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Sun Life Assurance Company of Canada v. Manna

November 29, 2007

SUN LIFE ASSURANCE COMPANY OF CANADA, APPELLANT,
v.
DEIRDRE K. MANNA, ACTING DIRECTOR OF INSURANCE, ET AL., APPELLEES.



JUSTICE FITZGERALD delivered the judgment of the court, with opinion.

Chief Justice Thomas and Justices Freeman, Kilbride, Garman, Karmeier, and Burke concurred in the judgment and opinion.

OPINION

Sun Life Assurance Company of Canada (Sun Life) brought a declaratory judgment action against the Director of Insurance for the State of Illinois, and the Division of Insurance of the Illinois Department of Financial and Professional Regulation (Division), claiming that Illinois' retaliatory tax (215 ILCS 5/444 (West 2006)) on alien corporations is unconstitutional. The circuit court found that the tax was constitutional. The appellate court affirmed. 368 Ill. App. 3d 591. This appeal raises three issues: whether the Retaliatory Tax violates the uniformity clause of the Illinois Constitution (Ill. Const. 1970, art. IX, §2); whether the United States Congress, through the language of the McCarran-Ferguson Act (15 U.S.C. §1012 (2000)), has authorized Illinois to impose a retaliatory tax upon Sun Life, an alien corporation; and, if not, whether the retaliatory tax violates the so-called dormant commerce clause of the United States Constitution (U.S. Const., art. I, §8, cl. 3). For the following reasons, we affirm the judgment of the appellate court.

BACKGROUND

The Illinois Insurance Code classifies insurance companies doing business in Illinois into three categories. Illinois insurers are "domestic"; insurers organized under the state laws of the United States other than Illinois are "foreign"; and insurers organized under the laws of another country are "alien." Sun Life is a corporation organized under the laws of Canada doing business in Illinois. Therefore, it is considered an "alien" insurance company under the Illinois Insurance Code.

The two relevant taxes on insurance companies for purposes of this appeal are the privilege tax and the retaliatory tax. Domestic, foreign, and alien insurance companies pay a privilege tax to do business in Illinois. 215 ILCS 5/409, 413 (West 2006). The privilege tax is equal to 0.5% of their net premium income "for the privilege of doing business in this State." 215 ILCS 5/409(1) (West 2006). The retaliatory tax, however, is not imposed on domestic companies; it is only imposed on foreign and alien companies. 215 ILCS 5/444.1 (West 2006).

The retaliatory tax provision (215 ILCS 5/444 (West 2006)) provides, in part, "Whenever the existing or future laws of any other state or country shall require of companies incorporated or organized under the laws of this State as a condition precedent to their doing business in such other state or country, compliance with laws, rules, regulations, and prohibitions more onerous or burdensome than the rules and regulations imposed by this State on foreign or alien companies, or shall require any deposit of securities or other obligations in such state or country, for the protection of policyholders or otherwise or require of such companies or agents thereof or brokers the payment of penalties, fees, charges, or taxes greater than the penalties, fees, charges, or taxes required in the aggregate for like purposes by this Code or any other law of this State, of foreign or alien companies, agents thereof or brokers, then such laws, rules, regulations, and prohibitions of said other state or country shall apply to companies incorporated or organized under the laws of such state or country doing business in this State, and all such companies, agents thereof, or brokers doing business in this State, shall be required to make deposits, pay penalties, fees, charges, and taxes, in amounts equal to those required in the aggregate for like purposes of Illinois companies doing business in such state or country, agents thereof or brokers." 215 ILCS 5/444(1) (West 2006).

The purpose of the retaliatory tax is "to promote the interstate business of domestic insurance companies and thus attempt to prevent other states from handicapping Illinois domestic companies with excessive taxes." Trinity Universal Insurance Co. v. O'Connor, 113 Ill. App. 3d 560, 563-64 (1983); Pacific Mutual Life Insurance Co. of California v. Lowe, 354 Ill. 398, 405-06 (1933).

The Department of Insurance has promulgated regulations to determine the retaliatory tax on foreign and alien companies. 50 Ill. Adm. Code §2515.10 et seq., amended at 24 Ill. Reg. 10228, eff. July 1, 2000. The Illinois Administrative Code provides that a retaliatory tax is due from a foreign or alien insurance company if the sum of its "State of Illinois basis" is less than the sum of its "state of incorporation's basis" (50 Ill. Adm. Code §2515.50) and then sets out a formula to determine the retaliatory tax. According to the Administrative Code, "State of Illinois' Basis means the taxes, fees and charges in the aggregate assessed against and paid by a company transacting insurance business in the State of Illinois" 50 Ill. Adm. Code §2515.40. The Administrative Code also defines the "State of Incorporation's Basis" as:

"State of Incorporation's Basis means the taxes, fees and charges that would have been assessed against and paid by an Illinois company if it had similar operation in the state of domicile of the foreign or alien company, as the foreign or alien company had in Illinois. *** If applicable, the state of domicile for the alien company may mean its port or state of entry or, for an alien Lloyds, the state in which it maintains its assets in compliance with Article V of the Code." (Emphasis added.) 50 Ill. Adm. Code §2515.40.

Sun Life uses the State of Michigan as its "port of entry" to conduct its United States branch business. Therefore, the Division determined that Sun Life's state of incorporation basis would be determined by its port of entry in Michigan.

Sun Life consistently paid the privilege tax for the years it operated in Illinois. Sun Life, however, did not pay the retaliatory tax for the years 1997-2003 because it argued that it would owe no Canadian tax on its life insurance business in Canada. Because Sun Life owed tax and fees under the Illinois tax law but not under the Canadian tax law, it determined that its Canadian tax basis was not higher than its Illinois tax basis and that it owed no retaliatory tax. According to the Division, Illinois companies doing insurance business in Michigan are charged more in aggregate taxes and fees than Illinois charges Michigan companies doing the same insurance business in Illinois. Accordingly, basing its retaliatory tax audit on Michigan tax, the Division assessed Sun Life $4,010,743 in retaliatory taxes for 1997 through 2003.

Sun Life filed a declaratory action in the circuit court of Cook County. It sought a declaration that Illinois is not authorized to impose a discriminatory retaliatory tax on insurance business conducted by alien companies in Illinois. Sun Life asserted the retaliatory tax violates the uniformity clause of the Illinois Constitution, the equal protection clause of the Illinois Constitution, and the foreign commerce clause of the United States Constitution. Both parties filed motions for summary judgment. On March 23, 2005, the circuit court granted defendant's motion for summary judgment and denied plaintiff's motion for summary judgment. Sun Life appealed.

The appellate court first held that the retaliatory tax did not violate the uniformity clause of the Illinois Constitution (Ill. Const. 1970, art. IX, §2). The appellate court stated, "[w]hether an alien insurer must actually pay a retaliatory tax depends entirely on the tax laws of its own state of incorporation, not on the retaliatory tax statute." 368 Ill. App. 3d at 596. It noted that in an interstate context, the United States Supreme Court in Western & Southern Life Insurance Co. v. State Board of Equalization, 451 U.S. 648, 68 L.Ed. 2d 514, 101 S.Ct. 2070 (1981), held that the retaliatory tax is not " 'imposed on [alien] corporations qua [alien] corporations ***; it is imposed only on corporations whose home States impose more onerous burdens on [Illinois] insurers than [Illinois] otherwise would impose on those corporations.' " 368 Ill. App. 3d at 596. Further, the " ' "ultimate object is not to punish foreign corporations doing business in the state *** but to induce such foreign state to show the same consideration to corporations of the enacting state doing business therein as is shown to corporations of such foreign state doing business in the enacting state." ' " 368 Ill. App. 3d at 597, quoting Western & Southern Life Insurance Co. v. State Board of Equalization, 451 U.S. at 668-69, 68 L.Ed. 2d at 531, 101 S.Ct. at 2083, quoting P. Vartanian, Annotation, Constitutionality, Construction, Operation and Effect of Retaliatory Statutes Against Foreign Corporations Doing Business Within the State, 91 A.L.R. 795, 795 (1934). The court then considered whether this could be applied in the international context, discussing the principles enunciated in our decision in Springfield Rare Coin Galleries, Inc. v. Johnson, 115 Ill. 2d 221 (1986). The appellate court found the retaliatory tax to be an "incidental" intrusion, as "[t]he tax is not directed at one particular nation, being applied to all alien insurers equally." 368 Ill. App. 3d at 600. The appellate court also noted that because the retaliatory tax on alien insurers is valid under the uniformity clause, it is also valid under the equal protection clause. 368 Ill. App. 3d at 600-01.

The appellate court next considered the case under the commerce clause. The appellate court rejected Sun Life's interpretation that the McCarran-Ferguson Act, a federal statute ceding regulation of insurance to the states, operates to remove only domestic restrictions on interstate insurance regulation. It noted that the United States Supreme Court in Western & Southern Life Insurance Co., 451 U.S. at 655, 68 L.Ed. 2d at 522, 101 S.Ct. at 2076 (1981), stated that " 'the McCarran-Ferguson Act removes entirely any Commerce Clause restriction upon California's power to tax the insurance business.' " (Emphasis in original.) 368 Ill. App. 3d at 602. The appellate court, following both the plain language of the McCarran-Ferguson Act and United States Supreme Court precedent, interpreted the Act to mean that there is no limitation in the Act to domestic enterprises. It explained, "Although Western & Southern Life Insurance Co. is an interstate commerce case, its pronouncement that the McCarran-Ferguson Act 'removes entirely any' commerce clause restrictions on a state's taxation of insurance is categorical. All such restrictions are eliminated by the Act. If Congress intended that states could only tax interstate commerce, it failed to say so and the United States Supreme Court has yet to interpret the Act in this manner." ...


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