Court of Appeals of Texas,
AMERICAN HOME ASSURANCE; Birmingham Fire Insurance Company of Pennsylvania; and The Insurance Company of the State of Pennsylvania, Appellants,
TEXAS DEPARTMENT OF INSURANCE; J. Robert Hunter, Commissioner of Insurance; Claire Korioth, Chairman, Allene D. Evans, and Deece Eckstein, Members, State Board of Insurance; Martha Whitehead, Texas State Treasurer; Dan Morales, Texas Attorney General; John Sharp, Texas Comptroller; and Texas Public Finance Authority, Appellees.
Sept. 20, 1995.
Rehearing Overruled Oct. 25, 1995.
Attorneys & Firms
*92 Anthony Icenogle, DeLeon & Boggins, P.C., Austin, for appellants.
Dan Morales, Attorney General, William E. Storie, Assistant Attorney General, Taxation Division, Austin, for appellees.
Before KIDD, JJ.
American Home Assurance, Birmingham Fire Insurance Company of Pennsylvania, and The Insurance Company of the State of Pennsylvania appeal from a take-nothing judgment in favor of appellees1 in a tax-protest suit brought pursuant to Tex.Ins.Code art. 5.76–5 (West Supp.1995) (the “Code”). We will affirm the trial-court judgment.
In 1991, the Legislature created the Texas Workers’ Compensation Insurance Fund as a corporate body for the purpose of providing workers’ compensation coverage to Texas employers. See Act of August 25, 1991, 72d Leg., 2d C.S., ch. 12, §§ 18.07–.19, 1991 Tex.Gen.Laws 342, 342–61 (article 5.76–5. See 28 Tex.Admin.Code § 1.411 (1993) (“Rule 1.411”). Rule 1.411 required that the 1992 maintenance-tax surcharge be calculated based upon 1991 premiums and established recoupment procedures by which insurance companies could “pass through” the maintenance-tax surcharge to their policyholders. Id. In protesting their 1992 and 1993 tax payments, appellants contested this method of calculating the surcharge. In five points of error, appellants complain the recoupment scheme is unconstitutional and the trial court erred in upholding it.
“[W]e begin with a presumption of validity. It is to be presumed that the Legislature has not acted unreasonably or arbitrarily; and a mere difference of opinion, where reasonable minds could differ, is not a sufficient basis for striking down legislation....” Massachusetts Indem., 685 S.W.2d at 109.
Appellants’ first point of error complains that Rule 1.411 results in a retroactive tax that is unconstitutional under article I, section 16 of the Texas Constitution3 and therefore beyond the Department’s delegated power to promulgate under sections 5.76–5 and 5.68 of the Code.4
There is a distinction between a direct tax on property5 and a tax imposed on the privilege of conducting business within the state. “A gross premiums tax is not a property tax, but is an excise tax, or, otherwise stated, a privilege or franchise tax which a company must pay for the privilege of doing business within the state.” 19B John A. Appleman & Jean Appleman, Insurance Law and Practice § 10938 (1982); see art. 5.76–5, § 10(a)(1) (emphasis added). Thus, the Department argues, the maintenance-tax surcharge is in the nature of a franchise tax assessed for the privilege of doing business in the state.6 We agree.
We find persuasive the court’s discussion in Neild. In Neild, plaintiffs challenged a revenue statute imposed on the corporate privilege to conduct business, contending the statute was unconstitutionally retroactive because the tax was based on gross receipts collected in the preceding year. Upholding the statute, the court held that because the tax was levied only on taxpayers exercising the privilege of doing business in the taxable year and was not exclusively a tax on the gross receipts of the preceding year, the tax was not impermissibly retroactive. Id. at 255. The court reasoned that a statute *94 should not be construed to operate retrospectively if it may be construed in a manner that avoids such operation. Reliance Ins. Co. v. Nutt, 403 S.W.2d 828, 830–31 (Tex.Civ.App.—Austin 1966, writ ref’d n.r.e.) (“surviving company” that merged with former insurance company liable for taxes based on gross premiums collected by defunct company in preceding year).
Appellants argue that Rule 1.411 results in a direct tax on gross premiums that cannot be for the privilege of engaging in business in Texas because: (1) self-insurers are taxed, and (2) insurers are taxed even after they leave the workers’ compensation market. See Code article 5.76–5, section 10 provide as follows:
(a) A maintenance tax surcharge is assessed against: (1) each insurance company writing workers’ compensation insurance in this state; (2) each certified self-insurer as provided in [Tex.Lab.Code Ann. §§ 407.001–.133 (West Supp.1995) ]; and (3) the fund.
(e) As a condition of engaging in the business of insurance in this state, an insurance company writing workers’ compensation insurance in this state agrees that if the company leaves the workers’ compensation insurance market in this state it remains obligated to pay, until the bonds are retired, the company’s share of the maintenance tax surcharge assessed under this section in an amount proportionate to that company’s share of the workers’ compensation insurance market in this state as of the last complete reporting period before the date on which the company ceases to engage in the insurance business in this state. The proportion assessed against the company shall be based on the company’s workers’ compensation insurance gross premiums for the company’s last reporting period. However, a company is not required to pay the proportionate amount in any year in which the surcharge assessed against insurance companies continuing to write workers’ compensation insurance in this state is sufficient to service the bond obligation. The abolition of the fund under Section 2(d), Article 5.76–3, Insurance Code, does not affect the liability of an insurance company for a maintenance tax surcharge assessed under this section.
Code (e) (emphasis added).
We reject appellants’ argument as it pertains to the taxing of self-insurers. Like their insurance-company counterparts, self-insurers are taxed for the privilege of engaging in the analogous practice of self-insurance. We also disagree with appellants’ argument regarding the constitutionality of Nutt, 403 S.W.2d at 831. We overrule appellants’ first point of error.
PUBLIC FUNDS FOR PRIVATE PURPOSES
Appellants’ second point of error complains the taxation scheme is unconstitutional because it purports to authorize the use of public funds for private purposes. See Tex. Const. art. XVI, § 6 (“No appropriation for private or individual purposes shall be made, unless authorized by this Constitution”). Appellants’ *95 argument may be summarized as follows: (1) the Fund, created by articles 5.76–3–.76–5, is not a “state agency”; (2) the Fund serves no public purpose because private carriers presently supply the market; (3) the Fund competes with private carriers, reducing their share of the market and affecting adversely their financial strength; (4) the part of the market requiring “last resort” workers’ compensation insurance consists of only a small group of employers unrepresentative of the public-at-large; (5) two small, private groups—businesses insured by the Fund and bondholders—are the only beneficiaries of the public funds; and (6) absent a constitutional amendment, the constitutional provisions quoted above forbid the taxation scheme in question.
We reject the argument. Firstly, the Fund is a “state agency” for purposes relevant to the present discussion.8 Secondly, one may not conclude that the Fund expends money for private purposes in violation of Woolsey v. Panhandle Ref. Co., 131 Tex. 449, 116 S.W.2d 675, 676 (1938). The characteristics of the market for workers’ compensation insurance, referred to in items (2) through (4) of appellants’ argument, were presumably known to the legislature and that body presumably evaluated them but reached different conclusions from those advocated by appellants. We cannot say the legislature was clearly wrong. We therefore overrule the point of error.
EQUAL AND UNIFORM TAXATION
Appellants’ third and fourth points of error complain on various grounds that Rule 1.411 results in taxation that is not equal and uniform as required by Edinburg Improvement Ass’n v. City of Edinburg, 191 S.W.2d 752, 754 (Tex.Civ.App.—San Antonio 1945, no writ).
Appellants contend first that Rule 1.411 is invalid because it authorizes a “recoupment” system instead of a “pass-through” system as expressly prescribed by Bullock v. Hewlett–Packard Co., 628 S.W.2d 754, 756 (Tex.1982).
Appellants complain of that part of Rule 1.411 requiring an insurer to remit to the Department any excess, over and above the amount of the surcharge, that an insurer may collect from its policyholders in a particular year.12 The Department rejoins by arguing, in derogation of its own rule, that no harm results because insurers are in practice allowed to retain the excess and to credit the amount against the surcharge for the succeeding year.13 We believe the rule is not *97 invalid on the ground claimed. Any excess must be held by either the Department or the insurer who receives it from the policyholders. In its administration of the statutory scheme, the agency reasonably could have concluded that the public should hold the excess as a credit until the subsequent year to avoid a windfall to insurers, to encourage accuracy in their calculations, and to discourage repeated recoupment of excess sums from policyholders. Id.
Appellants complain the recoupment provisions of Rule 1.411 make it impossible for insurers to calculate with precision the amount they must prorate among and charge their policyholders.14 Consequently, similarly situated insurers will pay different amounts of surcharge in a particular year. We do not believe the rule is invalid for this reason. Over time, operation of the rule results in all insurers recovering from their policyholders the amounts paid as surcharges, notwithstanding any over- or under-collection in a particular year. The purpose of the statute is thus effectuated. We believe the provisions are reasonable and therefore valid. Id.
We conclude that Rule 1.411 authorizes an equal and uniform tax. The maintenance-tax surcharge for 1992 was calculated by adding:
the maintenance tax surcharge at the rate of 1.140% of the correctly reported gross workers’ compensation insurance premiums for the calendar year 1991 to cover debt service for bonds issued on behalf of the [Fund]; and ... an additional maintenance tax surcharge at the rate of .702% of the correctly reported gross workers’ compensation insurance premiums for the calendar year 1991 to cover all additional debt service for bonds issued on behalf of the [Fund].
28 Tex.Admin.Code § 1.411(a)(2), (3) (1993). We overrule appellants’ third point of error.
Section 12(b) of article 5.76–3 grants the Fund, one of appellants’ competitors in the workers’ compensation market, a tax credit equal to two percent of the Fund’s gross written premiums. Code art. 5.76–3, § 12(b).15 The tax credit is applied first against the Fund’s liability for the maintenance-tax surcharge. Id. § 12(b)(1). Appellants argue the Fund gains an unfair advantage in the form of reduced taxes and that no rational or reasonable basis exists for the legislature’s classification.
In the present circumstances, the Fund is taxed “in the same manner as an insurance carrier authorized by [the Department] to write workers’ compensation insurance,” Code art. 5.76–3, § 12(a), except that the Fund receives a two-percent tax credit. We must determine whether the greater proportion of high-risk employers insured by the Fund, as the insurer of last resort, justifies a separate and distinct classification.
The legislature may create separate tax classifications which treat differently those engaged in the same business so long as a reasonable basis justifies the disparate treatment. Prudential Health, 626 S.W.2d at 830.
The courts ... can only interfere when it is made clearly to appear that an attempted classification has no reasonable basis in the nature of the business classified, and that the law operates unequally upon subjects between which there is no real difference to justify the separate treatment of them undertaken by the Legislature.
Fairmont Dallas Restaurants, Inc. v. McBeath, 618 S.W.2d 931, 933 (Tex.App.—Waco 1981, no writ).
In Texas Company, the supreme court upheld a statute that levied higher taxes against those engaged in the wholesale business of selling oil, as opposed to wholesalers of other commodities. 103 S.W. at 485. In assessing the reasonableness of the legislature’s classification, the court considered the following factors:
Differences in the profits derived, in the extent of the consumption of the articles, and therefore in the facility with which the burdens may in the course of business be distributed among consumers generally, and other conditions that might be supposed could properly be taken into consideration by the Legislature in making classifications and determining the amount of the tax to be laid upon each; and it would be only an extreme and a clear case that would justify an interference by the courts with the legislative action.
Id. Differences in commodities sold or services rendered are appropriate bases for distinct classifications. Dancetown, U.S.A., Inc. v. State, 439 S.W.2d 333, 336 (Tex.1969).16
We cannot conclude that the legislature’s classification is so arbitrary and unreasonable as to render unconstitutional section 12(b) of article 5.76–3, granting a two-percent tax credit to the Fund. Although appellants and the Fund perform the same business function—that of providing workers’ compensation insurance to the general public—the Fund assumes the additional responsibility of insuring high-risk employers who have not been able to find workers’ compensation in the private market. The difference in profits that may be derived by a discriminating private compensation carrier and an insurer of last resort and the burdens associated with otherwise uninsurable employers are appropriate factors that the legislature might have considered. We overrule appellants’ third and fourth points of error.
Appellants’ fifth point of error complains the trial court erred in concluding that doubling the first-year tax, as authorized by Rule 1.411(a)(3), was valid under Article 5.68 does not address the method of calculating *99 the amount of taxes collected. We overrule appellants’ fifth point of error.
Having overruled each of appellants’ points of error, we affirm the trial-court judgment.
Appellees are: the Texas Department of Insurance; J. Robert Hunter, Commissioner of Insurance; Claire Korioth, Allene D. Evans, and Deece Eckstein, former members of the State Board of Insurance; Martha Whitehead, Texas State Treasurer; Dan Morales, Texas Attorney General; John Sharp, Texas Comptroller; and the Texas Public Finance Authority.
Tex.Ins.Code Ann. art. 5.76–5, § 3(a) (West Supp.1995) (the “Code”).
Deacon v. City of Euless, 405 S.W.2d 59, 62 (Tex.1966); see generally 1 George D. Braden et al., The Constitution of the State of Texas: An Annotated and Comparative Analysis, 58–62 (1977).
The maintenance-tax surcharge must be sufficient to pay the debt service on the $300 million dollars in bonds and “shall be collected ... on behalf of the fund in the same manner as provided under Article 5.68 of this code.” Code 28 Tex.Admin.Code 1.414 (1995).
Taxes on property owned in January may be levied at any time during the calendar year without violating the prohibition against retroactive laws. Hanson v. Town of Flower Mound, 539 S.W.2d 178, 179–80 (Tex.Civ.App.—Fort Worth 1976, no writ).
See Houston Oil Co. v. Lawson, 175 S.W.2d 716, 723 (Tex.Civ.App.—Galveston 1943, writ ref’d) (“a franchise tax is neither a tax upon the property or the income of a corporation, though both are to be regarded in measuring the tax”).
Taxes on gross premiums are assessed in lieu of franchise taxes. See Prudential Health, 626 S.W.2d at 828.
See Neild, 110 F.2d at 255 (“Since [the tax] can be levied only when the taxpayer both exercises the privilege of doing business in the taxable year and has been in receipt of gross receipts during a previous year, the tax, obviously is not exclusively on gross receipts apart from the privilege.”).
The Fund is governed by a board of directors appointed by the Governor with the advice and consent of the Senate. Code art. 5.76–3, Tex.Gov’t Code Ann. §§ 2001.171–.178).
Section 1 of article VIII provides:
Taxation shall be equal and uniform. All property in this State, whether owned by natural persons or corporations, other than municipal, shall be taxed in proportion to its value, which shall be ascertained as may be provided by law. The Legislature may impose a poll tax. It may also impose occupation taxes, both upon natural persons and upon corporations, other than municipal, doing any business in this State. It may also tax incomes of both natural persons and corporations other than municipal, except that persons engaged in mechanical and agricultural pursuits shall never be required to pay an occupation tax; Provided, that two hundred and fifty dollars worth of household and kitchen furniture, belonging to each family in this State shall be exempt from taxation, and provided further that the occupation tax levied by any county, city or town for any year on persons or corporations pursuing any profession or business, shall not exceed one half of the tax levied by the State for the same period on such profession or business.
Tex. Const. art. VIII, § 1.
art. 5.76–5, § 10(d).
The evidence showed the following: Birmingham Fire Insurance Company of Pennsylvania wrote $35,125,602 in gross written premiums in 1991. The 1992 maintenance tax surcharge on the 1991 premiums totalled $647,013.59. Effective January 1, 1992, The Insurance Company of the State of Pennsylvania changed its policy to allow its policyholders to elect to have larger deductibles, thereby reducing their premiums. This decision caused Birmingham policyholders to switch companies in order to take advantage of the lower rates offered by The Insurance Company of the State of Pennsylvania. In the 1992 calendar year Birmingham lost $11 million in premiums due to policyholders canceling their polices in order to take advantage of the larger deductibles. During the recoupment period, June 1, 1992 through May 31, 1993, Birmingham premiums totalled approximately $9 million. Birmingham had selected before the June 1, 1992 deadline, a recoupment percentage of 2.031 percent. Based on this percentage, Birmingham would recoup only $182,790 instead of the $647,013.59 paid in surcharges in taxes over the first recoupment period.
Rule 1.411(c)(8) provides:
If an insurance company or the Texas Workers’ Compensation Insurance Facility (facility) collects from its insureds as recoupment an amount in excess of the amount actually paid as surcharges under subsection (a)(2) and (a)(3) of this section, the company shall pay this excess amount to the [department] in the form and manner required by the department. The department shall deposit the excess amounts collected under this subsection in the same manner and in the same accounts as surcharges collected under subsection (a)(2) and (3) of this section and these amounts shall be used for the same purposes as those surcharges.
28 Tex.Admin.Code 1.411(c)(8) (1993) (emphasis added).
A “legislative” administrative rule is based on a grant of legislative power to an agency. See Kenneth C. Davis, Administrative Law Text § 5.03 (3d ed. 1972). Article 1.03A of the Code grants rulemaking power to the Commissioner of Insurance. Tex.Ins.Code Ann. art. 1.03A (West Supp.1995) (“The Commissioner may adopt rules and regulations for the conduct and execution of the duties and functions of the department only as authorized by a statute.”). The consequences of the Department’s failure to enforce this aspect of the rule are immaterial to our decision here.
Under Rule 1.411, insurance companies may use whatever recoupment rate they consider necessary to recover the surcharges paid. 28 Tex.Admin.Code § 1.411(c) (1993). Appellants introduced evidence at trial showing that each of the three plaintiffs used the same rate of recoupment even though the companies wrote substantially different amounts of premiums; one of the three plaintiffs actually recouped more than it paid in taxes.
The matters discussed here refer to appellants’ fourth point of error, asserting the trial court erred in rejecting their complaint of unequal and non-uniform taxation on additional grounds.
In McBeath, a restaurant company challenged a statute that assessed a five-percent tax on the sale of mixed drinks on an airplane, but assessed a ten-percent tax if the drinks were sold elsewhere. H. Rouw Co. v. Texas Citrus Comm’n, 151 Tex. 182, 247 S.W.2d 231, 234–35 (1952) (section of statute which exempts natural persons from tax imposed by statute upon corporate citrus-fruit growers held unconstitutional).
Sections 7 and 8(a) provide as follows:
Sec. 7 In a bond resolution, the board may make additional covenants with respect to the bonds and the designated income and receipts of the fund pledged to their payment and may provide for the flow and the establishment, maintenance, and investment of funds and accounts with respect to the bonds....
Sec. 8 (a) A bond resolution may establish special accounts including an interest and sinking fund account, reserve account, and other accounts.
Code art. 5.76, § 3(a)(2) ( “On behalf of the fund, the [Authority] shall issue revenue bonds to: ... establish and maintain reserves.”).