In Johnson & Johnson v. Director, Division of Taxation,(A-51-19/083612) (Decided December 7, 2020), the Supreme Court of New Jersey ruledthat Johnson & Johnson (J&J) was required to pay an insurance premium tax (IPT) based only upon its premium for risks localized in New Jersey rather than upon its total United States premium. Accordingly, the company is owed a $56 million tax refund.
Facts of Johnson & Johnson v. Director, Division of Taxation
J&J is insured through Middlesex Assurance, which it wholly owns and which provides insurance exclusively to J&J. Middlesex is not a licensed or authorized insurance dealer in New Jersey. As a result, J&J’s IPT requirements are governed by the statutes regulating New Jersey’s “nonadmitted” or “unauthorized” insurance market.
The nonadmitted market is comprised of two main types of unauthorized insurance markets, which are separate and distinct from each other: the surplus lines market and the self-procured market. The principal difference is that surplus lines insurance is purchased through a surplus lines agent who bears responsibility for paying any insurance premium taxes, N.J.S.A. 17:22-6.59, while the insured is responsible for paying premium taxes on self-procured insurance, N.J.S.A. 17:22-6.64.
Prior to 2011, New Jersey collected IPT on both surplus lines and self-procured insurance that covered risks located in New Jersey. If the insurance covered risks located in other states as well, those other states could each assess IPTs based on the premium for the risk located there.
In 2011, Congress enacted the Nonadmitted and Reinsurance Reform Act (NRRA), which provides that, in cases where nonadmitted insurance covers multistate risks, “[n]o State other than the home State of an insured may require any premium tax payment for nonadmitted insurance.” That new Home State Rule prompted the New Jersey Legislature to amend certain state insurance laws. A sentence was added to both N.J.S.A. 17:22-6.59 and -6.64: “If a surplus lines policy covers risks or exposures in this State and other states, where this State is the home state, . . . the tax payable pursuant to this section shall be based on the total United States premium for the applicable policy.”
Although that sentence was added to N.J.S.A. 17:22-6.64, the rest of that statute was left unchanged, including the statute’s requirements that every holder of self- procured insurance report when it procures or continues coverage “upon a subject of insurance resident, located or to be performed within this State, other than insurance procured through a surplus lines agent pursuant to the surplus lines law of this State,” and pay a five-percent IPT for such coverage.
It is undisputed that J&J’s insurance is self-procured. Prior to the 2011 Amendments, J&J accordingly paid IPT based on its New Jersey-located risks. The question here is whether, in light of the 2011 Amendments, J&J is now also required to pay IPT to its home state of New Jersey on its nationwide coverage. In other words, did the 2011 Amendments extend an obligation to pay IPT based on the total United States premium solely to holders of surplus lines policies, or did they also impose that obligation upon holders of self-procured policies, like J&J?
In the wake of the 2011 Amendments, J&J increased its IPT payments to reflect the amount due on its nationwide insurance premiums “as a precautionary measure.” J&J continued to make those voluntary payments until November 2015, when it filed a claim with the Department of Banking and Insurance (DOBI) and the Director of the Division of Taxation (Division) seeking a refund of IPT in the amount of nearly $56 million, plus interest. The Division denied J&J’s refund claim in August 2016.
J&J then filed a complaint in the Tax Court. See 30 N.J. Tax 479, 490-91 (Tax Ct. 2018). The Tax Court found in favor of the Division and DOBI, concluding that the 2011 “amendments apply the Home State Rule to all nonadmitted insurance including self- procured captive insurance.” The court acknowledged that “the addition of a paragraph in the self-procurement statute relating to surplus lines policies is problematic, as is the failure to remove the original language allocating the IPT to the location of the risk.” Ibid. “Nonetheless,” the court reasoned, “the Legislature’s intent is clear and purposeful. By amending both N.J.S.A. 17:22-6.59 and -6.64, the Legislature kept consistent its equal treatment of nonadmitted insurers, and maximized its nonadmitted IPT revenue stream under the NRRA.”
The Appellate Division reversed the Tax Court, holding that New Jersey could only tax the premiums paid by Johnson & Johnson to Middlesex Assurance for New Jersey risks.” Under these circumstances, we are unable to conclude that the Legislature, by specifically stating that the Home State Rule only applied to surplus insurance coverage obtained through surplus line agents, likewise intended to extend it to the types of insurance coverage procured by J&J from Middlesex Assurance,” the panel wrote.
In reaching its decision, the Appellate Division disagreed with the Tax Court’s interpretation of the statute, writing:
However, nothing in the plain language of N.J.S.A. 17:22-6.64 supports this interpretation. Even if the language of the statute is somehow ambiguous, the Tax Court specifically found that there was nothing in the legislative history of L. 2011, c. 119 that even discusses the self-procurement statute. Under these circumstances, we are unable to conclude that the Legislature, by specifically stating that the Home State Rule only applied to surplus insurance coverage obtained through surplus line agents, likewise intended to extend it to the types of insurance coverage procured by J&J from Middlesex Assurance. Thus, we believe that the Tax Court erred by effectively rewriting N.J.S.A. 17:22-6.64 to apply to J&J.
The Appellate Division remanded the case back to the Tax Court to calculate the proper tax and refund the remaining amount. The Division of Taxation appealed to the New Jersey Supreme Court.
NJ Supreme Court’s Decision in Johnson & Johnson v. Director, Division of Taxation
The Supreme Court of New Jersey affirmed in a per curium opinion. “The judgment of the Appellate Division is affirmed substantially for the reasons expressed in Judge Haas’s thoughtful opinion, which rests heavily on the plain language of N.J.S.A. 17:22-6.64. 461 N.J. Super. at 162-64,” the court wrote. “The Legislature, of course, may amend the statute if it chooses to do so.”
Justice Jaynee LaVecchia dissented. She argued that the plain language argument advanced by the Division asks the Court to “put on blinders and ignore the effort the Legislature has made to achieve taxation of premiums on nationwide risks insured by entities for which New Jersey is the home state.” She also emphasized the primacy of legislative intent in statutory construction, as well as the deference due the Division’s interpretation of tax statutes, arguing that the only conceivable purpose for including the new clause in N.J.S.A. 17:22-6.64 was to impose nationwide premium taxation on home-state insureds with self-procured coverage.
According to Justice LaVecchia, that purpose is further evidenced by the new provisions allowing the State to engage in compacts with other states for the collection of taxation under N.J.S.A. 17:22-6.64 as well as -6.59. Noting that the Legislature has at times referred to all nonadmitted insurance as surplus lines coverage, without distinguishing between surplus lines insurance and self-procured insurance, Justice LaVecchia argued that reading the new clause in -6.64 to draw such a distinction renders the clause meaningless.