FISHER, Senior Judge.
United Parcel Service, Inc. (UPS) challenges the Indiana Department of State Revenue's denial of its refund claim for the 2000 tax year and its assessment of additional corporate income tax for the 2001 tax year ("the years at issue"). The matter,
UPS and its affiliates ("the affiliated group"), which include the foreign reinsurance companies of UPINSCO, Inc. and UPS Re Ltd., form the world's largest package delivery company. Prior to 2001, UPS included the income of UPINSCO and UPS Re on the affiliated group's Indiana corporate income tax returns. Because UPS filed the returns under the worldwide unitary combined method, it reported the affiliated group's income, deductions, and credits on a combined basis. In 2001, however, UPS excluded the income of UPINSCO and UPS Re from the affiliated group's Indiana return. UPS also subsequently amended its 2000 Indiana return in order to exclude the income of UPINSCO and UPS Re from the return, thereby seeking a refund of $359,466 in income tax initially paid.
After auditing the affiliated group's returns for the years at issue, the Department determined that UPS erred in excluding the income of UPINSCO and UPS Re from the returns. As a result, the Department denied UPS's refund claim and assessed it with an additional income tax liability of $291,105 for 2001. UPS protested the Department's denial of its refund claim and its issuance of the proposed assessment with no success.
In March 2010, after appealing to this Court, UPS moved for summary judgment, asserting that because UPINSCO and UPS Re were "subject to" Indiana's gross premium privilege tax (premiums tax) under Indiana Code § 27-1-18-2, their income was exempt from Indiana's corporate income tax pursuant to Indiana Code § 6-3-2-2.8(4). The Department filed a cross-motion for summary judgment, contending that because UPS failed to comply with several provisions of the premiums tax statutory scheme, UPINSCO and UPS Re were neither "subject to" the premiums tax nor exempt from Indiana's corporate income tax.
On December 29, 2010, in an unpublished decision, this Court granted UPS's motion for summary judgment on the basis that UPINSCO and UPS Re were exempt from Indiana corporate income tax because they were both "subject to" the premiums tax based on the plain and ordinary meaning of the phrase "subject to." See United Parcel Serv., Inc. v. Indiana Dep't of State Revenue, No. 49T10-0704-TA-24, slip op. at 6-7, 2010 WL 5549039 (Ind. Tax Ct. Dec. 29, 2010), rev'd on other grounds, 969 N.E.2d 596 (Ind.2012) (UPS I). On June 21, 2012, the Indiana Supreme Court reversed this Court's grant of summary judgment to UPS in UPS I, explaining:
Indiana Dep't of State Revenue v. United Parcel Serv., Inc., 969 N.E.2d 596, 601 (Ind.2012) (UPS II) (citation omitted). After determining that the designated evidence failed to show whether UPINSCO and UPS Re were doing business within this state for purposes of Indiana Code § 27-1-18-2, the Indiana Supreme Court remanded the case for further proceedings. See id. at 603.
On April 18, 2013, UPS once again moved for summary judgment. The Court held a hearing on August 16, 2013. Additional facts will be supplied as necessary.
Summary judgment is proper only when the designated evidence demonstrates that no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law.
During the years at issue, Indiana imposed an income tax on the part of every corporation's adjusted gross income that was derived from sources within Indiana. See IND.CODE § 6-3-2-1(b) (2000) (amended 2002). Indiana Code § 6-3-2-2.8(4), however, provided certain entities with an exemption from that tax: "there shall be no tax on the adjusted gross income of ... [i]nsurance companies subject to tax under IC 27-1-18-2." IND.CODE § 6-3-2-2.8(4) (2000) (amended 2002). In turn, Indiana Code § 27-1-18-2, in relevant part, provided:
IND.CODE § 27-1-18-2(a), (c)(1) (2000) (amended 2001).
In its motion for summary judgment, UPS claims that the Indiana Supreme Court's decision in UPS II essentially requires foreign reinsurers to be physically present within this state in order to be "doing business" under Indiana Code § 27-1-18-2 and to qualify for the corporate income tax exemption provided under Indiana Code § 6-3-2-2.8(4). (See Hr'g Tr. at 4-6, Aug. 16, 2013; Pet'r Mot. Summ. J. ¶ 6, Apr. 18, 2013; Pet'r Br. Supp. Mot. Summ. J. ("Pet'r Br.") at 9, Apr. 18, 2013.) According to UPS, that determination creates tension between Indiana's premiums tax and its corporate income tax because UPS contends the latter utilizes an economic presence standard, not a physical presence standard. (See Hr'g Tr. at 6-8 (referring to MBNA Am. Bank, N.A. & Affiliates v. Indiana Dep't of State Revenue, 895 N.E.2d 140 (Ind. Tax Ct.2008).) The Department, however, maintains that UPS has misconstrued both UPS II and Indiana Code § 27-1-18-2 because neither of those authorities makes any mention of physical presence whatsoever. (See Hr'g Tr. at 9-12.)
At the outset, and contrary to UPS's claim, there is no tension between Indiana's premiums tax and its corporate income tax because each utilizes a physical presence standard. Thus, to the extent UPS believes this Court's decision in MBNA held that Indiana's corporate income tax utilized an economic presence standard, it is incorrect. See MBNA, 895 N.E.2d at 141-44 (holding that the statutory economic presence basis for imposing Indiana's financial institutions tax ("the FIT") did not violate the substantial nexus requirement of the Commerce Clause of the United States Constitution).
Furthermore, while this Court has found that an economic presence rather than a physical presence is a sufficient basis for imposition of the FIT, it cannot reach the same conclusion regarding Indiana's premiums tax for three main reasons. First, the U.S. Supreme Court has explained that a physical presence standard applies for purposes of a premiums tax:
Connecticut Gen. Life Ins. Co. v. Johnson, 303 U.S. 77, 80, 58 S.Ct. 436, 82 L.Ed. 673 (1938). See also State Bd. Ins. v. Todd Shipyards Corp., 370 U.S. 451, 452-56, 82 S.Ct. 1380, 8 L.Ed.2d 620 (1962) (reaffirming Johnson nearly twenty years later). Second, this Court's review of Indiana case law and the case law of other jurisdictions reveals decades of uniformity — wherein state courts have routinely declined to impose a premiums tax when foreign insurers/reinsurers lacked a physical presence in the taxing state. See UPS II, 969 N.E.2d at 601-03 (remanding the case because the record evidence did not reveal whether UPINSCO's and UPS Re's reinsurance transactions took place in
Finally, neither of the parties has presented a fully developed argument regarding the adoption of an economic presence standard for Indiana's premiums tax. For instance, UPS has encouraged the Court to avoid the issue altogether, arguing that such a finding is unnecessary given its Commerce Clause claim, that the finding would likely conflict with UPS II and Continental Insurance, and that the finding could have far-reaching, unintended effects in the insurance industry. (See Hr'g Tr. at 7-9.) In contrast, the Department has argued that UPS II provides that a foreign reinsurer need only show that it has a certificate of authority to satisfy the "doing business" requirement of Indiana Code § 27-1-18-2. (See Hr'g Tr. at 13-16; Resp't Resp. Pet'r Mot. Summ. J. at 6-9, May 28, 2013.) Nonetheless, while the Indiana Supreme Court mentioned the necessity of obtaining a certificate of authority in UPS II, it did so only in a general discussion of the statutory scheme regarding the business of insurance. See UPS II, 969 N.E.2d at 601. That discussion does not indicate that possessing a certificate of authority means a foreign reinsurer is physically present in Indiana; instead, it indicates that a foreign reinsurer must obtain such a certificate to legitimately engage in the reinsurance business in Indiana. See id. The plain language of Indiana Code § 27-1-17-8 supports this conclusion as it provides that a certificate of authority "shall license [a] foreign or alien insurance[/reinsurance] company to transact only the kind or kinds of insurance specified in its application for admission[.]" IND.CODE § 27-1-17-8 (2013) (emphasis added). Consequently, the Court concludes that foreign reinsurers must be physically present in Indiana to satisfy the statutory requirement of "doing business" under Indiana Code § 27-1-18-2.
With respect to its Commerce Clause challenge, UPS contends that because the physical presence requirement under Indiana Code § 27-1-18-2 provides a direct competitive advantage to all reinsurance companies conducting business within Indiana over foreign reinsurers like UPINSCO and UPS Re that did not conduct business in Indiana during the years at issue, it violates the Commerce Clause. (See Pet'r Br. at 4, 9-10, 14.) More specifically, UPS explains that foreign reinsurers conducting business in Indiana would generally have a lower tax liability than foreign reinsurers conducting business
The Commerce Clause of the United States Constitution grants Congress the power "[to] regulate Commerce ... among the several States[.]" U.S. CONST. art. I, § 8, cl. 3. While the Clause is "`silent as to how much economic regulatory power a state retains, it has been applied to prevent states from discriminating against out-of-state economic interests or from benefiting in-state interests.'" Rhoade v. Indiana Dep't of State Revenue, 774 N.E.2d 1044, 1049 (Ind. Tax Ct.2002) (citation omitted). Furthermore, the U.S. Supreme Court has rejected the view that interstate commerce is immune from state taxation. Id. (citation omitted).
Prior to 1944, the U.S. Supreme Court consistently held that the business of insurance was not "commerce" for purposes of the Commerce Clause. See, e.g., Paul v. Virginia, 75 U.S. 168, 183-84, 8 Wall. 168, 19 L.Ed. 357 (1868), overruled in part by United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944). As a result, insurance transactions were not subject to federal regulation as interstate commerce. See Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 414-17, 66 S.Ct. 1142, 90 L.Ed. 1342 (1946); Legal Asset Funding, LLC v. Travelers Cas. & Sur. Co., 155 F.Supp.2d 90, 96 (D.N.J.2001).
In 1944, however, the U.S. Supreme Court determined that the business of insurance was commerce within the meaning of the Commerce Clause. United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 552-53, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944). The following year, Congress enacted the McCarran-Ferguson Act, the relevant parts provide:
15 U.S.C.A. §§ 1011, 1012. The U.S. Supreme Court explained that the obvious purpose of the Act was "to give support to the existing and future state systems for regulating and taxing the business of insurance." Prudential, 328 U.S. at 429, 66 S.Ct. 1142. The Supreme Court further explained the Act "put the full weight of [Congress'] power behind existing and future state legislation to sustain it from any attack under the commerce clause to whatever extent this may be done with the force of that power behind it, subject only to the exceptions expressly provided for." Id. at 431, 66 S.Ct. 1142. In other words, Congress, through its enactment of the McCarran-Ferguson Act, once again protected insurance transactions from commerce clause challenges.
Given the plain language, and the U.S. Supreme Court's interpretation, of the McCarran-Ferguson Act it is difficult to surmise how the statutes at issue here do not fall within its scope. Indeed, nearly a century ago, the Indiana Court of Appeals explained that the predecessor to Indiana Code § 27-1-18-2 was a graduated privilege tax, designed to raise revenue and "imposed upon a foreign [insurance or reinsurance] corporation for the privilege of exercising its corporate franchises and carrying on business in a corporate capacity within the state." Continental Ins., 116 N.E. at 933. See also UPS II, 969 N.E.2d at 597-98 (stating that the "premiums tax works like an excise tax permitting a foreign reinsurer to do business in the state" (citation omitted)). Moreover, Indiana Code § 6-3-2-2.8(4) merely exempts foreign reinsurance corporations that conduct business within Indiana from the corporate income tax because they are "subject to" the premiums tax under Indiana Code § 27-1-18-2. See I.C. § 6-3-2-2.8(4). These statutes, therefore, plainly concern the regulation and taxation of insurance and are immune from Commerce Clause challenges.
For the above-stated reasons, UPS's motion for summary judgment is DENIED and summary judgment is GRANTED to the Department.
SO ORDERED.