UPS and
its affiliates (“the affiliated group”), which include the foreign reinsurance
companies of UPINSCO, Inc. and UPS Re Ltd., form the world’s largest package
delivery company. Prior to 2001, UPS included the income of UPINSCO and UPS Re
on the affiliated group’s Indiana corporate income tax returns. Because UPS filed
the returns under the worldwide unitary combined method, it reported the
affiliated group’s income, deductions, and credits on a combined basis. In
2001, however, UPS excluded the income of UPINSCO and UPS Re from the
affiliated group’s Indiana return. UPS also subsequently amended its 2000
Indiana return in order to exclude the income of UPINSCO and UPS Re from the
return, thereby seeking a refund of $359,466 in income tax initially paid.
After
auditing the affiliated group’s returns for the years at issue, the Department determined
that UPS erred in excluding the income of UPINSCO and UPS Re from the returns.
As a result, the Department denied UPS’s refund claim and assessed it with an additional
income tax liability of $291,105 for 2001. UPS protested the Department’s denial
of its refund claim and its issuance of the proposed assessment with no
success.3
In March
2010, after appealing to this Court, UPS moved for summary judgment, asserting
that because UPINSCO and UPS Re were “subject to” Indiana’s gross premium
privilege tax (premiums tax) under Indiana Code § 27-1-18-2, their income was
exempt from Indiana’s corporate income tax pursuant to Indiana Code § 6-3-2-2.8(4).
The Department filed a cross-motion for summary judgment, contending that because
UPS failed to comply with several provisions of the premiums tax statutory scheme,
UPINSCO and UPS Re were neither “subject to” the premiums tax nor exempt from
Indiana’s corporate income tax.
On
December 29, 2010, in an unpublished decision, this Court granted UPS’s motion
for summary judgment on the basis that UPINSCO and UPS Re were exempt from
Indiana corporate income tax because they were both “subject to” the premiums tax
based on the plain and ordinary meaning of the phrase “subject to.” See United Parcel
Serv., Inc. v. Indiana Dep’t of State Revenue, No. 49T10-0704-TA-24, slip op.
at 6-7 (Ind. Tax Ct. Dec. 29, 2010), rev’d on other grounds, 969 N.E.2d 596
(Ind. 2012) (UPS I).
On June 21, 2012, the Indiana Supreme Court reversed this Court’s grant of summary
judgment to UPS in UPS I, explaining:
The
plain language of Indiana Code section 27-1-18-2 requires that all insurance
companies – like UPINSCO and UPS Re – not “organized under the laws of this
state” must, at the very least, show they are “doing business within this
state” before the companies are entitled to an exemption from adjusted gross income
[tax]. The very first sentence of the statute reads, “Every insurance company
not organized under the laws of this state, . . . and doing business within
this state shall . . . .”
Indiana
Dep’t of State Revenue v. United Parcel Serv., Inc., 969 N.E.2d 596, 601 (Ind. 2012)
(UPS II) (citation omitted).
After
determining that the designated evidence failed to show whether UPINSCO and UPS
Re were doing business within this state for purposes of Indiana Code §
27-1-18-2, the Indiana Supreme Court remanded the case for further proceedings.
See id. at 603.
…
During
the years at issue, Indiana imposed an income tax on the part of every corporation’s
adjusted gross income that was derived from sources within Indiana. See IND.
CODE § 6-3-2-1(b) (2000) (amended 2002). Indiana Code § 6-3-2-2.8(4), however, provided
certain entities with an exemption from that tax: “there shall be no tax on the
adjusted gross income of . . . [i]nsurance companies subject to tax under IC
27-1-18-2.” IND. CODE § 6-3-2-2.8(4) (2000) (amended 2002). In turn, Indiana
Code § 27-1-18-2, in relevant part, provided:
(a)
Every insurance company not organized under the laws of this state . . . and
doing business within this state shall, on or before March 1 of each year,
report to the department [of insurance], under the oath of the president and
secretary, the gross amount of all premiums received by it on policies of
insurance covering risks within this state, or in the case of marine or
transportation risks, on policies made, written, or renewed within this state during
the twelve (12) month period ending on December 31 of the preceding calendar
year. From the amount of gross premiums described in this subsection shall be
deducted . . . considerations received for reinsurance of risks within this
state from companies authorized to transact an insurance business in this
state[.]
* * * *
*
(c)(1)
For the privilege of doing business in this state, every insurance company required
to file the report provided in this section shall pay into the treasury of this
state an amount equal to [two percent (2%)] of the excess, if any, of the gross
premiums over the allowable deductions[.]
IND.
CODE § 27-1-18-2(a), (c)(1) (2000) (amended 2001).
Physical
Presence
In its
motion for summary judgment, UPS claims that the Indiana Supreme Court’s
decision in UPS II essentially requires foreign reinsurers to be physically
present within this state in order to be “doing business” under Indiana Code §
27-1-18-2 and to qualify for the corporate income tax exemption provided under
Indiana Code § 6-3-2-2.8(4). (See Hr’g Tr. at 4-6, Aug. 16, 2013; Pet’r Mot.
Summ. J. ¶ 6, Apr. 18, 2013; Pet’r Br. Supp. Mot. Summ. J. (“Pet’r Br.”) at 9,
Apr. 18, 2013.) According to UPS, that determination creates tension between
Indiana’s premiums tax and its corporate income tax because UPS contends the
latter utilizes an economic presence standard, not a physical presence
standard. (See Hr’g Tr. at 6-8 (referring to MBNA Am. Bank, N.A. & Affiliates
v. Indiana Dep’t of State Revenue, 895 N.E.2d 140 (Ind. Tax Ct. 2008).) The Department,
however, maintains that UPS has misconstrued both UPS II and Indiana Code §
27-1-18-2 because neither of those authorities makes any mention of physical presence
whatsoever. (See Hr’g Tr. at 9-12.)
At the
outset, and contrary to UPS’s claim, there is no tension between Indiana’s premiums
tax and its corporate income tax because each utilizes a physical presence standard.
Thus, to the extent UPS believes this Court’s decision in MBNA held that Indiana’s
corporate income tax utilized an economic presence standard, it is incorrect. See
MBNA, 895 N.E.2d at 141-44 (holding that the statutory economic presence basis for
imposing Indiana’s financial institutions tax (“the FIT”) did not violate the
substantial nexus requirement of the Commerce Clause of the United States
Constitution).
Furthermore,
while this Court has found that an economic presence rather than a physical
presence is a sufficient basis for imposition of the FIT, it cannot reach the
same conclusion regarding Indiana’s premiums tax for three main reasons. First,
the U.S. Supreme Court has explained that a physical presence standard applies
for purposes of a premiums tax:
the
limits of [a] state’s legislative jurisdiction to tax, [as] prescribed by the
Fourteenth Amendment, are to be ascertained by reference to the incidence of
the tax upon its objects rather than the ultimate thrust of the economic
benefits and burdens of transactions within the state.
Connecticut
Gen. Life Ins. Co. v. Johnson, 303 U.S. 77, 80 (1938). See also State Bd. Ins.
v. Todd Shipyards Corp., 370 U.S. 451, 452-56 (1962) (reaffirming Johnson
nearly twenty years later). Second, this Court’s review of Indiana case law and
the case law of other jurisdictions reveals decades of uniformity – wherein
state courts have routinely declined to impose a premiums tax when foreign
insurers/reinsurers lacked a physical presence in the taxing state. See UPS II,
969 N.E.2d at 601-03 (remanding the case because the record evidence did not
reveal whether UPINSCO’s and UPS Re’s reinsurance transactions took place in
Indiana); State ex rel. Crittenberger v. Continental Ins. Co. of N.Y., 116 N.E.
929, 934-35 (Ind. Ct. App. 1917) (explaining that a foreign reinsurer did not
owe Indiana’s premiums tax because it conducted its reinsurance transactions in
Illinois, not Indiana).
Finally,
neither of the parties has presented a fully developed argument regarding the
adoption of an economic presence standard for Indiana’s premiums tax. For instance,
UPS has encouraged the Court to avoid the issue altogether, arguing that such a
finding is unnecessary given its Commerce Clause claim, that the finding would likely
conflict with UPS II and Continental Insurance, and that the finding could have
far-reaching, unintended effects in the insurance industry. (See Hr’g Tr. at
7-9.) In contrast, the Department has argued that UPS II provides that a
foreign reinsurer need only show that it has a certificate of authority to
satisfy the “doing business” requirement of Indiana Code § 27-1-18-2. (See Hr’g
Tr. at 13-16; Resp’t Resp. Pet’r Mot. Summ. J. at 6-9, May 28, 2013.)
Nonetheless, while the Indiana Supreme Court mentioned the necessity of
obtaining a certificate of authority in UPS II, it did so only in a general discussion
of the statutory scheme regarding the business of insurance. See UPS II, 969
N.E.2d at 601. That discussion does not indicate that possessing a certificate
of authority means a foreign reinsurer is physically present in Indiana;
instead, it indicates that a foreign reinsurer must obtain such a certificate
to legitimately engage in the reinsurance business in Indiana. See id. The
plain language of Indiana Code § 27-1-17-8 supports this conclusion as it
provides that a certificate of authority “shall license[a] foreign or alien
insurance[/reinsurance] company to transact only the kind or kinds of insurance
specified in its application for admission[.]” IND. CODE § 27-1-17-8 (2013)(emphasis
added). Consequently, the Court concludes that foreign reinsurers must be physically
present in Indiana to satisfy the statutory requirement of “doing business” under
Indiana Code § 27-1-18-2.
The
Commerce Clause
With
respect to its Commerce Clause challenge, UPS contends that because the physical
presence requirement under Indiana Code § 27-18-1-2 provides a direct competitive
advantage to all reinsurance companies conducting business within Indiana over
foreign reinsurers like UPINSCO and UPS Re that did not conduct business in Indiana
during the years at issue, it violates the Commerce Clause. (See Pet’r Br. at
4, 9-10, 14.) More specifically, UPS explains that foreign reinsurers
conducting business in Indiana would generally have a lower tax liability than
foreign reinsurers conducting business elsewhere because the latter would be
subject to Indiana’s corporate income tax. (See Pet’r Reply Br. Supp. Mot.
Summ. J. at 2, June 21, 2013.)
The
Commerce Clause of the United States Constitution grants the power
“[to] regulate Commerce . . . among the several States[.]” U.S. CONST. art. I,
§ 8, cl. 3. While the Clause is “‘silent as to how much economic regulatory
power a state retains, it has been applied to prevent states from
discriminating against out-of-state economic interests or from benefiting
in-state interests.’” Rhoade v. Indiana Dep’t of State Revenue, 774 N.E.2d
1044, 1049 (Ind. Tax Ct. 2002) (citation omitted).
Furthermore,
the U.S. Supreme Court has rejected the view that interstate commerce is immune
from state taxation. Id. (citation omitted).
Prior to
1944, the U.S. Supreme Court consistently held that the business of insurance
was not “commerce” for purposes of the Commerce Clause. See, e.g., Paul v.
Virginia, 75 U.S. 168, 183-84 (1868), overruled in part by United States v.
South Eastern Underwriters Ass’n, 322 U.S. 533 (1944). As a result, insurance
transactions were not subject to federal regulation as interstate commerce. See
Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 414-17 (1946); Legal Asset
Funding, LLC v. Travelers Cas. & Sur. Co., 155 F.Supp.2d 90, 96 (D.N.J.
2001).
In 1944,
however, the U.S. Supreme Court determined that the business of insurance was
commerce within the meaning of the Commerce Clause. United States v.
South-Eastern Underwriters Ass’n, 322 U.S. 533, 552-53 (1944). The following
year, Congress enacted the McCarran-Ferguson Act, the relevant parts provide:
Congress
hereby declares that the continued regulation and taxation by the several
States of the business of insurance is in the public interest, and that silence
on the part of the Congress shall not be construed to impose any barrier to the
regulation or taxation of such business by the several States.
The
business of insurance, and every person engaged therein, shall be subject to
the laws of the several States which relate to the regulation or taxation of
such business.
No Act
of Congress shall be construed to invalidate, impair, or supersede any law
enacted by any State for the purpose of regulating the business of insurance,
or which imposes a fee or tax upon such business, unless such Act specifically
relates to the business of insurance.
15
U.S.C.A. §§ 1011, 1012. The U.S. Supreme Court explained that the obvious purpose
of the Act was “to give support to the existing and future state systems for regulating
and taxing the business of insurance.” Prudential, 328 U.S. at 429. The Supreme
Court further explained the Act “put the full weight of [Congress’] power behind
existing and future state legislation to sustain it from any attack under the commerce
clause to whatever extent this may be done with the force of that power behind
it, subject only to the exceptions expressly provided for.” Id. at 431. In
other words, Congress, through its enactment of the McCarran-Ferguson Act, once
again protected insurance transactions from commerce clause challenges. See
Western & Southern Life Ins. Co. v. State Bd. of Equalization of Cal., 451
U.S. 648, 652-56 (1981)(footnote added). See also, e.g., In re Workers’ Comp.
Ins. Antitrust Litig., 574 F.Supp. 525, 527-28 (D.Minn. 1983); City of
Charleston v. Gov’t Emps. Ins. Co., 512 S.E.2d 504, 506-07 (S.C. 1999).
Given
the plain language, and the U.S. Supreme Court’s interpretation, of the McCarran-Ferguson
Act it is difficult to surmise how the statutes at issue here do not fall within
its scope. Indeed, nearly a century ago, the Indiana Court of Appeals explained
that the predecessor to Indiana Code § 27-1-18-2 was a graduated privilege tax,
designed to raise revenue and “imposed upon a foreign [insurance or
reinsurance] corporation for the privilege of exercising its corporate
franchises and carrying on business in a corporate capacity within the state.”
Continental Ins., 116 N.E. at 933. See also UPS II, 596 N.E.2d at 597-98
(stating that the “premiums tax works like an excise tax permitting a foreign
reinsurer to do business in the state” (citation omitted)). Moreover, Indiana
Code § 6-3-2-2.8(4) merely exempts foreign reinsurance corporations that
conduct business within Indiana from the corporate income tax because they are
“subject to” the premiums tax under Indiana Code § 27-1-18-2. See I.C. §
6-3-2-2.8(4). These statutes, therefore, plainly concern the regulation and taxation
of insurance and are immune from Commerce Clause challenges.
...
