PDF copy: ALJDEC decisions subject to certification as final

13A-027-INS · Department of Insurance · 2014-07-23

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

In the Matter of: No. 13A-027-INS METROPOLITAN LIFE INSURANCE COMPANY ADMINISTRATIVE LAW JUDGE (NAIC 65978), DECISION Petitioner.

HEARING: June 5, 2013; the record closed on October 15, 2013 APPEARANCES: Pat Derdenger, Esq. and Frank Crociata, Esq. represented Metropolitan Life Insurance Company. Assistant Attorney General Alyse Meislik represented the Arizona Department of Insurance. ADMINISTRATIVE LAW JUDGE: Sondra J. Vanella _____________________________________________________________________ FINDINGS OF FACT 1. Petitioner Metropolitan Life Insurance Company (“MLIC”) is a New York based insurance company that conducts business in Arizona. As such, MLIC is subject to retaliatory tax pursuant to A.R.S. § 20-230 and A.A.C. R20-6-205. A foreign insurer (an insurer that conducts business outside of Arizona) must pay retaliatory tax when the sum of the taxes and related fees that Arizona imposes on the foreign insurer is less than the sum of the tax obligations that the insurer’s domicile would impose on a similarly authorized Arizona domestic insurer. A.R.S. § 20-230 and A.A.C. R20-6-205

seek to equalize the burden between the tax amounts Arizona life insurers paid to other

states while transacting business in those states, with the tax amounts foreign insurers

conducting business in Arizona pay.

2. Under A.R.S. § 20-230, the Arizona Department of Insurance (“Department”) is

charged with calculating, for each year, an additional rate of tax to be applied to foreign

life insurers that conduct business in Arizona. A.R.S. § 20-230 requires Arizona domestic insurers to report their aggregate tax obligations paid on a statewide basis,

Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826 and then uses the aggregate amount of taxable premiums reported by the insurer to establish the retaliation rate for that state. “In each case, the addition to the rate of tax payable by Arizona insurers shall be calculated by dividing the aggregate of the tax

obligations paid by Arizona insurers to any such city, county or other political

subdivision of such state . . . by the aggregate of their taxable premiums under the

premium taxing statute of such state . . .” A.R.S. § 20-230. A.A.C. R20-6-205(D) is the

correlate rule that sets forth the calculation to be utilized by the Department when

calculating the retaliatory tax rate.

3. In order for the Department to determine the tax obligations paid by Arizona life

insurers conducting business in other states, Arizona life insurers are required to file

every year by March 1st, a Survey of Arizona Domestic Insurers (“Survey”). Pursuant to

A.A.C. R20-6-205, the Survey requires Arizona life insurers to report the total local or

regional taxes paid and the total premiums taxed under the premium taxing statute of

another state. See Exhibits 8 and 9. The Department further requires Arizona life

insurers to provide supporting documentation to substantiate the information provided

in the Survey. The Department reviews the Surveys received and contacts insurers

who fail to submit the Survey or supporting documentation. 4. Pursuant to A.A.C. R20-6-205(D), the Department calculates the addition to the rate of tax for each state by dividing the total local or regional taxes paid by Arizona life insurers by the total premiums taxed by the state. 5. Only one local or regional tax is imposed in New York – the MTA. The MTA supports the Metropolitan Commuter Transportation District (“MCTD”) which includes approximately 5,000 square miles and 70 percent of the state population. The MTA applies to insurers that conduct business within the MCTD, based on the portion of their New York premiums that insure risks within the MCTD. 6. In this matter, MLIC appealed the Department’s computation of the 2011 and 2012 retaliatory tax rates for New York based life insurers that conduct business in Arizona, contending that the calculation of the retaliatory tax rate is erroneous, excessive, and contrary to law.

7. The only Arizona based life insurer that conducts business in New York and that completed the Survey is Pacific Life and Annuity Company (“PLAC”). In its reporting, PLAC assumed that 100 percent of its business was conducted in the MCTD,

notwithstanding that the MCTD only covers a portion of the state. Further, the amount

PLAC reported as paid represented pre-payments of MTA, which in New York are

estimated payments. PLAC’s total pre-payments exceeded its actual MTA liability for

both 2010 and 2011, because PLAC overestimated its MTA tax. Essentially, MLIC

argued that because the Department based its retaliatory tax rate on only one insurer,

the result was distorted and the rate should be adjusted. MLIC argued that because

the Department calculated the additional rates of tax for 2011 and 2012 based on

overstated payments rather than actual tax liability, the rates were calculated

erroneously and in violation of due process and equal protection because the

retaliatory tax imposed is based on estimated taxes and may differ greatly from actual

tax liability based on PLAC’s method of reporting. MLIC contended that because the

Department based its additional rate of tax on information provided by only one

taxpayer, even a small overpayment can have a significant impact on the calculation of

tax that MLIC would have to pay in Arizona. However, the Department asserted that it does not have control over the fact that only one Arizona based life insurer was conducting business in New York during the time period in question, nor does the Department have control over the fact that PLAC seems to overestimate its MTA surcharge liability, nor that it does not differentiate between which of its policies are subject to MTA and which are not when calculating its payments. 8. Lori Guardado, Tax Manager for MetLife Group, testified that MLIC takes issue with the Department’s calculations because the Department utilized a cash-basis method for calculating the additional rate of tax and the 2011 and 2012 rates exceed the maximum possible MTA rate. Ms. Guardado testified that PLAC’s reporting of its cash payments is different from what is stated on its returns. Ms. Guardado further testified that PLAC is not getting the benefit of any prior overpayments, thereby over- inflating the amount of tax paid. Ms. Guardado opined that the Department’s calculations are skewed because the calculations are only based on one insurer, and consequently, New York based insurers are “held hostage” to PLAC’s Survey which does not contain accurate reporting resulting in a higher retaliatory tax. Ms. Guardado further opined that MLIC should not be penalized by PLAC’s overpayments. Transcript

at 119:3-9. Thus, MLIC contends that the Department should base its calculations on

actual tax liability.

9. The Department argued that its calculations are based on amounts that each

Arizona life insurer reported as having been paid in New York pursuant to New York tax

laws. In this matter, the only Arizona life insurer conducting business in New York was

PLAC. The method of calculation utilized by the Department is the same whether there

are one or many Arizona life insurers conducting business in New York. According to

the Department, if there are no Arizona life insurers conducting business in New York,

there is no retaliatory tax imposed on New York life insurers conducting business in

Arizona.

10. Scott Greenberg, the Department’s Chief Operations Officer, testified that all

insurers conducting business in the MCTD are obligated to pay four installments of

estimated MTA tax payments during the year. Transcript at 78:11-25. The estimates

are amounts that are actually paid. If an insurer does not make an estimated tax payment timely, or pay the entire amount due, the MCTD imposes a penalty. Transcript at 78:21-25; 79:1-7. Should an overpayment be made, a credit will carry over and could reduce the additional rate of tax in future years, as would an underpayment be reflected in future years. 11. MLIC further argues that the Department is placing higher burdens on New York based life insurers than New York imposes on Arizona insurers because New York has a maximum MTA rate of .34% if all of a New York insurer’s business was conducted in the MCTD. The Department has imposed a retaliatory tax rate of .465149% for 2012, and .380822% for 2011, both of which exceed New York’s maximum MTA rate of .34%, and therefore, the tax burdens are not equalized thus defeating the purpose of the retaliatory tax because the maximum MTA an Arizona insurer would be obligated to pay is .34%.

12. The Department asserts that the Legislature could have required that the local and regional retaliatory tax be based on or limited to the maximum tax that could be imposed by the other state, but it did not do so. A.R.S. § 20-230 does not look to the

rates of tax imposed, but rather the actual tax burdens placed on Arizona insurers. The

Department, pursuant to regulation, requires Arizona insurers to report what they

actually paid in local taxes. This may be more or less than the maximum burdens or

there may be an offset for previous years’ overpayments or underpayments.

13. MLIC argued that the term “tax obligation” is synonymous with the term “tax

liability.” The Department argued that the Arizona Legislature established a simple

formula for calculating the burden of local and regional taxes within a specifically

defined time period, taking into account the nature, timing and calculation of taxes,

licenses and other obligations imposed in other states. The Department contends that

A.R.S. § 20-230 mandates that the addition to the rate of tax be calculated based on

the amounts paid by Arizona life insurers conducting business in New York. The

Department argues that the relevant statute does not allow it discretion to calculate the

addition to the rate of tax in a manner other than as set forth in A.R.S. § 20-230 and

A.A.C. R20-6-205. The Department’s position is that A.R.S. § 20-230 and A.A.C. R20- 6-205 require it to use the “aggregate of tax obligations paid” and to base the calculation on the amount of tax “reported as paid.” The statute and rule do not limit the calculation to “actual tax liability.” The Department argued that the plain language of the statute mandates that the Department use the amounts paid by insurers for local and regional taxes, even if they are estimated amounts, in its calculation of the retaliatory tax rate. 14. MLIC contended that administrative convenience cannot supersede statute and rule, and that the Department’s argument for a cash basis approach is for that purpose. A.A.C. R20-6-205(E) requires the Department to publish retaliatory tax rates by November 1st based on Survey information obtained from Arizona based insurers for the preceding calendar year, on or before November 1st. Pat Wersching, Assist Vice- President of the Tax Department for MetLife Group, testified that although New York taxes are due on March 15th, MLIC typically files extensions until December 15th to file its New York taxes with its actual MTA tax liability. Transcript at 98:3-22. As such, the Department asserted that it would be impossible to publish retaliatory tax rates in November if data is unavailable until December.

15. Mr. Greenberg testified that the statute and rule pertain to all jurisdictions, not

just New York, and that if the Department were to calculate the retaliatory tax as

proposed by MLIC, it would require the Department to become an expert in each state’s

individual tax code, as well as regional and local taxes in order to administer the tax.

Transcript at 43:16-25. The Department would have to “step into New York’s shoes” in

this case to audit surcharge reports for each jurisdiction to ensure accuracy. Transcript

at 79:10-21. Mr. Greenberg explained that the rule requires that retaliatory tax be

calculated based on actual payments made in another state, divided by the premiums

that are taxed in that other state. Transcript 44:8-11.

CONCLUSIONS OF LAW

1. MLIC bears the burden of proof, and the standard of proof on all issues is by a preponderance of the evidence. A.A.C. R2-19-119. 2. A "preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not." Morris K. Udall, ARIZONA LAW OF EVIDENCE, § 5 (1960). It "is evidence which is of greater weight or more convincing than the evidence which is offered in opposition to it; that is, evidence which as a whole shows that the fact sought to be proved is more probable than not." BLACK’S LAW DICTIONARY, 1182 (6th ed. 1990). 3. In A.R.S. § 20-230, the Arizona State Legislature established the formula for calculating retaliatory tax as follows: In each case, the addition to the rate of tax payable by Arizona insurers shall be calculated by dividing the aggregate of the tax obligations paid by Arizona insurers to any such city, county or other political subdivision of such state or foreign country by the aggregate of their taxable premiums under the premium taxing statute of such state or foreign country. The director may issue rules to carry out the purpose of this section. 4. A.A.C. R20-6-205 was promulgated by the Department to implement A.R.S. § 20-230. The rule provides for how the addition to the rate of tax is calculated for

purposes of a retaliatory tax computation. See A.A.C. R20-6-205(D). The Department makes this determination by using data that Arizona domestic insurers are required to report each year. See A.A.C. R20-6-205(C). Pursuant to A.A.C. R20-6-205(D):

For each foreign country or other state having one or more local or regional taxes on domestic insurers, the Department shall compute on a statewide or foreign countrywide basis an addition to the rate of tax. The Department shall compute the addition to the rate of tax payable by Arizona life insurers separately from the addition to the rate of tax payable by other Arizona insurers. The addition to the rate of tax payable by each category of Arizona domestic insurers shall be the quotient of:

1. The aggregate local or regional taxes reported as paid to the foreign country or other state by domestic insurers in each category for the calendar year covered by the Premium Tax and Fees Report divided by, 2. The aggregate statewide or foreign countrywide premiums taxed under the premium taxing statute of the other state or foreign country reported by domestic insurers in each category for the calendar year covered by the Premium Tax and Fees Report.

5. MLIC's contention that the Department should calculate the addition to the rate of tax using PLAC’s actual tax liability is tenable. However, MLIC’s arguments do not prevail over the mandate of the Arizona statute and rule regarding the calculation of retaliatory taxes and additions to the rate of tax as applied by the Department. Neither the statute nor the rule provides discretion to the Department to calculate retaliatory taxes in a manner different than that set forth in statute and rule. 6. The Department argued that deference should be given to the agency’s construction of the statutory scheme which it is entrusted to administer. Ariz. Water Co. v. Ariz. Dep’t of Water, 208 Ariz. 147, 91 P.3d 990 (2004) (citing Chevron, USA, Inc. v. Natural Res. Def. Council, Inc. 467 U.S. 837, 844 (1984)). The Department followed the methodology and computation set forth in A.A.C. R20-6-205 and appropriately determined the additions to the rate of tax and retaliatory taxes for calendar years 2011 and 2012 for MLIC in accordance with A.R.S. § 20-230. “In applying a statute . . . its words are to be given their ordinary meaning unless the legislature has offered its own

definition of the words or it appears from the context that a special meaning was intended.” Mid Kansas Federal Savings and Loan Ass’n of Wichita v. Dynamic Development Corp., 167 Ariz. 122, 128, 804 P.2d 1310, 1316 (1991).

7. The Administrative Law Judge concludes that MLIC failed to prove by a

preponderance of the evidence that the Department incorrectly calculated its retaliatory

taxes and additions to the rate of tax for calendar years 2011 and 2012.

ORDER

IT IS ORDERED that MLIC’s appeal be denied and the retaliatory taxes and

additions to the rate of tax the Department calculated for MLIC for the calendar years

2011 and 2012 are affirmed.

In the event of certification of the Administrative Law Judge Decision by the Director of the Office of Administrative Hearings, the effective date of the Order will be five (5) days from the date of that certification.

Done this day, October 29, 2013.

/s/ Sondra J. Vanella Administrative Law Judge

Transmitted electronically to: Germaine L. Marks, Director Department of Insurance