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.