ATTORNEYS FOR APPELLANT ATTORNEYS FOR APPELLEE
Gregory F. Zoeller Richard D. Birns
Attorney General of Indiana Birns & Goff
Philadelphia, Pennsylvania
Andrew W. Swain
Chief Counsel Jeffrey S. Dible
Frost Brown Todd LLC
Jessica E. Reagan Indianapolis, Indiana
Deputy Attorney General
Indianapolis, Indiana FILED
Jun 21 2012, 8:43 am
______________________________________________________________________________
CLERK of the supreme court,
court of appeals and
In the
tax court
Indiana Supreme Court
_________________________________
No. 49S10-1107-TA-417
INDIANA DEPARTMENT OF REVENUE,
Petitioner (Respondent below),
v.
UNITED PARCEL SERVICE, INC.
Respondent (Petitioner below).
_________________________________
On Petition for Review from the Indiana Tax Court, No. 49T10-0704-TA-24
The Honorable Thomas G. Fisher, Judge
_________________________________
June 21, 2012
Rucker, Justice.
In this case we examine whether income received by a corporation’s affiliated foreign
reinsurance companies falls within the ambit of Indiana’s gross premium privilege tax statute
and is on that basis exempt from Indiana adjusted gross income tax.
Background
Typically, insurance premiums paid by a corporation are deductible from federal
corporate gross income as ordinary and necessary business expenses. See Clinton N. McGrath,
Jr., Using Captives to Manage Risk, 35 Am. Inst. of Certified Pub. Accountants Tax Adviser
419, 419 (July 2004). However, a company electing to insure its own risks does not receive this
tax benefit. See id. For this and other reasons, “a non-insurance company [may] establish[] an
insurance subsidiary (often in Bermuda or another offshore location) to insure risks of the U.S.
parent and other subsidiaries.” Joint Comm. on Taxation Reinsurance Analysis at 4 n.5.1 This is
commonly called a “captive” insurance arrangement. Id.
Insurance companies are subject to federal income tax at regular corporate tax rates,
though companies qualifying as “insurance companies” under federal law benefit from certain
federal tax code provisions applying specifically to insurance companies. Id. at 14; McGrath,
supra, at 419. In Indiana and many other states, insurance companies are required to pay tax on
earned premiums, in lieu of state corporate income tax. See Ind. Code §§ 6-3-2-2.8(4), 27-1-18-
2(d) (2000 supp.), 27-1-18-2(h) (2001 supp.). 2 See also 14A William Meade Fletcher, Fletcher
Cyclopedia of the Law of Corporations § 6966 at 411-12 (perm. ed. rev. vol. 2008).
Foreign insurance companies have been obligated to pay Indiana premiums tax since at
least 1873, although Indiana’s first uniform system of income tax was not instituted until 1933.
See Linda C. Gugin & James E. St. Clair, The Governors of Indiana 295 (2006); Carlyn E.
1
More precisely Joint Comm. on Taxation, Present Law and Analysis Relating to the Tax Treatment of
Reinsurance Transactions Between Affiliated Entities 2, 3 (July 12, 2010) [hereinafter Joint Comm. On
Taxation Reinsurance Analysis], available at http://www.jct.gov/publications.html?func=startdown
&id=3690.
2
Unless otherwise noted, the statutory language cited is that in effect during 2000 and 2001, the years at
issue in this case.
2
Johnson, Taxing Interstate Commerce: A New Experience in Indiana, 39 Notre Dame L. 557,
557 (1963-64). In essence, the premiums tax works like an excise tax permitting a foreign
insurer to do business in the state. See Fletcher, supra n.1, § 6966 at 411-12. The tax is typically
calculated as a percentage of annual premiums a foreign insurer collects on its policies in the
taxing state, minus various deductions. See id. at 412-15. In Indiana, an insurance company that
is covered by the premiums tax statute is exempt from income tax. See I.C. §§ 6-3-2-2.8(4), 27-
1-18-2(d) (2000 supp.), 27-1-18-2(h) (2001 supp.).
Reinsurance is a type of “insurance for insurers.” Joint Comm. on Taxation Reinsurance
Analysis, supra n.1, at 3. More specifically, “[a] reinsurance transaction is an agreement
between insurance companies to pass – or cede – a risk, or a block of risks, from one company to
the other company.” Id. See also Black’s Law Dictionary 1399 (9th ed. 2009) (defining
“reinsurance” as “[i]nsurance of all or part of one insurer’s risk by a second insurer, who accepts
the risk in exchange for a percentage of the original premium”). Petitioner United Parcel Service
describes reinsurance as essentially an indemnification agreement – a transaction in which one
insurer (the reinsurer) indemnifies another insurer (the primary insurer) against all or part of the
loss the primary insurer may sustain under the policies of insurance it has issued. See
Appellant’s App. at 50 (citing Reinsurance Ass’n. of Am., Fundamentals of Property and
Casualty Reinsurance (2007)).
Facts and Procedural History
United Parcel Service (UPS) and its affiliates comprise the world’s largest package
delivery company. Appellant’s App. at 38. UPS and its affiliates have traditionally filed a
“consolidated” Indiana corporate income tax return whereby UPS filed one tax return on behalf
of itself and its affiliates. See I.C. § 6-3-4-14; Pet’r’s Designation of Evidence in Support of
Mot. for Summ. J. at 1 [hereinafter D.E.]. UPS’s numerous affiliates include reinsurance
companies UPINSCO (formed under the laws of the U.S. Virgin Islands) and UPS Re (formed
under the laws of Bermuda) (the “Affiliates”). For its operations nationwide, including in
Indiana, UPS decided to obtain worker’s compensation insurance to cover its employees, as well
as liability insurance for damage to its packages. During the years at issue, UPS contracted with
3
Liberty Mutual Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa.,
and Illinois National Insurance Company (the “Primary Insurers”) to provide this insurance. The
Affiliates then reinsured, or indemnified, the Primary Insurers for these risks. As UPS declared
at oral argument, it ultimately desired to bear its own risks for worker’s compensation and
package damage losses. Oral Arg. Video Tr. at 26:02-26:40. And UPS accomplished this end
through the reinsurance arrangement with its Affiliates. Oral Arg. Video Tr. at 26:02-26:40.
The net effect is that UPS’s own subsidiaries ultimately insured UPS’s risks, but without the
federal tax disadvantages of self-insurance.
This case stems from an Indiana Department of Revenue (“Department”) audit of UPS’s
Indiana corporate income tax returns for the years 2000 and 2001. In 2000, UPS amended its
originally-filed year 2000 tax return to exclude from federal taxable income, and thus from
Indiana adjusted gross income, the income of the Affiliates.3 These exclusions contributed to a
$359,466.00 reduction in UPS’s total Indiana adjusted gross income tax for the year 2000, for
which UPS sought a refund. UPS’s 2001 tax return likewise excluded the income of the
Affiliates, resulting in a lower total tax liability imposed on UPS than if the income of the
Affiliates had been included. In its audit, the Department disallowed the exclusion. The
Department also denied UPS’s request for a refund for tax year 2000 and issued a proposed
assessment for underpaid taxes in 2001, resulting in a net proposed assessment of $390,715.94.
See D.E. at 279.
UPS protested the assessment and after a hearing the Department issued a Letter of
Findings denying UPS’s protest. UPS filed a timely appeal of the denial with the Indiana Tax
Court. The parties filed cross-motions for summary judgment. After a hearing and in an
unpublished order the court granted UPS’s motion for summary judgment and denied the
Department’s motion. See United Parcel Serv., Inc. v. Ind. Dep’t of State Revenue, No. 49T10-
0704-TA-24 (Ind. Tax Ct. December 29, 2010). The court reasoned that because UPS was
3
Though the record is not entirely clear, it appears that the amended 2000 return also included other
adjustments to UPS’s income. The only adjustments at issue here concern the exclusion of income from
UPINSCO and UPS Re.
4
“subject to” the premium tax, it was exempt from the adjusted gross income tax. We granted
review. Additional facts are set forth below where necessary.
Standard of Review
The Indiana Tax Court was established to develop and apply specialized expertise in the
prompt, fair, and uniform resolution of state tax cases. Ind. Dep’t of State Revenue v. Belterra
Resort Ind., LLC, 935 N.E.2d 174, 176 (Ind. 2010). This Court extends cautious deference to
decisions within the special expertise of the Tax Court, and we do not reverse unless the ruling is
clearly erroneous. Id. We extend the same presumption of validity to Tax Court rulings on
summary judgment and apply the same standard of review. Id. at 176-77; Ind. Dep’t of State
Revenue v. Bethlehem Steel Corp., 639 N.E.2d 264, 266 (Ind. 1994). That is, “[w]hen a
summary judgment involves a question of law within the particular purview of the Tax Court,
cautious deference is appropriate.” Bethlehem Steel, 639 N.E.2d at 266 (quoting Ind. Dep’t. of
State Revenue v. Caylor-Nickel Clinic, P.C., 587 N.E.2d 1311, 1313 (Ind. 1992)). We will set
aside the Tax Court’s determinations of tax law on summary judgment only if we are definitely
and firmly convinced that an error was made. Id.
Discussion
During the tax years at issue, several state taxes applied to corporate income, including an
adjusted gross income tax imposed “on that part of the adjusted gross income derived from
sources within Indiana of every corporation.” I.C. § 6-3-2-1(b). The adjusted gross income tax
is an apportioned tax designed to reach income from interstate transactions. Bethlehem Steel
Corp., 639 N.E.2d at 266 n.4. However, Indiana Code section 6-3-2-2.8(4) provides in relevant
part, “there shall be no tax on the adjusted gross income of . . . [i]nsurance companies subject to
tax under IC 27-1-18-2.” (emphasis added).
In turn, Indiana Code section 27-1-18-2 provides for a gross premium privilege tax, or
“premiums tax” for short. In brief, the statute requires all foreign insurance companies “doing
business within this state” to report annually to the Department of Insurance “the gross amount
5
of all premiums received by it on policies of insurance covering risks within this state.” I.C. §
27-1-18-2(a). Deducted from this amount are “considerations received for reinsurance of risks
within this state.” I.C. § 27-1-18-2(a)(1). Under this statute, the insurance company is taxed at a
certain rate on “the excess, if any, of the gross premiums over the allowable deductions.” I.C. §
27-1-18-2(c) (2001 supp.).4
Both parties to this litigation have focused on the meaning of the phrase “subject to”
under the provision of Indiana Code section 6-3-2-2.8(4). The Department insists that UPS is
not subject to the premiums tax because it did not comply with the various provisions of the
statute, see supra n. 4, and thus does not qualify for an exemption. Just as important, according
to the Department, neither of the Affiliates has ever paid the premiums tax as required by statute.
UPS counters it never paid the premiums tax because all the premiums it received were for
reinsurance and thus were deductible from gross premiums under section 27-1-18-2(a)(1). UPS
asserts, “[i]t is undisputed that the two insurance affiliates of UPS received premiums on policies
of insurance covering risks within Indiana.” Br. in Resp. to Pet’n for Review at 2. Thus, UPS
posits that the reinsurance Affiliates were “subject to” the premiums tax such that their income
should have been excluded from the corporate adjusted gross income tax. Br. in Resp. to Pet’n
for Review at 2.
4
More particularly relevant portions of the statute provide:
(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: (1)
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.
I.C. § 27-1-18-2 (2000 supp.).
6
The Tax Court concluded, “[T]o be ‘subject to’ the premiums tax under Indiana Code §
6-3-2-2.8(4) does not mean that one must ‘pay’ the premiums tax; rather, it simply means that
one is ‘placed under the authority, dominion, control, or influence’ of the premiums tax under §
27-1-18-2.” United Parcel Serv., No. 49T10-0704-TA-24, slip op. at 6 (footnote omitted)
(quoting Webster’s Third New Int’l Dictionary 2275 (2002 ed.)). According to the Tax Court
“Indiana Code § 6-3-2-2.8(4), in conjunction with Indiana Code § 27-1-18-2, clearly
demonstrate[s] that UPINSCO and UPS Re were ‘subject to’ the premiums tax under Indiana
Code § 27-1-18-2.” Id. at 7.
Assuming without deciding that the Tax Court’s interpretation of the phrase “subject to”
is correct, that is, “one is ‘placed under the authority, dominion, control, or influence’ of the
premiums tax under § 27-1-18-2” we are of the view this does not resolve the question of
whether the Affiliates are entitled to an exemption from the payment of adjusted gross income
tax.
As with other statutes, we interpret tax statutes to give effect to their language and the
intent of the legislature. See Ind. Wholesale Wine & Liquor Co. v. State ex rel. Ind. Alcoholic
Beverage Comm’n, 695 N.E.2d 99, 103, 104-05 (Ind. 1998); DeKalb Cnty. E. Cmty. Sch. Dist.
v. Dep’t of Local Gov’t Fin., 930 N.E.2d 1257, 1260 (Ind. Tax Ct. 2010). Further, “[i]t has long
been held that exemption statutes are to be strictly construed against the taxpayer and, therefore,
the burden is on the taxpayer to establish its right to an exemption.” Tipton Cnty. Health Care
Found., Inc. v. Tipton Cnty. Assessor, 961 N.E.2d 1048, 1051 (Ind. Tax Ct. 2012).
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. 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 . . . .” I.C. § 27-1-18-2(a) (emphasis added).
7
Title 27 of the Indiana Code governs the business of insurance within the state of Indiana.
Article 1 of this title provides for the creation of a state department of insurance (the “Insurance
Department”) which will “have charge of the organization, supervision, regulation, examination,
rehabilitation, liquidation, and/or conservation of all insurance companies to which this title is
applicable, shall have charge of the enforcement, administration, and execution of the provisions
of this title . . . .” I.C. § 27-1-1-1). The code further provides that the commissioner of the
Insurance Department “may issue a certificate of authority to any company when it shall have
complied with the requirements of the laws of this state so as to entitle it to do business herein,”
and “[n]o company shall transact any business of insurance or hold itself out as a company in the
business of insurance in Indiana until it shall have received a certificate of authority as
prescribed in this section.” I.C. § 27-1-3-20(a), (c). Foreign insurance companies are
specifically required to obtain this certificate of authority, I.C. § 27-1-17-1, and in order to do so
they must comply with comprehensive Insurance Department requirements including submitting
an application for admission and providing extensive documentation of their corporate
organization and financial condition. See I.C. § 27-1-17-4.
Focusing on the fact that UPINSCO and UPS Re are foreign reinsurance companies that
collected premiums for reinsurance of risks within the State of Indiana, UPS insists the adjusted
gross income of the Affiliates “was and is exempt” from corporate adjusted gross income tax.
Pet’r’s Mot. for Summ. J. at 2. However, the mere fact that the Affiliates “collected premiums
for reinsurance of risks” in Indiana does not ipso facto establish they were doing business in
Indiana. We find support for this view in State ex rel. Crittenberger v. Continental Insurance Co.
of New York, 116 N.E. 929 (Ind. Ct. App. 1917).
In that case the state auditor, Crittenberger, sought to recover premiums tax on
reinsurance premiums received by Continental, an insurance company organized under the laws
of New York. Continental maintained a primary fire insurance business in Indiana, and also
received reinsurance premiums from other foreign insurers for risks located in Indiana. One
question in the case was whether under the terms of the premiums tax statute Continental had the
duty to pay Indiana premiums tax on the reinsurance premiums it received. 5 The Court of
5
In relevant part the statute at issue in Crittenberger was much the same as it is today. It read:
8
Appeals construed the statute to mean “the tax shall be imposed only on business done within the
territorial boundaries of the state of Indiana” because the premiums tax statute applied to “every
insurance company not organized under the laws of this state, and doing business therein.”
Crittenberger, 116 N.E. at 934-35. The Court of Appeals determined that reinsurance
transactions occurring outside of Indiana, even if they involved primary risks located in Indiana,
did not amount to business done in the state. The court reasoned:
Where a foreign company takes over from another foreign
company, for the purpose of reinsurance, risks on property in this
state, the transaction is, of course, between the companies, and the
insurer would not be subject to the tax on the reinsurance premium
received if the business was not done in this state. And this would
be so whether the companies were licensed to do business in this
state or not.
Id. at 935.6 The court next analyzed the reinsurance transaction at issue and found it took place
entirely within the state of Illinois. Therefore, the court held that Continental was “not required
Every insurance company not organized under the laws of this state, and
doing business therein, shall, in the months of January and July of each
year, report to the auditor of state under oath of the president and
secretary the gross amount of all receipts received in the state of Indiana
on account of insurance premiums for the six months last preceding,
ending on the last day of December and June of each year next
preceding, and shall at the time of making such report pay into the
treasury of the state the sum of three dollars on every one hundred
dollars of such receipts, less losses actually paid within the state, and any
such insurance company failing or refusing for more than thirty days to
render an accurate [account] of its premium receipts as above provided
and pay the required tax thereon shall forfeit one hundred dollars for
each additional day such report and payment shall be delayed, to be
recovered in an action in the name of the state of Indiana on the relation
of the auditor of state in any court of competent jurisdiction, and it shall
be the duty of the auditor of state to revoke all authority of any such
defaulting company to do business within this state.
Burns Ann. Ind. Statutes § 10216 (1914).
6
Accord Ind. Att’y Gen., Insurance Department: No authority for premium tax on reinsurance premiums.
Reinsurance premiums no right to tax, 181, 184 (Apr. 12, 1938) (“[I]t is my opinion that the State of
Indiana cannot collect a premium tax on reinsurance premiums, whether the company is authorized to do
business in Indiana or not, so long as such companies, parties to the reinsurance agreement, are foreign
insurance companies and the reinsurance contract is consummated beyond the borders of the state.”)
(citing Conn. Gen. Life Ins. Co. v. Johnson, 303 U.S. 77 (1938)). See also Ind. Att’y Gen., Official
Opinion No. 81, 313, 319 (Aug. 13, 1946) (concluding that because Indiana cannot tax reinsurance
9
to pay taxes to the state of Indiana on said reinsurance premiums.” Id.7 Although interpreting a
much earlier version of the premium tax statute, the Court of Appeals’ assessment applies with
equal force to the statute before us today.
The question here is whether the summary judgment materials presented to the Tax Court
support the conclusion that during the years in question UPINSCO and UPS Re were “doing
business within this state.” The record shows and the parties do not dispute the reinsurance
transactions at issue took place between foreign companies – that is, neither the Primary Insurers
nor UPINSCO and UPS Re are organized under the laws of Indiana. UPS designated a
substantial amount of evidentiary material concerning its business operations including
agreements governing its reinsurance transactions. The UPINSCO agreements specify all
payments under the agreements shall be made to the Primary Insurer whose address is listed as
Boston, Massachusetts. See, e.g., D.E. at 63, 60. UPINSCO’s address is listed as St. Croix, U.S.
Virgin Islands. See, e.g., D.E. at 46, 72. Payments under the UPINSCO agreements are to be
made via drafts on a letter of credit issued by an Italian bank, as presented to the bank’s New
York office. D.E. at 94. The UPS Re agreement provides that any “notice, report, order, request
or other communication” shall be made to UPS Re in Hamilton, Bermuda and Atlanta, Georgia8
and to the Primary Insurer in New York, New York. D.E. at 112. The UPS Re agreement
provides that UPS Re’s liability “shall attach simultaneously with that of the [Primary Insurer] . .
. [but] nothing herein shall in any manner create any obligation to or establish any rights against
premiums and reinsurance losses are not paid within the state, reinsurance losses are not deductible by an
insurer in computing premium tax due).
7
Indiana is not alone in concluding its premiums tax statute does not apply to reinsurance agreements.
See Fletcher, supra n.1, § 6966 at 414-15. See also, e.g., In re Cont’l Cas. Co., 179 N.W. 185, 189 (Iowa
1920) (concluding that reinsurance of Iowa risks between New York insurance companies “was business
done by these companies in the state of their domicile” and seeing “no fair reason for saying that such
business should be deemed as constructively done in Iowa, or should be deemed as coming within the
letter or spirit of our [premiums tax] statute”); People ex rel. Sea Ins. Co. v. Graves, 8 N.E.2d 872, 874
(N.Y. 1937) (holding a reinsurance contract entered into in New Jersey but covering primary risks in New
York constituted business done in New Jersey and was therefore not subject to New York premiums tax);
Se. Fire Ins. Co. v. S.C. Tax Comm’n, 171 S.E.2d 355, 356 (S.C. 1969) (recognizing “[t]here is certainly
a difference between insurance and reinsurance” and determining a statute taxing “total premiums . . .
from insurance contracts” did not apply to reinsurance contracts).
8
The contract specifies the Primary Insurer shall copy all Bermuda notices to a UPS Re fax number with
a 404 area code. 404 is the area code for Atlanta, Georgia.
10
[UPS Re] by any third parties or any persons not parties to this Agreement.” D.E. at 107. The
UPINSCO agreements contain a choice of venue provision for Massachusetts state courts, an
arbitration clause in which arbitration is to take place in Boston, Massachusetts, mandates that
the agreements “shall be governed by the law of the Commonwealth of Massachusetts,” requires
service to UPINSCO in St. Croix and Atlanta, Georgia, and requires service to the Primary
Insurer in Massachusetts. D.E. at 66, 67, 71, 77, 78. The UPS Re agreement provides for choice
of venue and law in New York and mandates service to be given in the same manner as other
notices under the agreement. D.E. at 111.
In sum, even assuming UPINSCO and UPS Re reinsured Indiana risks, there is no
evidence in the record before us that the reinsurance transactions took place in the State of
Indiana. Stated somewhat differently, none of the summary judgment materials presented to the
Tax Court and in consequence nothing before this Court establishes that during the years in
question UPINSCO and UPS Re were doing business within the State of Indiana. Because this is
a necessary condition in order to be “subject to” the premium tax, UPS failed in its burden of
establishing that it is entitled to summary judgment as a matter of law. Because we are definitely
and firmly convinced the Tax Court’s determination to the contrary is in error, we reverse the
grant of summary judgment in favor of UPS and remand this cause for further proceedings.
Conclusion
The judgment of the Tax Court is reversed and this cause remanded.
Dickson, C.J., and Sullivan, David and Massa, JJ., concur.
11