May 17, 2007
FOR IMMEDIATE RELEASE
Texas Third Court of Appeals Reverses Grant of Taxpayer's Motion for Summary Judgment;
Independently Procured Insurance Tax Invalid.
On May 1, 2007, the Texas Third Court of Appeals ("Court") reversed the Travis County
District Court's grant of the taxpayer's Motion for Summary Judgment, which held that
the independently procured insurance tax (IPIT) is invalid because it violates the
McCarran-Ferguson Act (15 U.S.C.A. Sec. 1011-15). The Court determined that a state
can regulate insurance transactions that occur within its borders and that "as applied"
the tax does not violate Due Process or the McCarran-Ferguson Act. The pertinent facts
listed by the Court are 1) the supervisor of corporate insurance, who offices in Texas,
testified that he "supervised the procurement of the policies of insurance..."; 2) the
taxpayer, located in Texas, and the insurer exchanged e-mails and letters regarding the
insurance contracts; 3) the insurance contracts were negotiated and approved by the
taxpayer's employees in Texas; 4) premium payments, although transferred through a
Delaware representative, originated in Texas; and 5) losses were payable to the taxpayer's
owners in Texas.
The Court relies on Risk Managers Int'l, Inv. v. State, 858 S.W.2d 567 (Tex. App. – Austin 1993,
writ denied) to assert that the IPIT has been construed as an exemption from the state's
unauthorized insurance laws. By excluding independently procured insurance from the "business
of insurance," it becomes exempt from state regulation by the Department of Insurance, and
the tax is instead imposed on the insured.
The Court does not take into account whether the specific tax being imposed is correct.
Footnote No. 11 to the Opinion provides that, "[G]iven our holding that the independently
procured insurance tax as applied to the facts in this case does not violate Due Process or the
McCarran-Ferguson Act we do not reach the Comptroller's alternative argument that STP is liable
for the unauthorized insurance tax." However, it is clear, based on the discussion of the
requirements for the "exemption" under Tex. Ins. Code Sec. 101.053(b)(4), that the facts identified
by the Court do not satisfy that provision or those in Chapter 226 imposing the IPIT. Instead, the
facts described satisfy the requirements for imposing the unauthorized insurance premium tax described
in Tex. Ins. Code Sec. 226.003(d). But, if the unauthorized insurer defaults in payment of the
unauthorized insurance premium tax, the insured is still responsible for paying it under Tex. Ins.
Code Sec. 226.005(c). Because the Court determined that the tax as applied to the transaction does
not violate either Due Process or the McCarran-Ferguson Act, it apparently would not matter which
tax was involved.
The IPIT applies to insurance that is independently procured and that is negotiated for entirely
outside of Texas under Tex. Ins. Code Sec. 101.053(b) and Sec. 226.052. It is difficult to understand
how the location where a payment originates constitutes a sufficient contact with a state even if the
individual authorizing the payment is located in Texas. Would it matter if the bank account is located
outside of Texas? In addition, payment for losses occurs only after the insurance contract has been
entered into, not at the time of the transaction. A taxpayer would have to wait until the end of the
coverage period to determine whether any payments were issued to determine whether any tax is due.
If you have any questions regarding the above information, please contact Mr. Eric Stein, Principal, or
Ms. Sandi Farquharson, Senior Taxpayer Advocate, of the Ryan & Company Austin office, at 512.476.0022.
Mr. Stein and
Ms. Farquharson can also be reached via e-mail.
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