution.

The defendants appealed. We have carefully reviewed the briefs of the parties and have carefully considered the oral arguments. Based on the reasons discussed below, we reverse and remand.

Discussion

In our analysis of whether the challenged tax credits violate §§ 1 and 35 of the Alabama Constitution, we must first note that, as a general principle, acts of the legislature are presumed by this Court to be valid and that this Court "seek[s] to sustain rather than strike down the enactment of a coordinate branch of the government" and that it will not hold such an act unconstitutional "unless it is clear beyond reasonable doubt that [the act violates] the fundamental law." Alabama State Federation of Labor v. McAdory, 246 Ala. 1, 9, 18 So.2d 810, 815 (1944). In McAdory, this Court also stated that when a court is passing upon the constitutionality of a legislative act, "questions of propriety, wisdom, necessity, utility, and expediency [of the act] are held exclusively for the legislative bodies, and are matters with which the [court has] no concern." 246 Ala. at 9, 18 So.2d at 815.

Regarding the taxing power, we also note that "`in taxation, even more than in other fields, legislatures possess the greatest freedom in classification.'" Thorn v. Jefferson County, 375 So.2d 780, 786 (Ala.1979), quoting Madden v. Kentucky, 309 U.S. 83, 88, 60 S.Ct. 406, 84 L.Ed. 590 (1940). This Court has discussed the taxing power as follows:

"[T]he power to tax is essentially an attribute of sovereignty conferred by the people, through the constitution, on the state, and is vested in the legislative department.... Legislative classifications in tax matters are presumably valid, the burden being on the challenger to prove that such a classification or subclassification does not rest on a reasonable basis and such statutes are not to be deemed unconstitutional or invalid if any state of facts can be conceived which would support the subject of the tax."

Haden v. Watson, 270 Ala. 277, 281, 117 So.2d 694, 696 (1960). Similarly, as the Court of Civil Appeals has written:

"The power of the legislature to exempt from taxation unless restricted by express constitutional provisions is as broad as its power to tax. The legislature is free to exempt according to its views of public policy and expediency.

Barron-Leggett Elec., Inc. v. Department of Revenue, 336 So.2d 1124, 1127 (Ala.Civ.App. 1976) (citations omitted).

The burden the plaintiff must meet in showing that a taxation statute is unconstitutional is stringent.

"It

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