W. & S. Life Ins. Co. v. Board of Equalization
451 U.S. 648 (1981)

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U.S. Supreme Court

W. & S. Life Ins. Co. v. Board of Equalization, 451 U.S. 648 (1981)

Western & Southern Life Ins. Co. v. Board of Equalization

No. 79-1423

Argued January 12, 1981

Decided May 26, 1981

451 U.S. 648

APPEAL FROM THE COURT OF APPEAL OF CALIFORNIA,

SECOND APPELLATE DISTRICT

Syllabus

California, in addition to imposing a premiums tax on both foreign and domestic insurance companies doing business in the State, imposes a "retaliatory" tax on such a foreign insurer when the insurer's State of incorporation imposes higher taxes on California insurers doing business in that State than California would otherwise impose on that State's insurers doing business in California. Appellant, an Ohio insurer doing business in California, after unsuccessfully filing administrative refund claims for California retaliatory taxes paid, brought a refund suit in California Superior Court, alleging that the retaliatory tax violates the Commerce Clause and the Equal Protection Clause of the Fourteenth Amendment. The Superior Court ruled the tax unconstitutional, but the California Court of Appeal reversed.

Held:

1. The retaliatory tax does not violate the Commerce Clause. The McCarran-Ferguson Act, which leaves the regulation and taxation of insurance companies to the States, removes entirely any Commerce Clause restriction upon California's power to tax the insurance business. Neither the language nor the history of that Act suggests that it does not permit, as appellant argues, "anticompetitive state taxation that discriminates against out-of-state insurers." Pp. 451 U. S. 652-655.

2. Nor does the retaliatory tax violate the Equal Protection Clause. Pp. 451 U. S. 655-674.

(a) Whatever the extent of a State's authority to exclude foreign corporations from doing business within the State, that authority does not justify imposition of 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. Pp. 451 U. S. 655-668.

(b) The purpose of the retaliatory tax, to promote the interstate business of California insurers by deterring other States from imposing discriminatory or excessive taxes on California insurers, is a legitimate state purpose. And the California Legislature rationally could have

Page 451 U. S. 649

believed that the retaliatory tax would promote that purpose, it being immaterial whether, in fact, the tax will accomplish its objectives. Assuming that the lawmakers of each State are motivated in part by a desire to promote the interests of their domestic insurance industry, it is reasonable to suppose that California's retaliatory tax will induce other States to lower the burdens on California insurers in order to spare their domestic insurers the cost of the retaliatory tax in California. Pp. 451 U. S. 668-674.

99 Cal.App.3d 410, 159 Cal.Rptr. 539, affirmed.

BRENNAN, J., delivered the opinion of the Court, in which BURGER, C.J., and STEWART, WHITE, MARSHALL, POWELL, and REHNQUIST, JJ., joined. STEVENS, J., filed a dissenting opinion, in which BLACKMUN, J., joined, post, p. 451 U. S. 674.

JUSTICE BRENNAN delivered the opinion of the Court.

California imposes two insurance taxes on insurance companies doing business in the State. A premiums tax, set at a fixed percentage of premiums paid on insurance policies issued

Page 451 U. S. 650

in the State, is imposed on both foreign and domestic insurance companies, and a "retaliatory" tax, set in response to the insurance tax laws of the insurer's home State, is imposed on some foreign insurance companies. This case presents the question of the constitutionality of retaliatory taxes assessed by the State of California against appellant Western & Southern Life Insurance Co., an Ohio corporation, and paid under protest for the years 1965 through 1971.

I

Section 685 of the California Insurance Code imposes a retaliatory tax on out-of-state insurers doing business in California when the insurer's State of incorporation imposes higher taxes on California insurers doing business in that State than California would otherwise impose on that State's insurers doing business in California. [Footnote 1] In computing the retaliatory

Page 451 U. S. 651

tax owed by a given out-of-state insurer, California subtracts the California taxes otherwise due from the total taxes that would be imposed on a hypothetical similar California company doing business in the out-of-state insurer's State of incorporation. If the other State's taxes on the hypothetical California insurer would be greater than California'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 California insurer would be less than or equal to California's taxes, however, California exacts no retaliatory tax from the other State's insurer.

Western & Southern, an Ohio corporation headquartered in Ohio, has engaged in the business of insurance in California since 1955. During the years in question, the company paid a total of $977,853.57 to the State in retaliatory taxes. After unsuccessfully filing claims for refunds with appellee Board of Equalization, Western & Southern initiated this refund suit in Superior Court, arguing that California's retaliatory tax violates the Commerce and Equal Protection Clauses of the United States Constitution. [Footnote 2]

Page 451 U. S. 652

The Superior Court tried the case on stipulated facts without a jury, and ruled that the retaliatory tax is unconstitutional. It ordered a full refund of retaliatory taxes paid, plus interest and costs. App. 78-79. The California Court of Appeal reversed, upholding the retaliatory tax. 99 Cal.App.3d 410, 159 Cal.Rptr. 539. The California Supreme Court denied Western & Southern's petition for hearing. App. 89. Western & Southern filed a notice of appeal in this Court, and we noted probable jurisdiction. 449 U.S. 817 (1980). We affirm.

II

The Commerce Clause provides that "The Congress shall have Power . . . To regulate Commerce . . . among the several States." U.S.Const, Art. I, § 8, cl. 3. In terms, the Clause is a grant of authority to Congress, not an explicit limitation on the power of the States. In a long line of cases stretching back to the early days of the Republic, however, this Court has recognized that the Commerce Clause contains an implied limitation on the power of the States to interfere with or impose burdens on interstate commerce. [Footnote 3] Even in the absence of congressional action, the courts may decide whether state regulations challenged under the Commerce Clause impermissibly burden interstate commerce. See, e.g., Minnesota v. Clover Leaf Creamery Co.,449 U. S. 456 (1981); Philadelphia v. New Jersey,437 U. S. 617 (1978).

Our decisions do not, however, limit the authority of Congress to regulate commerce among the several States as it sees fit. In the exercise of this plenary authority, Congress may "confe[r] upon the States an ability to restrict the flow of interstate commerce that they would not otherwise enjoy." Lewis v. BT Investment Managers, Inc.,447 U. S. 27, 447 U. S. 44 (1980); see H. P. Hood & Sons, Inc. v. Du Mond,336 U. S. 525, 336 U. S. 542-543 (1949). If Congress ordains that the States

Page 451 U. S. 653

may freely regulate an aspect of interstate commerce, any action taken by a State within the scope of the congressional authorization is rendered invulnerable to Commerce Clause challenge.

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, 59 Stat. 33, 15 U.S.C. § 1011 et seq., as this Court acknowledged in State Board of Insurance v. Todd Shipyards Corp.,370 U. S. 451, 370 U. S. 452 (1962). See also Group Life & Health Ins. Co. v. Royal Drug Co.,440 U. S. 205, 440 U. S. 219, n. 18 (1979); Wilburn Boat Co. v. Firemen's Fund Ins. Co.,348 U. S. 310, 348 U. S. 319 (1955). Nevertheless, Western & Southern, joined by the Solicitor General as amicus curiae, argues that the McCarran-Ferguson Act does not permit "anticompetitive state taxation that discriminates against out-of-state insurers." Brief for Appellant 28; Brief for United States as Amicus Curiae 16. We find no such limitation in the language or history of the Act.

Section 1 of the Act, 59 Stat. 33, 15 U.S.C. § 1011, contains a declaration of policy:

"Congress declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States."

Section 2(a), 59 Stat. 33, 15 U.S.C. § 1012(a), declares: "The business of insurance . . . shall be subject to the laws of the several States which relate to the regulation or taxation of such business." The unequivocal language of the Act suggests no exceptions.

The McCarran-Ferguson Act was passed in the wake of United States v. South-Eastern Underwriters Assn.,322 U. S. 533 (1944), which held that insurance is "commerce" within the meaning of the Commerce Clause. Prior to South-Eastern

Page 451 U. S. 654

Underwriters, insurance was not considered to be commerce within the meaning of the Commerce Clause, New York Life Ins. Co. v. Deer Lodge County,231 U. S. 495 (1913); Paul v. Virginia, 8 Wall. 168 (1869), and thus "negative implication from the commerce clause was held not to place any limitation upon state power over the [insurance] business." Prudential Ins. Co. v. Benjamin,328 U. S. 408, 328 U. S. 414 (1946) (emphasis added). Believing that the business of insurance is "a local matter, to be subject to and regulated by the laws of the several States," H.R.Rep. No. 143, 79th Cong., 1st Sess., 2 (1945), Congress explicitly intended the McCarran-Ferguson Act to restore state taxing and regulatory powers over the insurance business to their pre-South-Eastern Underwriters scope. H.R.Rep. No. 143, supra, at 3; see SEC v. National Securities, Inc.,393 U. S. 453, 393 U. S. 459 (1969); Maryland Casualty Co. v. Cushing,347 U. S. 409, 347 U. S. 412-413 (1954). The Court has squarely rejected the argument that discriminatory state insurance taxes may be challenged under the Commerce Clause despite the McCarran-Ferguson Act. Prudential Ins. Co. v. Benjamin, supra; Prudential Ins. Co. v. Hobbs, 328 U.S. 822 (1946) (per curiam). In Benjamin, the Court considered a South Carolina insurance premiums tax imposed solely on foreign insurance companies. The Court found it unnecessary to decide whether the tax "would be valid in the dormancy of Congress' power," 328 U.S. at 328 U. S. 427, or whether the tax "would be discriminatory in the sense of an exaction forbidden by the commerce clause," id. at 328 U. S. 428. Expressly assuming that the tax would be discriminatory, id. at 328 U. S. 429, the Court held that enactment of the McCarran-Ferguson Act

"put the full weight of [Congress'] power behind existing and future state legislation to sustain it from any attack under the commerce clause to whatever extent this may be done with the force of that power behind it, subject only to the exceptions expressly provided for."

Id. at 328 U. S. 431. In Hobbs, this Court sustained against a Commerce Clause challenge a Kansas retaliatory insurance tax indistinguishable

Page 451 U. S. 655

from California's. [Footnote 4] The Kansas Supreme Court, upholding the retaliatory tax, had held that the McCarran-Ferguson Act "left the matter of regulation and taxation of insurance companies to the states." In re Insurance Tax Cases, 160 Kan. 300, 313, 161 P.2d 726, 735 (1945). This Court summarily affirmed, citing Benjamin and its companion case, Robertson v. California,328 U. S. 440 (1946). Prudential Ins. Co. v. Hobbs, supra, at 822. [Footnote 5]

We must therefore reject Western & Southern's Commerce Clause challenge to the California retaliatory tax: the McCarran-Ferguson Act removes entirely any Commerce Clause restriction upon California's power to tax the insurance business.

III

Ordinarily, there are three provisions of the Constitution under which a taxpayer may challenge an allegedly discriminatory state tax: [Footnote 6] the Commerce Clause, see, e.g., 430 U. S. S. 656

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