Metropolitan Life Insurance v. Insurance Commissioner

WILNER, Judge. We have before us a dispute between Metropolitan Life Insurance Company, a New York corporation (Metropolitan), and the State Insurance Commissioner over the amount of premium tax due by Metropolitan for 1971. The dispute arises from a difference of opinion concerning the application of Maryland’s “retaliatory” premium tax (Md.Code Ann. art. 48A, § 61(1)). Metropolitan contends that one part of the tax statute — the last sentence of § 61(1) — is unconstitutional because of vagueness and because it improperly delegates legislative authority to the Commissioner.

The Maryland Tax Court found no merit in Metropolitan’s argument; the Circuit Court for Baltimore City found no merit in it; and we find no merit in it. We do not necessarily concur with the method used by the Commissioner to calculate the tax, but as Metropolitan has not complained about the use of that particular method, we shall not further consider that question. Insurance companies are taxed in a different manner than other business corporations. Since New York began the trend in 1824, the principal (and in most cases the only) State tax on insurance companies is a premium tax — a tax fixed at a set percentage of gross direct premiums attributable to business done in the State.

All fifty States impose ⁴⁵⁹ such a tax. The Maryland tax is found in Md.Code Ann. art. 81, §§ 136-143A. At least forty-nine States, Hawaii being the possible exception, also have what has become known as a “retaliatory” tax. This, too, is of somewhat ancient lineage, dating back to a Massachusetts enactment in 1832.

The purpose of this tax is less the raising of revenue than the encouragement of a parity among the primary State premium taxes, to assure that insurance companies chartered in the home (i.e., retaliating) State are not subjected to a greater tax burden in other States than the insurance companies chartered in those other States are subjected to in the home State. As the Court of Appeals put it, in terms of the Maryland retaliatory tax, “[t]he design was to put insurance companies, coming from other States, into the same position as ours would be in the State whence they came.” Talbott v. Fidelity & Casualty Co., 74 Md. 536, 544 , 22 A. 395 (1891); State Insurance v. Nationwide, 241 Md. 108, 115-16 , 215 A.2d 749 (1966). The nature and operation of the retaliatory tax was well-described by the United States Supreme Court in Western & Southern L.I. Co. v. Bd. of Equalization, 451 U.S. 648, 650-51 , 101 S.Ct. 2070, 2073 , 68 L.Ed.2d 514 (1981), a case involving the California counterpart to our § 61(1). Substituting “Maryland” for “California,” we quote: “[The statute] imposes a retaliatory tax on out-of-state insurers doing business in [Maryland], when the insurer’s State of incorporation imposes higher taxes on [Maryland] insurers doing business in that State than [Maryland] would otherwise impose on the State’s insurers doing business in [Maryland].

In computing the retaliatory tax owed by a given out-of-state insurer, [Maryland] subtracts the [Maryland] taxes otherwise due from the total taxes that would be imposed on a hypothetical similar [Maryland] company doing business in the out-of-state insurer’s State of incorporation. If the other State’s taxes on the hypothetical [Maryland] insurer would be greater than ⁴⁶⁰ [Maryland’s] taxes on the other State’s insurer, a retaliatory tax in the amount of the difference is imposed. If the other State’s taxes on the hypothetical [Maryland] insurer would be less than or equal to [Maryland’s] taxes, however, [Maryland] exacts no retaliatory tax from the other State’s insurer.” As New York is Metropolitan’s home State, the comparison, for purposes of the Maryland retaliatory tax, is between the aggregate tax burden imposed by New York and that imposed by Maryland. The issue before us does not stem from an inequality between the State taxes imposed by Maryland and New York.

Indeed, we are apprised that if Metropolitan had been the hypothetical Maryland company doing the same amount of business in New York in 1971 as it in fact did in Maryland, it would have paid less New York State premium tax than the actual Maryland premium tax. 1 The problem arises from a New York City premium tax, which existed in 1971 and was separate from and additional to the New York State tax. 2 The city tax was 0.4% of gross direct premiums allocable to New York City, i.e., received on policies insuring risks located in the city. Section 61(1) of art. 48A sets the amount of the Maryland retaliatory tax as the difference between the taxes imposed “pursuant to the laws of any other State” on Maryland insurers and the taxes imposed on “similar insurers . . . under the statutes of this State.” It further provides, ⁴⁶¹ however that “[a]ny tax . . . imposed by any city, county, or other political subdivision ... of such other state ... on Maryland insurers . . . shall be deemed to be imposed by such state .. . within the meaning of this section.” The clear import of this provision is to regard the New York City tax as though it were a New York State tax for the purpose of calculating whether, and how much of, a Maryland retaliatory tax should be imposed. The problem is one of allocation. The city tax, as we have noted, was imposed only upon premiums on policies attributable to New York City; what would the burden of that tax have been on a hypothetical Maryland insurance company doing business in New York State?

Metropolitan argues that the statute (§ 61(1)) sets no standards or guidelines for making such an allocation; that is the basis of its “void for vagueness” argument. To the extent that it vests unbridled discretion in the Insurance Commissioner to develop an allocation formula, the statute, says the company, vests legislative taxing authority in an Executive official, in contravention of Md. Declaration of Rights, art. 8 (Separation of Powers). The Insurance Commissioner acknowledges that the statute provides no specific method for allocating local taxes, and indeed suggests that, because of the myriad of possibilities that could arise depending on how many subdivisions within a State chose to enact such a tax and how the various local taxes were constructed, it might be impractical for the Legislature to write a particular formula or method into the law. Thus, he argues, this is an area that is particularly appropriate for administrative flexibility.

It must be kept in mind that whatever formula is used would be based on a hypothetical situation. Metropolitan is being taxed on its Maryland business, not its New York business, but at a rate that expresses what a hypothetical Maryland company would have to pay, in the aggregate, to New York State and New York City if it collected the same gross premiums in New York State as Metropolitan in fact ⁴⁶² collected in Maryland. The formula seeks to determine how much of the hypothetical Maryland company’s total New York State premiums would be attributable to New York City policies and thus subject to the city tax. Based on that, the New York City tax could be extrapolated into an effective Statewide rate that would then be added to the New York State tax rate.

The treatment of municipal taxes (in both the home State and foreign States) in the administration of the retaliatory tax law has been a particularly vexatious problem for many years. See, for example, Report of the Special Committee on Insurance Taxation, American Bar Association Section on Insurance Law (1939); Proceedings of the 72nd Annual Session of the National Association of Insurance Commissioners (1940); The Problem of Retaliatory Taxation on Municipal Taxes and Fees, National Association of Insurance Commissioners (1958); Insurance Retaliatory Laws, 39 Notre Dame Lawyer 243, 258-63 (1964). Most of the litigation in this area seems to have involved local taxes in the home State — i.e., whether in comparing burdens for purposes of applying the retaliatory tax, a foreign insurance company was entitled to include local taxes in the home State as part of its aggregate home State burden. See, for example, Pacific Mut.

Life Ins. Co. v. Gerber, 22 Ill.2d 196 , 174 N.E.2d 862 (1961); Firemen’s Fund Ins. Co. v. Commissioner, 325 Mass. 386 , 90 N.E.2d 668 (1950); Life & Cas. Ins.

Co. v. Coleman, 233 Ky. 350 , 25 S.W.2d 748 (1930); Commonwealth v. Firemen’s Fund Ins. Co., 369 Pa. 560 , 87 A.2d 255 (1952); John Hancock Mut. Life Ins. Co. v. Pink, 276 N.Y. 421 , 12 N.E.2d 529 (1938).

That, of course, is not our concern here. Some of the difficulties in retaliating against local exactions in foreign States, which is our concern, were noted in the 1958 NAIC Report, ante: “1. The municipal taxes and fees in a state do not constitute a simple specific overall tax levy like a state tax at 2 per cent but can be a multitude of exactions, differing ⁴⁶³ in rate or amount by community, county, parish or district. 2. Such levies can be upon the company, directly upon the agent of the company, or upon both. 3.

Such levies can be by almost any municipal division of that state such as city, village, town, county or parish and in one isolated instance within our knowledge, by a school district. 4. There is question as to the legality of retaliation against such municipal levies under the normal retaliatory law. 5. There is difficulty of obtaining accurate information for use as a basis of retaliation. 6. The normal human reluctance of state department personnel makes them unwilling to undertake difficult added burdens of administration when most departments are, even now, understaffed. 7.

There is apprehension on the part of domestic company personnel that such retaliation, even if legal, may provoke reprisals and antagonisms.” Despite these, and perhaps other difficulties, at least twenty-nine States, including Maryland, specifically include local taxes in foreign States as part of the aggregate tax burden imposed by those States for purposes of their own retaliatory tax. 3 Of those twenty-nine States, only two ⁴⁶⁴ (Michigan and New Jersey) purport in the retaliatory tax statute itself to set forth a precise method for allocating the foreign local taxes on a Statewide basis. 4 The other twenty-seven, including Maryland, either say nothing at all in the statute as to how the local taxes are to be so allocated or, as in the case of Missouri and Tennessee, direct only that they be computed on an aggregate Statewide basis. The issues raised by Metropolitan in this case are thus not unique to Maryland; they have national implications. Unfortunately, there is no national (or Maryland) precedent. The only court that has apparently addressed the vagueness and delegation complaints squarely is a nisi prius court in Arizona, and the opinion of that court is unpublished.

We obviously do not regard that decision, which was not appealed, as having any precedential value in Maryland. There are, as Metropolitan points out, various formulae that could be used to convert the New York City tax, or any other local tax, into an aggregate Statewide ration. There are multiple substitutions that could be made for most of the elements in any given formula, each of which would produce a different end result. One could base the formula on the relationship between New York City and New York State population, or on the amount of business done in New York City and New York State by all insurers, all life insurers, life and casualty insurers, all Maryland insurers, Maryland life insurers, Maryland life and casualty insurers, all non- ⁴⁶⁵ New York insurers, all non-New York life insurers, and so on.

The formula chosen by the Maryland Insurance Commissioner follows essentially the approach taken by New Jersey and Michigan in their statutes and was initially suggested to the Commissioner for use in Maryland by the Attorney General in 1959. See 44 Op. Att’y Gen. 188 (1959), authored by C. Ferdinand Sybert and Shirley Brannock Jones. In its simplest terms, the formula calculates the effect of the local tax by looking at the experience of a11 Maryland insurance companies doing business in New York State during the year in question (1971).

It compares the total premium taxes actually paid by those companies to New York City with the total premiums which they earned throughout New York State that were subject to the New York State premium tax. In terms of Metropolitan, the formula proceeded thusly: (1) The aggregate amount of New York City premium taxes paid by all Maryland insurers for 1971 ($129,038) was divided by the total amount of premiums received by those insurers in 1971 subject to the New York State premium tax ($99,269,092). The quotient (0.13%) was regarded as the effective burden of the New York City tax on the hypothetical Maryland insurer. (2) That rate, 0.13%, was then applied to Metropolitan’s Maryland premiums ($76,564,427), the product ($99,533) being regarded as the effect the New York City tax would have had on the hypothetical Maryland insurer doing the same business in New York State as Metropolitan did in Maryland.

(3) The $99,533 was then added to the New York State tax that would be payable by a Maryland insurer doing Metropolitan’s business in New York State ($1,454,483) for an aggregate New York tax burden of $1,554,017. (4) The actual Maryland premium taxes payable by Metropolitan for 1971 (including the minor license and filing fees) was $1,534,003. ⁴⁶⁶ (5) The aggregate New York taxes ($1,554,017) exceeded the Maryland taxes ($1,534,003) by $20,013. That was the amount of “retaliatory” tax assessed. Metropolitan argues that because neither this formula nor any other method of allocation is specified in § 61(1) itself, “the Insurance Commissioner must disregard New York City tax in its entirety when determining Metropolitan’s Maryland retaliatory tax liability for 1971.” The company finds no particular fault with the Commissioner’s formula itself— i.e., it does not argue that the formula actually used is inconsistent with the statute or is arbitrary or irrational; it simply urges that any allocation criteria must be enacted by the Legislature, and that no formula adopted administratively by the Commissioner is or can be valid.

Both prongs of Metropolitan’s argument — that the statute is vague and that it improperly vests legislative authority in the Commissioner — arise from that underlying premise. In considering these issues, it is well to start by looking precisely at what the General Assembly itself has done and what it has authorized or directed the Insurance Commissioner to do. In § 136 of art. 81, the Legislature has, as we have noted, imposed a specific premium tax on all insurers doing business in Maryland. The rate is fixed; the obligation and its method of calculation are clear.

In § 61(1) of art. 48A, the Legislature has expressly directed the Commissioner to impose an additional levy on foreign insurers to the extent that their respective States of origin impose a tax burden on Maryland insurers that exceeds the burden which Maryland has otherwise imposed on them. Although the statute speaks in terms of the Commissioner imposing this additional levy, it seems clear from the context that the imposition is effectively made by the General Assembly; the Commissioner’s authority is limited to ascertaining in each case what the respective burdens actually are. That is essentially a factual determination, from which the calculation of the additional levy becomes a matter of arithmetic. ⁴⁶⁷ The second sentence of § 61(1) — the one at issue here — is basically an adjunct to the first part of the statute. The Legislature has declared that, in computing the burden imposed by foreign States on Maryland insurers, local taxes “shall be deemed to be imposed by such state ... within the meaning of this section.” That is a clear legislative mandate that the Commissioner may not ignore.

If there is such a local tax, the Commissioner must regard it as though it were imposed by the State. His discretion is limited to devising a