IN THE SUPREME COURT OF TEXAS

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No. 05-0541

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First American Title Insurance Company and Old Republic National Title Insurance Company, Petitioners

v.

Susan Combs, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of Texas, Respondents

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On Petition for Review from the

Court of Appeals for the Third District of Texas

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Argued April 11, 2007

             Justice Hecht, joined by Justice Wainwright, Justice Brister, and Justice Medina, dissenting.

             Texas, like most other states,[1] taxes gross premiums for insurance of risks and property in the state,[2] and like every other state but Hawaii,[3] Texas imposes an additional retaliatory tax on out-of-state insurers doing business in Texas whose home states tax more heavily than Texas does, all other things being equal.[4] Such retaliatory taxes have been “a common feature of insurance taxation for over a century”,[5] and though they obviously impinge on interstate commerce, they do not implicate the “implied limitation on the power of the States to interfere with or impose burdens on interstate commerce” contained in the Commerce Clause of the United States Constitution because “Congress removed all Commerce Clause limitations on the authority of the States to regulate and tax the business of insurance when it passed the McCarran-Ferguson Act.”[6] But the Fourteenth Amendment Equal Protection guaranty does not permit states to impose “more onerous taxes or other burdens on foreign corporations than those imposed on domestic corporations, unless the discrimination between foreign and domestic corporations bears a rational relation to a legitimate state purpose.”[7] “[T]he principal purpose of retaliatory tax laws is to promote the interstate business of domestic insurers by deterring other States from enacting discriminatory or excessive taxes.”[8] The United States Supreme Court has held that this purpose is legitimate and that a retaliatory tax rationally related to it does not violate Equal Protection.[9]

             Texas’ retaliatory tax, first enacted in 1935[10] and consistently applied until this case, falls squarely within the Supreme Court’s holding. But in this case, the Comptroller has reinterpreted the statute as it applies to title insurers, multiplying the tax due and transforming it into a penalty on nonresident insurers doing business in Texas. This sudden departure from the settled application of the retaliatory tax was not prompted by any legislative revision of the statute or any change in retaliatory taxation in other states. The only apparent purpose for the Comptroller’s new position is to generate revenue from nonresident title insurers simply because they are nonresident. In my view, the Comptroller has misconstrued the tax statute so that it now violates Equal Protection. Because the Court disagrees, I respectfully dissent.

             When insurance is sold through an agent, the insurer and the agent share the premium revenue. For title insurance in Texas, the revenue division is set by the Commissioner of Insurance.[11] During the times material to this case, that division has been 15% to the insurer and 85% to the agent.[12] For decades, the retaliatory tax in Texas and other states has been determined by comparing the taxes on total premiums, not just the insurer’s share. A few years ago, it is not clear exactly when, the Comptroller decided for the first time to compare other states’ taxes on total premiums with Texas’ tax on only the insurer’s 15% share. Simply put, the Comptroller now takes the position that “total” means 100% in every other state and 15% in Texas.

             Ordinarily, everything is bigger in Texas, and though “total” is now smaller here, taxes have increased. The Comptroller’s “new math”, as the Court refers to it, multiplies the retaliatory tax and discriminates against out-of-state insurers doing business in Texas. For example, suppose an insurer from a state with a 2% premium tax rate does business in Texas, where the rate is 1.35%. On a $1,000 premium, the total tax would be $20 in the other state and $13.50 in Texas. Requiring the out-of-state insurer to pay a $6.50 retaliatory tax on its Texas business equalizes the tax burden on the two insurers’ business in each other’s state. Each insurer and its respective agents would, together, pay $20 in taxes and collect $980 in revenue. But in the Comptroller’s view, the retaliatory tax is determined by the difference between the other state’s $20 premium tax and the insurer’s 15% share of Texas’ $13.50 premium tax – $2.03 – a difference of $17.97. Hence, the out-of-state insurer together with its respective agents pays $31.47 in taxes and collects $969.73 in revenue. The Comptroller’s new math increases the out-of-state title insurer’s tax burden merely because the insurer is out-of-state.

             By artificially reducing the size of Texas’ premium tax, the Comptroller’s new position dictates that Texas impose retaliatory taxes even when insurers hail from states imposing lower premium taxes than Texas. Suppose an insurer from a state with a 1% premium tax does business in Texas. On a $1,000 premium, the Comptroller would compare the $2.03 insurer’s share of the Texas tax to the $10 premium tax in the other state and assess a $7.97 surcharge. In essence, for purposes of applying the retaliatory tax, the Comptroller has reduced Texas’ gross premiums tax rate by 85%, from 1.35% to 0.2025%. Virtually every other state taxes gross premiums, but none has so low a rate. The tax now applies to all out-of-state insurers doing business in Texas merely because they are not domestic companies. The retaliatory tax, thus construed, no longer operates to discourage excessive taxation in other states; it now operates to discourage foreign insurers from doing business in Texas.

             The Comptroller’s change in position transforms the retaliatory tax, long a means of equalizing tax burdens on domestic and foreign insurers doing business in Texas, into a penalty against out-of-state insurers. The Comptroller’s new position is not based on any change in the law. The relevant statutory provisions have been materially the same for decades. The retaliatory tax statute imposes “a tax . . . on a foreign insurer if . . . the foreign insurer’s state of organization . . . imposes a tax . . . on a similar domestic insurer that is . . . more than the [tax] this state directly imposes on the foreign insurer.”[13] The retaliatory tax must be “impose[d] and collect[ed] . . . in the same manner and for the same purpose” as the tax on the insurer in the other state.[14] These provisions, recodified in 2003,[15] were enacted in 1957[16] and derived from the first retaliatory tax statute enacted in 1935.[17] The premium tax statute imposes a “tax . . . on all premiums from the business of title insurance”,[18] “regardless of whether paid to a title insurance company or retained by a title insurance agent”,[19] to be paid by the insurer.[20] These provisions, also recodified in 2003,[21] and amended in 2007,[22] were enacted in 1987[23] and derived from prior premium tax statutes, the first one dating to 1893.[24]

             The Comptroller argues that the premium tax on the agent’s 85% share of premiums is not “directly impose[d]” on the insurer within the meaning of the retaliatory tax statute, even though the insurer must remit the tax. In furtherance of its view, the Comptroller in 2001 adopted a rule limiting an insurer’s liability for the premium tax to the amount due on its share.[25] The Comptroller acknowledges that no one took this position in the forty years after the phrase “directly imposes” was adopted in the 1957 statute, or in the ten years after the premium tax imposition and collection provisions were detailed in 1987. The Comptroller’s position not only discards a settled, decades-old application of statutory provisions frequently revisited and left substantively unchanged by the Legislature, it contradicts the purpose of a tax in place since at least 1935. This tax was based on the burden imposed by other states on the insurance industry and not on an artificial allocation of the tax burden between insurers and their agents.

             The Court concludes that the Comptroller’s reinterpretation of the statute is due deference under Tarrant Appraisal District v. Moore.[26] While an agency’s initial interpretation of a statute “is not carved in stone”,[27] an agency’s decision to depart from a longstanding interpretation is entitled to “considerably less deference” unless the agency provides some reasonable explanation for the change.[28] This is particularly so where the agency’s earlier interpretation is accompanied by legislative acquiescence.[29]

             But even if the Comptroller’s interpretation of “directly imposed” were entitled to more serious consideration, the plain language of the rest of the statute makes clear that the new interpretation is unreasonable.[30] The statute clearly requires the Comptroller to make apples-to-apples comparisons. Section 281.004 instructs the Comptroller to impose and collect the retaliatory tax “in the same manner and for the same purpose” as the foreign insurer’s state tax. The Court insists that the retaliatory tax focuses on the insurance company to the exclusion of agents, but it is myopic to view a tax on gross revenue as affecting only some of the participants in the business who must share that revenue. One cannot assume that insurers and agents in other states do not share premium revenues merely because Texas has a statute specifying how they must do so. Indeed, one must assume that insurers and agents expect to be paid and to share in premium revenue. If only the insurer’s share of the Texas premium tax is to be considered, then that share must be compared to the insurer’s share of the premium tax in the other state. But by comparing only the insurer’s share of the Texas premium tax to another state’s undivided premium tax, the Comptroller imposes and collects the retaliatory tax in a different manner and for a different purpose than the other state in imposing and collecting its tax.

             There is another equally important reason to reject the Comptroller’s new interpretation: it makes no sense. In Western & Southern, the Supreme Court acknowledged that a state has a legitimate interest in promoting interstate commerce by “deterring other States from enacting discriminatory or excessive taxes.”[31] But there is no rational basis for comparing 100% of another state’s premium taxes with 15% of Texas’ premium taxes to determine whether the other state’s taxes are excessive. Texas’ legitimate interests in deterring excessive taxation by other states are not served by retaliating whenever another state’s industry-wide tax would exceed Texas’ tax on some of the participants, or whenever another state employs a different accounting method for calculating and assessing premium taxes. Nor is it served by retaliating against states whose total premium taxes are lower than Texas’. Under the Comptroller’s new construction, the retaliatory tax provisions have been transformed into a means for blatant and unapologetic discrimination against out-of-state insurers and parochial protectionism.

             The Court asserts that “the Comptroller’s interpretation is consistent with the statutory scheme developed by the Legislature”,[32] but the fact is that the Comptroller and others who administered the retaliatory tax for decades thought a contrary interpretation was required by the statute. The Court adds that “[t]he Comptroller did not develop this scheme independently as a revenue-raising plan”,[33] but no other basis for the “scheme” has been advanced, and none is apparent. The Comptroller’s sudden multiplication of the retaliatory tax cannot serve the legitimate state purpose of discouraging excessive taxation in other states because even when a state’s tax rate is a fraction of the rate in Texas, insurers from that state must, in the Comptroller’s view, pay a retaliatory tax.

             I agree with the Court that whether other states may react in a way that is ultimately unfavorable to Texas insurers, or whether the Comptroller’s position may have other “unforeseen or unintended results”, is none of our business. But it is certainly our business to ensure that persons similarly situated are afforded the equal protection of the law guaranteed by the Fourteenth Amendment. The Court concludes that the retaliatory tax remains “an equalizer between similarly situated title insurers.”[34] The Comptroller’s treatment of Texas title insurers doing business in other states and out-of-state title insurers doing business in Texas is as equal as 15 is to 100.

             I would hold that the Comptroller’s position is not permitted by the text of the retaliatory tax statute or by the Fourteenth Amendment. Accordingly, I respectfully dissent.

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Nathan L. Hecht

Justice

Opinion delivered: May 16, 2008