U.S. v. West Virginia, 02-2037.

• Decision Date: 07 August 2003
• Docket Number: No. 02-2037.,02-2037.
• Citation: 339 F.3d 212
• Parties: UNITED STATES of America, Plaintiff, v. State of West Virginia, Defendant & Third Party Plaintiff-Appellant, v. Secretary, Department of Health and Human Services, as administrator of the Health Care Financing Administration; Health Care Financing Administration, Third Party Defendants-Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 212

339 F.3d 212

UNITED STATES of America, Plaintiff, v. State of West Virginia, Defendant & Third Party Plaintiff-Appellant, v. Secretary, Department of Health and Human Services, as administrator of the Health Care Financing Administration; Health Care Financing Administration, Third Party Defendants-Appellees.

No. 02-2037.

United States Court of Appeals, Fourth Circuit.

Argued: May 7, 2003.

Decided: August 7, 2003.

ARGUED:

Katherine A. Schultz, Senior Deputy Attorney General, OFFICE OF THE ATTORNEY GENERAL, Charleston, West Virginia, for Appellant.

Sambhav Nott Sankar, Appellate Staff, Civil Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellees.

ON BRIEF:

Darrell V. McGraw, Jr., Attorney General, Stephen Stockton, Senior Assistant Attorney General, Jennifer Lea Stollings, Assistant Attorney General, OFFICE OF THE ATTORNEY GENERAL, Charleston, West Virginia, for Appellant. Robert D. McCallum, Jr., Assistant Attorney General, Karl K. Warner, II, United States Attorney, Mark B. Stern, Appellate Staff, Civil Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellees.

Before LUTTIG, WILLIAMS, and TRAXLER, Circuit Judges.

Reversed by published opinion. Judge Luttig wrote an opinion and issued the judgment of the court. Judge Traxler wrote an opinion concurring in the judgment. Judge Williams wrote a dissenting opinion.

OPINION

LUTTIG, Circuit Judge:

Appellant West Virginia appeals the district court's grant of summary judgment for the United States on its claim that West Virginia tax statute 11-27 is preempted by 5 U.S.C. § 8909(f), which bars states from taxing insurance carriers with respect to funds they receive from the Federal Employees Health Benefits Program (FEHBP). Because we conclude that the statutory language of section 8909(f) does not encompass the tax that 11-27 imposes, we reverse the district court's judgment.

I.

Congress has provided for federal employees, their families, and federal retirees (the "Enrollees") to gain access to health benefits through a program known as the Federal Employees Health Benefits Program ("FEHBP"). The Federal Employees Health Benefits Act, whose provisions are now codified in Title 5 of the United States Code in sections 8901 et seq., sets out the terms of FEHBP and provides for the Office of Personnel Management ("OPM"), the agency charged with administering FEHBP, to contract with various health insurance carriers (the "Carriers") to offer the Carriers' health insurance plans to FEHBP Enrollees. To purchase insurance under a FEHBP plan, Enrollees make payments, matched by contributions from the federal government, into a specifically designated account in the United States Treasury, entitled the Federal Employees Health Benefits Fund (the "Fund"). 5 U.S.C. §§ 8906, 8909. The Fund in turn disburses payments directly to the Carriers, reimbursing them for the health care services they purchase on behalf of the Enrollees.

As part of the Omnibus Budget Reconciliation Act of 1990, Congress amended the statutory scheme governing FEHBP, including section 8909(f), which now reads as follows:

(1) No tax, fee or other monetary payment may be imposed directly or indirectly, on a carrier . . . of an approved health benefits plan by any State . . ., with respect to any payment made from the Fund.

5 U.S.C. § 8909(f) (emphasis added).

Based on this preemption provision, which, broadly-speaking, forbids states from taxing health insurance carriers with respect to funds they obtain from FEHBP, the United States challenged West Virginia's enforcement of West Virginia Code 11-27 et seq., a state tax on the gross receipts health care providers receive for various broad categories of services. The tax's legal incident falls solely on health care providers (e.g., hospitals), who are required to calculate a percentage of their receipts in each taxed category of services, and then to pay that amount to the state tax authority. In stipulations before the court, West Virginia admits that the tax's cost may be passed through from providers to Carriers, and that some providers do in fact pass the tax's cost on to Carriers, including with respect to FEHBP covered patient services. See J.A. at 163, 178. Ultimately though, the provider alone bears the tax's legal liability.

The district court granted summary judgment to the United States, concluding that 11-27, insofar as it taxes health care services provided to FEHBP Enrollees, is preempted by section 8909(f) because providers can, and some in fact do, pass the tax's cost through to the Carriers, thus indirectly taxing the Carriers' purchase of those services with Fund monies.

II.

We review de novo the district court's grant of summary judgment for the United States, viewing the facts and inferences drawn therefrom in the light most favorable to West Virginia. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Because this dispute ultimately turns entirely on a question of statutory interpretation, the district court properly proceeded to resolve the case on summary judgment.

West Virginia argues that section 8909(f) of Title 5 cannot preempt 11-27 because 11-27 is not a tax on the Carriers, but on the providers. Of critical importance, it reasons that even though providers might be able to pass the economic costs of the tax along to the Carriers, that potential economic burden does not constitute a tax "imposed [] indirectly on [the] Carriers."

Whether the economic pass-through effect with which 11-27 may burden the Carriers constitutes indirect imposition of a tax on the Carriers can be resolved only by first determining what an "indirect tax" is, as that term relates to the relationship between a tax and its payer. As neither section 8909(f), nor its accompanying regulation, 48 C.F.R. § 1631.205-41, provides guidance as to that definition, we instead look to the consistent usage of that term, as it stood in 1990 when Congress amended the provision.¹

For over two hundred years, a single, consistent usage of the term "indirect tax" has been employed in reference to the relationship between a tax and its payer. That usage establishes that an indirect tax is one imposed on goods. Examples abound since our Founding. At that time, taxes were understood to be imposed indirectly on persons when they were imposed in the form of "Imposts or Duties," U.S. Const. art. I, section 10, cl. 2., or as "excises." See The Federalist No. 12, at 61 (Alexander Hamilton) (Clinton Rossiter ed., 1961) ("[I]n America, far the greatest part of the national revenue is derived from taxes of the indirect kind, from imposts, and from excises. Duties on imported articles form a large branch of this latter description."); The Federalist No. 36, at 187 (Alexander Hamilton) ("[T]axes may be subdivided into those of the direct and those of the indirect kind. Though objection be made to both, yet the reasoning upon it seems to be confined to the former branch. And indeed, as to the latter, by which must be understood duties and excises on articles of consumption, one is at a loss to conceive what can be the nature of the difficulties apprehended.").

And, up to the present time, the Supreme Court has consistently employed this same usage, saying, for example, that "an indirect tax [is] a tax levied on the goods themselves, and computed as a percentage of the manufacturer's sales price rather than the income or wealth of the purchaser or seller." Zenith Radio Corp. v. United States, 437 U.S. 443, 446, 98 S.Ct. 2441, 57 L.Ed.2d 337 (1978). Compare Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 639-40, 117 S.Ct. 1590, 137 L.Ed.2d 852 (1997) (Thomas, J., dissenting) (recognizing the distinction between direct and indirect taxes and that indirect taxes are marked by their being taxes on goods), United States v. Ptasynski, 462 U.S. 74, 80, 103 S.Ct. 2239, 76 L.Ed.2d 427 (1983) ("The Uniformity Clause [governing duties, imposts, and excises] conditions Congress' power to impose indirect taxes."), Michelin Tire Corp. v. Wages, 423 U.S. 276, 291 n. 12, 96 S.Ct. 535, 46 L.Ed.2d 495 (1976) (citing Hamilton's definition of an indirect tax from The Federalist Papers), with Hylton v. United States, 3 U.S. 171, 3 Dall. 171, 1 L.Ed. 556 (1796) ("The general division of taxes is into direct and indirect. Although the latter term is not to be found in the Constitution, yet the former necessarily implies it. Indirect stands opposed to direct. There may, perhaps, be an indirect tax on a particular article, that cannot be comprehended within the description of duties, or imposts, or excises; in such case it will be comprised under the general denomination of taxes. For the term tax is the genus, and includes, (1) Direct taxes. (2) Duties, imposts, and excises. (3) All other classes of indirect kind, and not within any of the classifications enumerated [above]."). As a consequence of this consistent usage, Congress' reference in section 8909(f) to a tax being imposed indirectly, without further legislative or agency definition, is best understood to refer to a tax, and the legal incidents thereof, being levied on goods in which taxpayers transact.

That indirect taxes have consistently been defined with respect to the legal incidents of goods-based levies, duties, and the like provides strong reason to reject the United States' interpretation of section 8909(f), asserting that the pass-through of tax costs, as an economic matter, equates to the indirect imposition of a tax. But it is not the only reason. Also pivotal here is that the Supreme Court has expressly considered and rejected like economic pass-through theories in formulating its understanding of what constitutes indirect taxation in the analogous constitutional field of preemption of state taxation of the federal government.

In United States v. Fresno, 429 U.S. 452, 459, 97 S.Ct. 699, 50 L.Ed.2d 683 (1977), ...