The Supreme Court of New Jersey recently heard oral arguments in Johnson & Johnson v. Director, Division of Taxation et al. The case involves whether, following the New Jersey Legislature’s 2011 amendment of N.J.S.A. 17:22-6.64, plaintiff Johnson & Johnson (J&J) was required to pay an insurance premium tax (IPT) based upon all the risks it insured throughout the United States or based upon only those risks localized in New Jersey.
Facts of the Case
In 1970, Johnson & Johnson formed Middlesex Assurance Company Limited (Middlesex Assurance) to secure broader coverage and lower the costs and fees associated with its substantial global insurance needs. Middlesex Assurance is a “single-parent” or “pure” captive insurance company, which is an insurance company that insures only the liabilities of its owner.
The dispute arises as a result of statutory amendments the New Jersey Legislature enacted in response to the Nonadmitted and Reinsurance Reform Act (NRRA), which specified rules for the reporting, payment, and allocation of IPT for nonadmitted insurance. Nonadmitted insurance, also known as unauthorized insurance, refers to insurance provided by an insurer that does not have a license to transact business within a particular state.
In New Jersey, there are two main types of unauthorized insurance markets: the surplus lines market and the self-procured market. As explained in Railroad Roofing & Bldg. Supply Co. v. Fin. Fire & Cas. Co., 85 N.J. 384, 389 (1981), “Surplus lines insurance involves New Jersey risks which insurance companies authorized or admitted to do business in this State have refused to cover by reason of the nature of the risk.” Meanwhile, the self-procured insurance market consists of unauthorized insurers directly providing coverage to the insured.
Prior to 2011, the two insurance markets were treated differently under New Jersey tax law. Nonetheless, the State collected IPT on all unauthorized insurance covering New Jersey risks. Surplus lines insurance was taxed under the authority of N.J.S.A. 17:22-6.59 (2010), which required the insurance agent to “collect from the insured” a “tax of 5% of all gross premiums” charged by the insurer, and to remit this amount to the State. Meanwhile, the tax on insurance coverage that an insured independently procures from a captive insurer located outside the State is governed by N.J.S.A. 17:22-6.64 (2010), which prior to the 2011 amendments at issue in the case, required the insured to directly pay a 5% tax (the IPT) on the gross premiums it paid to procure “excess loss, catastrophe or other insurance” with an unauthorized captive insurer.
In 2011, NRRA created the Home State Rule, which provides that “no state other than the home state of an insured may require any premium tax payment for nonadmitted insurance.” Following the enactment of the NRRA, New Jersey enacted S.B. 2930, which added the following paragraph to N.J.S.A. 17:22-6.64: “If a surplus lines policy covers risks or exposures in this state and other states, where this state is the home state, as defined in [N.J.S.A. 17:22-6.41], the tax payable pursuant to this section shall be based on the total United States premium for the applicable policy.”
Nothing else in the statute was changed. Thus, N.J.S.A. 17:22-6.64 continues to provide, as it did before the amendment, that the insured must pay a 5% tax on the gross amount of any premium it pays to a nonadmitted captive insurer “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 or exempted from tax under [N.J.S.A. 17:22- 6.59].”
J&J started paying insurance premium taxes on all of the U.S. premiums it paid to Middlesex Assurance Co. Ltd. for the self-procured insurance coverage, but later filed a claim seeking a refund of approximately $55.9 million, plus applicable interest. J&J argued that the 2011 amendments to N.J.S.A. 17:22-6.59 and N.J.S.A. 17:22-6.64 that allowed the State to impose an IPT based upon the total premium paid by an insured for all risks covered in the entire United States only applied to surplus lines insurance coverage.
In response, the Division argued that the Legislature has always treated IPT imposed under N.J.S.A. 17:22-6.59 and -6.64 “as the same tax since their enactment in 1960” and that the only difference between the two taxes is that the surplus lines agent pays the tax under N.J.S.A. 17:22-6.59, and the insured pays the tax directly under N.J.S.A. 17:22-6.64.
The Tax Court acknowledged that the wording of the statute raised concerns. “Understandably, 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.” However, it found that the Legislature’s intent to assess tax on all of a company’s premiums paid to an unadmitted insured for the company’s operations throughout the United States was “clear and purposeful.”
Appellate Division’s Decision
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.
Issues Before the New Jersey Supreme Court
The New Jersey Supreme Court granted certification on February 20, 2020. The justices have agreed to consider the following question: “Following the 2011 amendment of N.J.S.A. 17:22-6.64, was plaintiff required to pay an insurance premium tax based upon all the risks it insured throughout the United States or based upon only those risks localized in New Jersey?”
During oral arguments held on October 27, 2020, the justices questioned why the self-procured insurance coverage at issue in the case should face the same tax liability as surplus lines coverage. “I’m still having trouble understanding why that language is still in there after it was amended if it was supposed to allow … the IPT to be applied throughout the United States,” Justice Fabiana Pierre-Louis said to Deputy Attorney General William B. Puskas Jr. In response, Paskas argued that the New Jersey Legislature has consistently treated self-procured insurance the same as surplus lines coverage.