TIG Ins. Co., Inc. v. Dept. of Treasury, Docket No. 115915

• Decision Date: 03 July 2001
• Docket Number: Docket No. Calendar No. 3.,Docket No. 115915,Docket No. 115916
• Citation: 629 N.W.2d 402,464 Mich. 548
• Parties: TIG INSURANCE COMPANY, INC., Plaintiff-Appellee, v. Revenue Division, DEPARTMENT OF TREASURY, State of Michigan, Defendant-Appellant. TIG Premier Insurance Company, Inc., Plaintiff-Appellee, v. Revenue Division, Department of Treasury, State of Michigan, Defendant-Appellant.
• Court: Michigan Supreme Court

629 N.W.2d 402

464 Mich. 548

TIG INSURANCE COMPANY, INC., Plaintiff-Appellee, v. Revenue Division, DEPARTMENT OF TREASURY, State of Michigan, Defendant-Appellant.

TIG Premier Insurance Company, Inc., Plaintiff-Appellee, v. Revenue Division, Department of Treasury, State of Michigan, Defendant-Appellant.

Docket Nos. 115915, 115916, Calendar No. 3.

Supreme Court of Michigan.

Argued March 6, 2001.

Decided July 3, 2001.

Honigman, Miller, Schwartz & Cohn (by Patrick R. Van Tiflin) Lansing, MI, and Dorsey & Whitney, L.L.P. (by John W. Windhorst, Jr.) Minneapolis, MN, for plaintiffs-appellees.

Jennifer M. Granholm, Attorney General, Thomas L. Casey, Solicitor General, and Kevin T. Smith, Assistant Attorney General, Lansing, MI, for defendants-appellants.

Dykema, Gossett, P.L.L.C. (by Stewart L. Mandell and Lori M. Silsbury) Lansing, MI, for amicus curiae, Michigan Insurance Federation.

MICHAEL F. CAVANAGH, J.

These consolidated cases require us to decide whether a 1988 amendment of the Michigan Insurance Code's retaliatory tax, M.C.L. § 500.476a, deprived plaintiffs TIG Insurance Company and TIG Premier Insurance Company of equal protection of the laws under U.S. Const., Am. XIV and Const. 1963, art. 1, § 2, or violated the Uniformity of Taxation Clause of Const. 1963, art. 9, § 3. Absent an imposition on a fundamental right or a suspect class, tax legislation is reviewed to determine whether its classifications bear a rational relation to a legitimate state purpose. We conclude that the 1988 amendments of the retaliatory tax, which changed the tax calculation, are rationally related to the legitimate state purpose of promoting the interstate business of domestic insurers, the same legitimate purpose behind the retaliatory tax itself. Thus, the amendments of the retaliatory tax do not violate equal protection, and also do not violate the Uniformity of Taxation Clause. Accordingly, the judgment of the Court of Appeals is reversed.

I

This case involves the retaliatory tax that Michigan imposes on foreign insurers doing business in Michigan. Under the retaliatory tax, when an insurer's state of incorporation imposes a larger aggregate tax burden on a Michigan insurer doing business in that state than Michigan imposes on a company from that state doing business in Michigan, the foreign insurer must pay Michigan a tax equal to the difference in the aggregate tax burdens. See M.C.L. § 500.476a. Thus, to compute the retaliatory tax due from a foreign insurer, if any, Michigan tallies all the taxes, fines, penalties, and other burdens it otherwise imposes on the foreign insurer doing business in Michigan. Michigan then tallies the burden a hypothetical Michigan insurer would pay to that insurer's home state were the hypothetical Michigan insurer doing the same amount of business there. If the other state's total burden on the hypothetical Michigan insurer doing the same amount of business in that state would be larger than the burden Michigan imposed on the foreign insurer, the actual burden Michigan imposes is subtracted from the other state's burden on the hypothetical insurer, and the difference is the retaliatory tax the foreign insurer owes Michigan. These taxes have been common in insurance taxation since the nineteenth century, see Western & Southern Life Ins. Co. v. State Bd. of Equalization, 451 U.S. 648, 668, 101 S.Ct. 2070, 68 L.Ed.2d 514 (1981), and Michigan has had a form of a retaliatory tax since 1871. See 1871 PA 80, § 4 (adding what was then § 28 to the insurance code).

Until 1987, the retaliatory tax was one of two taxes imposed on foreign insurers. The other was the premiums tax, M.C.L. § 500.440, repealed by 1987 PA 261, which taxed a percentage of the insurers' business. However, in 1987, the Court of Appeals held that the premiums tax violated equal protection, and struck it as unconstitutional. See Penn Mut. Life Ins. Co. v. Dep't of Licensing & Reg., 162 Mich. App. 123, 130-133, 412 N.W.2d 668 (1987). After the Court of Appeals decision in Penn Mutual, which was not appealed to this Court, the Legislature revised the Michigan Insurance Code tax provisions by repealing the premiums tax, subjecting foreign insurers instead to the Single Business Tax, M.C.L. § 208.1 et seq., and repealing and reenacting the retaliatory tax. See 1987 PA 261, 262. The new retaliatory tax, M.C.L. § 500.476a, mirrored the prior retaliatory tax. However, the revision added subsection (2), stating that "[T]he purpose of this section is to promote the interstate business of domestic insurers by deterring other states from enacting discriminatory or excessive taxes."

In 1988, actual revenue from insurance taxes was below the level of projected revenue the Legislature had relied upon in enacting 1987 PA 261 and 262. One of the reasons that revenue was lower than expected was that foreign insurers were including assessments paid to private insurance associations and facilities, such as the Worker's Compensation Placement Facility, among their Michigan burdens when calculating their retaliatory taxes. When these assessments were included in the foreign insurers' Michigan burden, their Michigan burden grew larger, and any differences between the Michigan burden and the burden the insurers' home states imposed shrank. The result was less retaliatory tax revenue.

After these facts were clear, the Legislature enacted 1988 PA 349. This provision did not affect the retaliatory tax's scope. Instead, it only changed the method of calculating the tax by providing that payments to private insurance associations and facilities are not counted as part of the Michigan burden when calculating retaliatory taxes. The resulting statute provides:

(5) Any premium or assessment levied by an association or facility, or any premium or assessment of a similar association or facility formed under a law in force outside this state, is not a burden or special burden for purposes of a calculation under section 476a, and any premium or assessment paid to an association or facility shall not be included in determining the aggregate amount a foreign insurer pays to the commissioner under section 476a.

(6) As used in this section, "association or facility" means an association of insurers created under this act and any other association or facility formed under this act as a non-profit organization of insurer members, including, but not limited to, the following:

(a) The Michigan worker's compensation placement facility created under [MCL 500.2301 et seq.]

(b) The Michigan basic property insurance association created under [MCL 500.2901 et seq.]

(c) The catastrophic claims association created under [MCL 500. 3101 et seq.]

(d) The Michigan automobile insurance placement facility created under [MCL 500.3301 et seq.]

(e) The Michigan life and health insurance placement facility created under [MCL 500.7701 et seq.]

(f) The property and casualty guaranty association created under [MCL 500.7901 et seq.] [MCL 500.134(5), (6).][¹]

Hence, payments to these and other similar facilities are not part of the Michigan burden on foreign insurers, and such payments required by other states cannot be considered part of those states' burden when calculating retaliatory taxes.

The dispute in this case originally involved plaintiffs' retaliatory tax returns for 1990, 1991, and 1996. In those years, plaintiffs had made payments to the Worker's Compensation Placement Facility, the Basic Property Insurance Association, and the Automobile Insurance Placement Facility. Subsections 134(5) and (6), however, required plaintiffs to exclude those payments from their Michigan burdens when calculating the retaliatory tax they owed. Plaintiffs initially excluded these payments from their Michigan burden and fully paid their retaliatory tax for each year. Later, though, they filed amended returns that included these payments in their Michigan burdens, claiming that requiring them to exclude the payments violated the Equal Protection Clauses of the state and federal constitutions, as well as the Uniformity of Taxation Clause of the Michigan Constitution. Plaintiffs, therefore, sought a refund of the alleged unconstitutional overcharge. Defendant, however, denied refunds for all three years.

Plaintiffs appealed the denial of refunds to the Michigan Court of Claims, which consolidated their cases. The Court of Claims held that M.C.L. § 500.134(5) violates equal protection because it was enacted to raise revenue rather than to deter other states from imposing discriminatory or excessive taxes on Michigan insurers doing business in those other states. Also, the court held that plaintiffs' 1990 and 1991 claims were time-barred by M.C.L. § 205.27a(6). The court, therefore, ordered defendant to pay plaintiffs refunds consistent with their amended 1996 retaliatory tax returns.

Both parties appealed, and the Court of Appeals affirmed. That Court believed that when the Legislature revised the retaliatory tax in 1987, the Legislature did not intend to change the definition of "burden," and later did so only because revenues did not meet expectations. Thus, the Court concluded that equal protection was violated because it was "abundantly clear that 1988 PA 349 was enacted as a stop-gap measure to raise funds in response to a projected shortfall in insurance tax revenues. This is not a valid reason for discriminating against foreign insurers." 237 Mich.App. 219, 230, 602 N.W.2d 839 (1999). The Court of Appeals also affirmed the Court of Claims conclusion that plaintiffs' 1990 and 1991 claims were time-barred, leaving plaintiffs with a judgment for refunds for 1996. Defendant appealed the Court of Appeals conclusion that 1988 PA 349 violates equal protection, we granted leave, 463 Mich. 905, 618 N.W.2d 915 (2000), and we now reverse.

II

The United States Supreme Court addressed the constitutionality of retaliatory taxes in Western & Southern Life Ins Co v. State Bd of Equalization, sup...