Johnson & Johnson will get a refund of $55.9 million that it paid in New Jersey insurance coverage premium tax for funds to a subsidiary that insured solely J&J and its associates as a “captive” insurer and weren’t paid for surplus line insurance coverage to which the tax utilized..
J&J as a precautionary measure paid the tax on its complete U.S. coverage from its captive insurer however later determined it didn’t owe the tax and sought a refund. The New Jersey Division of Taxation denied the refund, and the state Tax Court docket agreed with the division. The New Jersey Superior Court docket Appellate Division reversed and located for the corporate (Johnson & Johnson v. N.J. Div. of Taxation, No. A-5423-17T3 (N.J. Tremendous. Ct. App. Div. 9/25/19)).
Johnson & Johnson is a New Jersey company headquartered in New Brunswick, N.J. In 1970, J&J shaped Middlesex Assurance Co. Middlesex offers insurance coverage protection solely to J&J and J&J’s dangers within the U.S. Middlesex, due to this fact, is what’s popularly often called a “pure captive” insurance coverage firm. A pure captive insurance coverage firm, as its title implies, insures solely the chance(s) of its dad or mum.
There are two completely different insurance coverage markets—admitted insurance coverage and non-admitted insurance coverage, or as they’re recognized in New Jersey, “approved” and “unauthorized.” A licensed insurer, not surprisingly, is one who has a license to transact enterprise inside a selected state, whereas an unauthorized insurer is one who is just not so licensed. Nonetheless, unauthorized insurance coverage corporations can nonetheless concern insurance coverage insurance policies to residents of states wherein they don’t seem to be licensed beneath sure circumstances.
Surplus Traces Insurance coverage vs. Self-Procured Insurance coverage
In New Jersey, there are two fundamental sorts of unauthorized insurance coverage markets—the “surplus strains” market and the “self-procured” market. The previous entails New Jersey dangers which insurance coverage corporations approved to do enterprise within the state have refused to cowl. A surplus strains insurer is an unauthorized insurer wherein an insurance coverage protection is positioned or could also be positioned beneath the excess strains legislation. The self-procured insurance coverage market consists of unauthorized insurers instantly offering protection to the insured. This insurance coverage is independently procured and obtained with out the help of a surplus strains agent. Insurance coverage that’s independently procured can’t be a surplus strains coverage, since such protection have to be so positioned by means of a licensed New Jersey surplus strains agent. Captive insurance coverage is part of the self-procured insurance coverage market. Not one of the protection that J&J procured, due to this fact, might be characterised as surplus strains insurance coverage.
Previous to 2011, the 12 months wherein the Non-admitted and Reinsurance Reform Act (NRRA) went into impact, New Jersey collected insurance coverage premium tax (IPT) on all unauthorized insurance coverage masking New Jersey dangers. Surplus strains insurance coverage was taxed beneath the authority of N.J. Stat. Part 17:22-6.59 (2010), (“59”). That statute required the insurance coverage agent to gather from the insured a tax of 5% of all gross premiums charged by the insurer. “If a surplus strains coverage covers dangers … solely partially on this State, the tax payable shall be computed on the portion of the premium which is correctly allocable to the dangers … situated on this State.”
Previous to the 2011 amendments, Part 17:22-6.64 (2010) (“64“), required the insured to instantly pay a 5% tax (the IPT) on the gross premiums it paid to acquire insurance coverage with an unauthorized captive insurer. This tax needed to be paid provided that the insurance coverage offered protection ”upon a topic of insurance coverage resident, situated or to be carried out with this State, aside from insurance coverage procured by means of a surplus strains agent.“
From 1960 by means of 2011, the premium receipts tax and the self-procurement tax had been calculated primarily based on an allocation of the insured’s dangers throughout the state. In 2008, J&J started to remit the IPT to NJ beneath 64. The quantity of tax due from J&J was calculated primarily based solely upon that portion of the premium allotted to dangers in New Jersey.
In 2011, the NRRA grew to become efficient. The NRRA created the “Dwelling State Rule,” which offers that “no State aside from the house State of an insured might require any premium tax cost for non-admitted [i.e., unauthorized] insurance coverage.” Following the enactment of the NRRA, the New Jersey Senate launched laws to “revise strategies of regulation and assortment of surplus strains insurance coverage premium taxes.” “Nothing within the legislative historical past of the enactment that adopted…indicated that the amendments associated to something aside from the taxation of premiums paid for surplus strains protection,” the court docket mentioned.
Part 2 of N.J. Legal guidelines 2011, Chapter 119, amended 59 to allow the State, for the primary time, to tax all premiums collected by the excess strains agent for surplus strains protection offered in New Jersey and different states if New Jersey was the house state. Nonetheless, the court docket famous, “nothing else within the statute modified.” The statute now reads: “If a surplus strains coverage covers dangers…on this State and different states, the place this State is the house state…the tax payable pursuant to this part (i.e., 59) shall be primarily based on the full United States premium for the relevant coverage.” Nothing else within the statute was modified.
J&J, nevertheless, by no means bought surplus strains protection by means of Middlesex and, the court docket famous, “on the face of the 2011 amendments … was nonetheless solely required to pay IPT upon the premiums it paid for protection involving a ’topic of insurance coverage resident, situated or to be carried out inside New Jersey.’” Nonetheless, “as a precautionary measure,” J&J started to calculate and remit IPT primarily based on its complete United States premiums. Nonetheless, in November 2015, having thought higher of this technique, J&J sought a refund of IPT within the quantity of $55.9 million plus curiosity. The N.J. Division of Taxation denied J&J’s refund declare. J&J, thereafter, filed a criticism within the New Jersey Tax Court docket.
Tax Court docket Clearly Erred
For probably the most half, in what may be counted solely as an ethical victory, “the Tax Court docket agreed with J&J.” Nonetheless, J&J merely gained the battle, whereas shedding the battle. The Tax Court docket dominated that the New Jersey Legislature should have supposed to incorporate the insurance coverage J&J procured beneath 64 “within the adoption of the Dwelling State Rule as a result of it supposed to incorporate all non-admitted insurers, and to not restrict it to solely surplus strains insurance coverage.“ The Tax Court docket reasoned that, in gentle of the truth that the Legislature amended each 59 and 64, the Legislature ”seemingly supposed to deal with each sorts of insurance coverage the identical by basing the tax upon complete United States premiums fairly than upon the premium paid to cowl New Jersey dangers and exposures.“ The Tax Court docket discovered the legislative intent (or its notion thereof anyway) to be extra persuasive than the exact language of 64.
The Tax Court docket erred, the Appellate Division mentioned. The language in 64, which clearly restricted J&J’s tax legal responsibility to the dangers it insured in New Jersey, was not modified “in any method, form, or type within the 2011 modification” to 64. The Legislature included a brand new paragraph in 64 in regards to the taxation of surplus strains protection. The paragraph acknowledged: ”If a surplus strains coverage covers dangers…on this State and different states, the place this State is the house state…the tax payable…shall be primarily based on the full United States premium for the relevant coverage.“
This paragraph, the court docket famous, “is restricted by its categorical phrases to surplus strains insurance coverage insurance policies.” J&J doesn’t procure surplus strains protection from Middlesex. Thus, this paragraph “is just inapplicable to J&J.” We’re, the court docket noticed, “unable to conclude that the Legislature, by particularly stating that the Dwelling State Rule solely utilized to surplus strains protection obtained by means of surplus strains brokers, likewise supposed to increase it to the sorts of insurance coverage protection procured by J&J from Middlesex.”
The Dwelling State Rule tax relevant to surplus strains insurance policies and premiums mustn’t, due to this fact, be imposed on J&J. The choice of the Tax Court docket denying J&J’s refund request was reversed.
This column doesn’t essentially mirror the opinion of The Bureau of Nationwide Affairs, Inc. or its house owners.
Robert Willens is president of the tax and consulting agency Robert Willens LLC in New York and an adjunct professor of finance at Columbia College Graduate Faculty of Enterprise.