ALJDEC

98A-212-INS · Department of Insurance · 1999-05-20

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

On or about April 2, 1999, the undersigned Administrative Law Judge received a Memorandum from the Arizona Department of Insurance (the “Department”) regarding the Department’s assessment of a retaliatory tax against the Petitioner for the 1997 calendar year. On or about May 5, 1999, the undersigned Administrative Law Judge received a Reply Memorandum from Capital Markets Assurance Corporation (the “Petitioner”). Capital Markets Assurance Corporation was acquired by MBIA Insurance Corporation on February 17, 1998. This Recommended Decision shall apply to both of these insurance companies.

On May 11, 1999, a hearing was held on the Petitioner’s Appeal of the Department’s assessment regarding the underpayment of retaliatory taxes for the 1997 calendar year. Assistant Attorney General Patrick Irvine represented the Arizona Department of Insurance. William J. Carta and Kenneth L. Maxon appeared on behalf of the Petitioner. Evidence and testimony were presented. Based upon a review of the entire record (including the aforementioned memoranda), the following Findings of Fact, Conclusions of Law and Recommended Decision are made.

FINDINGS OF FACT

1. The Petitioner is a financial guarantee insurance company domiciled in the state of New York. It is one of five companies in the United States that insures the payment of

municipal bonds and asset backed securities. None of these five insurance companies is domiciled in Arizona or organized under Arizona law. The Petitioner does not issue life insurance or property casualty insurance. William C. Carta is the Petitioner’s Vice President and Tax Manager.

2. The Petitioner was assessed a retaliatory tax of $1,704.65 plus penalties and interest for the 1997 tax year. The Petitioner argued that the Department incorrectly determined the Petitioner’s retaliatory tax. The Petitioner argued that it is entitled to a refund of $514.00 from the Department.

3. The Petitioner argued that the purpose of the retaliatory tax laws is to equalize the taxation of insurance companies throughout the insurance industry. The Petitioner argued that to achieve equality, the Department’s taxes must be computed in the same way that another state would compute its taxes on an Arizona insurance company doing business with that state.

4. The Petitioner argued that the Department’s methodology in calculating the Petitioner’s retaliatory tax has resulted in an undue burden on the Petitioner because the Department has included taxes (i.e. fire department taxes) in its retaliatory tax rate calculation that the Petitioner does not have to pay within its domiciliary state of New York. Furthermore, the Petitioner argued that Arizona insurance companies that do not issue fire insurance policies within the City of New York would also not have to pay this tax either. Accordingly, the Petitioner argued that the Department’s retaliatory tax is unfair because it imposes a greater tax burden on New York domiciled insurance companies (i.e. the Petitioner) doing business in Arizona than Arizona insurers doing business in New York because all New York insurers are subject to New York’s fire department taxes via the Department’s retaliatory tax rate calculation.

5. The Petitioner argued that the Department determines a retaliatory tax rate that is based on the ratio of taxes paid by domestic insurers to premiums subject to the tax. The statute requires that the Department make separate calculations for life insurance companies and other insurers. The Petitioner argued that none of the Arizona insurance companies subject to New York taxes are in the same line of business as the Petitioner. Accordingly, the Petitioner argued that the “other insurance company” rate does not accurately reflect the tax burden placed upon the Petitioner and therefore, it is unfair and discriminatory.

6. The Petitioner further argued that the Department’s retaliatory tax calculation is in direct contrast to the calculation required by Arizona statute. The Petitioner argued that A.R.S. §20-230(A) requires that:

[T]he 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.

A.R.S. §20-230(A)(emphasis added). However, the Petitioner argued that A.A.C. R20-6-206(D) requires Arizona insurers to report the following:

The total local or regional taxes payable in the foreign country or other state for the calendar year covered by the insurer’s Premium Tax and Fees Report, and . . .

A.A.C. R20-6-206(D)(1995)(emphasis added).

7. The Petitioner argued that the plain meaning of the words “paid” and “payable” are different and therefore, the statute and rule (regarding the data required for determining the retaliatory tax rate) require different information. The Petitioner argued that because A.A.C. R20-6-206(D) requires Arizona domiciled insurers to report taxes payable instead of only taxes paid, the retaliatory tax is overstated. The Petitioner argued that this overstatement causes significant harm to the Petitioner because it must pay more taxes than Arizona domiciled insurers doing business in the state of New York.

8. The Petitioner further argued that the Department’s retaliatory tax rate is incorrect because it is higher than the maximum local tax that can mathematically be imposed by the New York Metropolitan transportation district.

9. The Department argued that calculating the hypothetical tax for a city in another state is never an exact science. The Department argued that the Arizona State Legislature has statutorily promulgated how the Department is to calculate the Petitioner’s retaliatory tax. The Department argued that the Arizona State Legislature could have required that local and regional retaliatory taxes be based on the maximum tax that could be imposed by the other state and its localities. However, the Arizona Legislature instead chose to look at the actual burdens imposed upon Arizona insurers. The Department argued that it must follow the statutory mandate of the Arizona State Legislature in calculating the Petitioner’s retaliatory tax.

10. The Department argued that the Petitioner is a unique insurer. Unfortunately, the Arizona State Legislature has set forth only two separate classifications of insurers (i.e. life insurers and “other insurers”) for determining the retaliatory tax. The Department argued that the Petitioner should petition the Arizona State Legislature to create more classifications for calculating the retaliatory tax.

CONCLUSIONS OF LAW

1. The Petitioner has the burden of proof, and the standard of proof on all issues is by a preponderance of the evidence. Culpepper v. State, 187 Ariz. 431, 930 P.2d 508 (App. 1996). 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).

2. There is a clear presumption that an additional assessment of a tax is correct and the burden is on the Petitioner to overcome such presumption. Arizona State Tax Commission v. Kieckhefer, 67 Ariz. 102, 105 (Ariz. 1948).

3. The State of Arizona generally imposes a two percent tax on premiums that insurance companies receive on insurance policies and contracts covering “property, subjects or risks located, resident or to be performed in Arizona.” See A.R.S. § 20-224. Arizona law also provides for retaliation against insurers from other states when the laws of the other state do not treat Arizona insurers as well as Arizona treats them. See A.R.S. §20-230.

4. The Arizona State Legislature has established the following formula for calculating a foreign insurer’s retaliatory tax burden:

. . . For the purpose of this section, the director shall compute the burden of any tax, license or other obligation imposed by any city, county or other political subdivision of a state or foreign country on insurers of this state or their agents on an aggregate statewide or foreign countrywide basis as an addition to the rate of tax payable by Arizona insurers in such state or foreign country. The addition to the rate of tax payable by Arizona life insurers shall be calculated separately from the addition to the rate of tax payable by other Arizona insurers. 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. . . . A.R.S. §20-230(A).

5. The Department has adopted a A.A.C. R20-6-206 to implement A.R.S. §20- 230(A). The key determination (for purposes of this case) is “the addition to the rate of tax payable by Arizona insurers.” This is calculated by “dividing the aggregate of the tax obligations paid by Arizona insurers . . . by the aggregate of their taxable premiums . . .” The Department makes this determination by requiring Arizona domestic insurers to report each year (1) the total local or regional taxes payable in each state that allows for such taxes, and (2) the total premiums received taxable under the laws of those states. A.A.C. R20-6- 206(D)(1995).

6. The Petitioner has raised some interesting arguments. However, the issues raised by the Petitioner should be resolved at the Arizona State Legislature. Accordingly, the undersigned Administrative Law Judge concludes that the Petitioner has failed to prove that the Department has incorrectly calculated the Petitioner’s retaliatory tax pursuant to A.R.S. §20-230. RECOMMENDED DECISION

The undersigned Administrative Law Judge recommends that the Petitioner’s protest of the Department’s retaliatory tax assessment be denied.

Done this day, May 26, 1999.

______________________________________ Casey J. Newcomb Administrative Law Judge

Original transmitted by mail this ____ day of May, 1999, to:

Mr. Charles R. Cohen Department of Insurance ATTN: Curvey Burton 2910 North 44th Street, Ste. 210 Phoenix, AZ 85018

By ___________________________

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Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826