I previously wrote about the opinion of the New Jersey Tax Court in Johnson & Johnson v. Director in my article, Johnson & Johnson Loses $60 Million Case To New Jersey For Captive Insurance Company.
In that case, the New Jersey Division of Taxation prevailed against Johnson & Johnson to the tune of $60 million in unpaid New Jersey insurance premium taxes (IPT), rejecting Johnson & Johnson’s argument that because its captive insurance (Middlesex) was domiciled in Vermont, the New Jersey IPT should have been restricted to only the risks of Johnson & Johnson that Middlesex underwrote in New Jersey even though it appeared that all the premiums were paid by Johnson & Johnson from its New Jersey headquarters.
Following that decision, Johnson & Johnson appeal the New Jersey Tax Court decision to the New Jersey Appellate Division (New Jersey’s intermediate appellate court) which reversed the Tax Court’s decision and remanded the case back to the Tax Court for further proceedings.
Essentially, the Tax Court had ruled when New Jersey amended its tax code for insurance companies in 2011, the intent of the New Jersey legislature was to continue to allow New Jersey to assess tax on all of a company’s (like Johnson and Johnson’s) premiums paid to an unadmitted insured (like Middlesex) for the company’s operations throughout the United States. While the Tax Court found the New Jersey legislature’s intent to be clear, that court admitted that there statutory ambiguities in the 2011 amendments:
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. Nonetheless the Legislature’s intent is clear and purposeful.
The Appellate Division rejected this holding, and stated that:
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. Ibid. 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.
Thus, the Appellate Division ruled that New Jersey could only tax the premiums paid by Johnson & Johnson to Middlesex for New Jersey risks, and not those of the company in other states, and remanded the matter back to the Tax Court to calculate this amount only (and pay Johnson and Johnson a refund for the balance).
We might not have heard the end of this matter, as presumably the Division of Taxation will next appeal this decision to the New Jersey Supreme Court. What will the likely outcome be? Who knows. The decision of the Tax Court is consistent with similar other opinions on the state taxation of captive insurance companies, but the Appellate Division’s decision seems to take the inside track when it comes to statutory interpretation ⸺ and ultimately the decision will come down to one of statutory interpretation and not what is going on elsewhere.
This opinion does illustrate that state legislatures had better nail down tightly their statutes by which they take advantage of the so-called “Home State Rule” of the National Risk Retention Act (NRRA), which essentially provides that only a company’s “home state”, i.e., where it is headquartered, may (but is not required to) assess a premium tax payment for so-called nonadmitted insurance companies such as out-of-state captive insurance companies.
The real problem here is that the New Jersey legislature did not tightly nail down the tax which the NRRA allows it to impose, allowing Johnson & Johnson to escape the tax in substantial part. Doubtless, New Jersey is not the only state with a sloppy or defective statute in this regard and we are probably very likely to see cases like this arise in other states as well, particularly states such as California in which a great number of significant companies are headquartered but which has not even attempted to develop anything like a viable captive insurance business of its own.
Johnson & Johnson v. Director, 2019 WL 4658534 (N.J.App., 9/25/2019). Full opinion at https://captiveinsurancecompanies.com/captive_insurance_johnson_johnson_state_tax.php