96-156
Response October 23, 1996
Request
October 2, 1996
Via Telecopy
XXXXX
Policy & Opinion Analyst
Utah State Tax Commission
210 N 1950 W
Salt Lake City UT 84134
RE: Request for Opinion/Declaratory Judgement
Dear XXXXX
Pursuant to our recent phone conversation, we
request your review of the following and seek an opportunity to visit with you
and the Commissioners to further discuss the issues presented below.
We represent a Utah domiciled insurance company
which issues accident, health and related life and disability policies. It is considering a corporate reorganization
that may result in the surviving entity being a Texas domiciled company that
thereafter would be licenced in Utah. A
question more fully discussed below has arisen concerning the applicability of
the Utah retaliatory tax on the Texas domiciled survivor of the proposed
reorganization. Until this question can
be resolved, the proposed transaction has been stalled and cannot move forward.
I. Background
Under UCA §59-9-101, insurance companies are taxed
on their premium income in Utah, at a 2.25% rate. However, under subsection (5) of that section, health insurance premiums
are exempted from the premium tax for all kinds of insurers, including, as
specified in §§ 5(a) and 5(g) respectively, domestic insurers and foreign
insurers licenced under Title 31A, Chapter 14.
Based on these provisions, an insurer doing business in Utah and
domiciled in Texas (or any other foreign state) should be exempt from the
premium tax on health insurance, and thus no such tax is actually imposed.
UCA § 59-9-101(7), which governs how the retaliatory
tax scheme in Utah (UCA § 31A-3-401 et seq.) applies to the admitted insurers
taxation provisions, provides as follows:
(7)
The retaliatory provisions of Title 31A, Chapter 3, apply to the tax or
assessment imposed under this chapter.
UCA § 31A-3-401 purports to out-of-state insurers
admitted in Utah if their states of domicile impose on Utah insurers any taxes,
licences, other fees, deposit requirements or other material obligations,
prohibitions, or restrictions that are in excess of the taxes, etc. imposed on
similar insurers of the other state that write business in Utah.
In this case,
Texas imposes a premium tax on all domestic and foreign insurers, as we
under stand, based on 1.75% of the premiums collected in Texas, and includes
health insurance in that assessment. If
the Utah retaliatory tax provisions applied, therefore, since Texas taxes
health premiums at 1.75% and Utah does not tax such premiums under ordinary
circumstances, resulting in a “zero” tax to a Texas health insurer admitted in
Utah, such Texas insurer would be subject to the Utah premium tax under the
retaliatory tax provisions at the rate of 1.75%.
In a discussion between the undersigned and XXXXX,
manager of the miscellaneous (retaliatory tax) unit for the Commission, XXXXX
indicated that the Commission staff does not include health premiums imposed by
the foreign insurer's state as a component of the retaliatory tax
computation. She stated that the
computation is made on Form TC-49 and operates essentially as follows: All of the Utah State taxes imposed on the
foreign insurer doing business in Utah are computed and listed on the
form. This aggregate Utah obligation is
then compared with the total of all of the taxes that would be owned by a
hypothetical Utah insurer (which has all of the characteristics of the foreign
insurer in Utah) doing business in the foreign state.
Under the retaliatory tax computational methodology,
there is no line-by-line comparison of any particular tax obligation, whether
franchise, premium tax or whatever, between Utah and the foreign state. Rather all of the taxes are aggregated and
compared on a wholesales basis within the retaliatory tax formula. Notwithstanding this global comparison, the
effect of including in the Utah retaliatory scheme the health premiums imposed
by a foreign state, such as Texas, can be calculated. In the instant case, the cost of including the Texas health
premiums in the retaliatory tax calculation of the surviving Texas company
doing business in Utah is substantial.
XXXXX further specified that there are other types
of premiums that are not subject to tax, such as those dealing with annuities
and ocean marine that should also be treated for retaliatory tax purposes
similar to health premiums.
II.
Discussion
After reviewing the factual background and the
relevant legal authorities, it is our view that the Utah retaliatory tax
computation should not take into consideration health insurance premiums levied
by a foreign state. This conclusion,
discussed more fully in the following paragraphs, is based on statutory
interpretation as well as sound policy considerations.
A. Strict
Construction
As a fundamental preliminary matter, you are
probably aware that courts in at least 13 states have held that retaliatory taxing
statutes are to be strictly construed, since such statutes are penal in nature
and involve comity between the states.
Thus, although there are sound reasons for states to impose retaliatory
taxes, their imposition is contested or close circumstances is carefully
construed by the courts.
B. Intent of
Legislature
As a secondary matter, the Utah retaliatory statute,
like that of most if not all other states, is a creature of statute and has no
constitutional underpinning. Thus, the legislature
may apply the retaliatory statute as and where it may. For example, UCA §31A-3-402 provides a
number of exceptions to the application of the tax, based on findings of the
legislature that are certainly not grounded in Constitutional or natural
law. Section 402 even provides that the
tax does not apply to “particular kinds of insurance,' specifying that the
legislature has and will continue to except from the retaliatory tax insurance
premiums that in its discretion should not be subject to the tax.
In our view,
the legislature has clearly made a policy determination as to the
applicability of the retaliatory tax relative to health insurance
premiums. As quoted above, UCA §
59-9-101(7) provides that the provisions of the retaliatory taxing scheme apply
“to the tax or assessment imposed under this chapter” (emphasis added). Thus, the plain language of the statute
provides that the provisions of the retaliatory taxing methodology are not
applicable if there are no taxes or assessments imposed under chapter 9 of
Title 59. There is no ambiguity in this
statement. There are numerous taxes
assessed under chapter 9 to which the retaliatory tax does apply, and there can
be little question that the legislature has the ability to include those taxes in
the retaliatory tax computation and exclude other taxes of its choosing.
On the other hand, if a tax is not imposed under
chapter 9, as is the case with health premiums, the Utah retaliatory tax
provisions do not apply according to UCA §59-9-101(7). It is hard to imagine statutory wording more
clear or understandable.
C. Policy
Considerations
The above interpretation is supported by policy
considerations as well. For example,
UCA § 59-9-101(7) is rendered surplus if the position currently espoused by the
Commission staff is correct. If
legislature intends that no premiums be levied against health policies and
excludes premiums from the tax, as it has done, the legislature is undermining
its own intent by turning around and taxing those premiums indirectly through
the retaliatory tax mechanism. The
exemption statute for health premiums is negated to the extent the retaliatory
tax is imposed on those premiums, which in this case is 1.75% of the 2.25% that
Utah would otherwise impose on health premiums but for the health premium
exemption.
Prudent, longstanding principles of statutory
construction provide that every statute has a specific purpose and should be
construed to fulfill its intended effect.
Inconsistent with these principles and flying in the face of common
sense is the position that the legislature would specifically exempt a taxpayer
from tax but then impose a retaliatory tax depending on the arbitrary circum
stance of where the entity was domiciled.
In other words, if an entity is exempted from a particular tax, the
exemption should be permanent, and not depend on where the entity happened to
be domiciled.
III. Request
for Opinion
We request an opinion/declaratory judgement from the
Tax Commission that the Utah exemption from tax for health insurance premiums
requires exclusion from the retaliatory tax computation of health premium taxes
imposed by a foreign state, based on the language of UCA §59-9-101(5) and (7)
and underlying policy considerations.
Stated differently, we seek your confirmation that the health insurance
premiums in Utah of a foreign health insurer, which are exempt from direct Utah
taxation are not indirectly taxed through the Utah retaliatory tax computation,
despite a tax on health insurance premiums imposed on a Utah insurer doing
business in the foreign state.
We look forward to further discussing these matters
with you at a meeting scheduled for that purpose and appreciate your review of
the foregoing.
Very truly yours,
XXXXX
XXXXX
Advisory opinion - Retaliation against foreign
insurers.
Dear XXXXX
We
have received your request for tax advice pertaining to the application of the
retaliation provisions applied to foreign insurers doing business in Utah. We offer the following guidance:
The
pertinent provisions of the Utah Code are found in Title 31A, Chapter 3 and
Title 59, Chapter 9. Section 31A-3-401
of the Insurance Code provides that to the extent that another state imposes
taxes, fees or other obligations on Utah insurers doing business in that state,
the Tax Commission will impose “the same taxes, licenses, other fees,
deposit requirements, or other material obligations, prohibitions or
restrictions” on insurers domiciled in that state and doing business in
Utah. (Emphasis added.) The only exceptions to or limitations on the
retaliatory action are set out in section 31A-3-402 of the Insurance Code. The apparent purpose of these provisions is
to place Utah-based and foreign insurers on equal footing with one
another. Therefore, subject to the
exceptions stated in section 31A-3-402, any taxes, fees or other
obligations imposed by Texas on Utah insurers are to be included in the
retaliation calculation.
Section
59-9-101 of the Tax Code imposes premium tax on premiums collected by admitted
insurers. As you have indicated, that
statute provides an exemption from premium tax on insurers licensed under Title
31A, Chapter 5 and insurers licensed under Title 31A, Chapter 9. However, we do not agree with your
interpretation of subsection (7). You
seem to read subsection (7) to say that the retaliatory provisions only
apply to premiums taxed under this statute.
We read it to say that the retaliatory provisions apply to premiums
taxed under this statute in addition to the provisions of
31A-3-401. The narrow interpretation
that you suggest for subsection (7) creates a conflict between subsection
59-9-101 (7) of the Tax Code and sections 31A-3-401 and -402 of the Insurance
Code. The legislature could not have
intended such a conflict.
We
also respectfully disagree with your policy argument. The legislature intended that Utah-based insurers not be
disadvantaged by taxes imposed in other states. To allow a Texas insurer to escape tax on its Utah health
insurance premiums while Utah insurers are subject to such taxes in Texas flies
in the face of the retaliation scheme.
Therefore, to the extent that Texas imposes a tax on health care
premiums collected by Utah insurers, that tax must be considered in the
retaliation calculation.
Form
TC-49 requires that the taxpayer calculate its premium tax on the worksheet
provided. (Notice that a deduction is
allow for qualifying health care premiums.)
The form also requires the taxpayer to separately calculate its
retaliatory basis by attaching the return from its state of domicile. A
comparison of these two computations shows whether the taxes imposed in the
domicile state exceed taxes imposed here.
If so, the tax imposed by Title 59, Chapter 9 is applied against the
retaliatory basis. We believe this is
the correct application of the statutory provisions discussed above.
We
note that you asked to meet with us in person to discuss this issue. If you still feel that a meeting is
important, please contact my secretary, XXXXX to arrange a time. I will ask XXXXX of the Auditing Division to
join us.
For
the Commission,
Joe
B. Pacheco,
Commissioner