Summary of a Recent
Judicial Development in
Crop Insurance

FCIC Reinsured Premiums Not
Subject to State Tax

Randal Busby
National Aglaw Center Research Assistant

In an action brought by an insurance company seeking a declaratory judgment that the Federal Crop Insurance Act ("FCIA"), 7 U.S.C. §§ 1501-1515, preempted a Massachusetts law that taxed the premiums paid by out-of-state insurance corporations, the Supreme Judicial Court of Massachusetts has ruled that the FCIA preempted Mass. Gen. Laws Ann. ch. 63, § 23 because crop insurance premiums reinsured by the Federal Crop Insurance Corporation ("FCIC") are exempt from state taxation under the FCIA. ACE Prop. & Cas. Ins. Co. v. Comm'r of Revenue, 770 N.E.2d 980, 982 (Mass. 2002).

The FCIA was enacted "to promote the national welfare by improving the economic stability of agriculture through a sound system of crop insurance and providing the means for the research and experience helpful in devising and establishing such insurance." Id. at 983 (quoting 7 U.S.C. § 1502(a)). The FCIC, a federal corporation within the Department of Agriculture, was given the responsibility for implementing the federal crop insurance program. See id. (citing 7 U.S.C. § 1503). The FCIC ordinarily reinsures crop insurance policies issued by private insurance companies, although it does provide some crop insurance directly to agricultural producers. See id. (citing 7 U.S.C. §§ 1508(a),(k)(1)).

Congress exempted the FCIC from all taxation "imposed by the United States . . . or by any State, county, municipality, or local taxing authority." Id. (citing 7 U.S.C. § 1511). The FCIA's general preemption provision states as follows:

State and local laws or rules shall not apply to contracts, agreements, or regulations of the [FCIC] or the parties thereto to the extent such contracts, agreements, or regulations provide that such laws or rules shall not apply, to the extent that such laws or rules are inconsistent with such contracts, agreements, or regulations.

Id. at 984 (quoting 7 U.S.C. § 1506(1)) (emphasis supplied).
Under 7 U.S.C. § 1506(p), the FCIC was authorized to create any necessary regulation to implement the FCIA. See id.

In 1990, the FCIC discovered that in the previous year many states had improperly assessed taxes that exceeded $15 million on reinsured policies at a substantial cost to the FCIC despite 7 U.S.C. § 1511. See id. (citing 55 Fed. Reg. 23,066 (1990)). To remedy the improper taxation, the FCIC formulated regulations to clearly specify that a variety of state laws, including state tax laws, were preempted by the FCIA. See id. (citing 7 C.F.R. §§ 400.351-.352 (2002)). In these regulations, the FCIC stated in part that "[t]ax premiums associated with policies issued [under the FCIA]" could not be taxed by states. Id. (citing 7 C.F.R. § 400.352(b)(2)). Further, the FCIC stated that "[a] policy or plan of insurance that is approved . . . for FCIC reinsurance is preempted from state and local taxation." Id. (citing 7 C.F.R. § 400.710 (2002)) (emphasis supplied).

Following the implementation of the 1990 regulations, the state of Kansas filed suit claiming that the FCIC had exceeded its statutory authority. Id. (citing State ex rel. Todd v. United States, 79 F. Supp. 1491, 1496 (D. Kan. 1992), aff'd, 995 F.2d 1505 (10th Cir. 1993)). Subsequently, Congress amended the FCIA in 1994 by adding a clause that stated "[a] contract of insurance of the [FCIC], and a contract of insurance reinsured by the [FCIC], shall be exempt from taxation imposed by any State, municipality, or local taxing authority." Id. at 985 (citing 7 U.S.C. § 1511).

ACE Property & Casualty Insurance Company ("ACE"), a Pennsylvania corporation with its principal place of business in Philadelphia was subject as a foreign corporation to the tax imposition of Mass. Gen. Laws Ann. ch. 63, § 23 on premiums issued to various cranberry growers within Massachusetts. See id. at 982. Mass. Gen. Laws Ann. ch. 63, § 23 provides that

[e]very foreign insurance company . . . shall annually pay an excise upon the gross premiums for all policies written or renewed, all additional premiums charged, and all assessments made during the preceding calendar year for insurance of property or interests in this common wealth . . . at the rate of two per cent but not less in amount than would be imposed by the laws of the state or country under which such company is organized upon a like insurance company incorporated in this commonwealth . . . .

Id.

Based upon its belief that the FCIC-reinsured policies were exempt from this tax imposition, ACE excluded those premiums on its premium excise return for 1995. See id. During the Commissioner of Revenue's (the "Commissioner") audit of the return, he issued an assessment for the excluded premiums. See id. The Commissioner subsequently denied an application for abatement by ACE. See id. ACE appealed the Commissioner's decision to the Appellate Tax Board ("Tax Board"). See id. While the appeal was pending, ACE brought an action for declaratory relief against the Commissioner in county court. See id.

Although the Commissioner did not raise the issue, the court addressed whether the action for declaratory relief could be pursued by ACE prior to a resolution of the pending appeal with the Tax Board. See id. The court stated that "[o]rdinarily, parties must first exhaust all administrative remedies before seeking judicial relief." Id. at 982-83 (citations omitted). "'Nevertheless,'" the court stated, "''[w]e have held repeatedly, in the tax field, that a declaratory action is not ousted merely by the fact that the taxpayer has an administrative path to relief. Rather we have taken the view that the judge in such a case may still exercise a discretion as to whether the action should be entertained.''" Id. at 983 (quoting Sydney v. Commissioner of Corps. & Taxation, 356 N.E.2d 460, 463 (1976)).

It also stated that judicial review is discretionary "when important, novel, or recurrent issues are at stake, when the decision has public significance, or when the case reduces to a question of law." Id. (citations omitted). The court added that the premium excise tax would affect other taxpayers who were also raising the preemption issue on abatement and on appeal with the Tax Board. See id. Therefore, the court concluded that the action could proceed because it was a matter of law with no facts in dispute and that the case was within the court's discretion, regardless of ACE's failure to exhaust all administrative remedies. See id.

The Commissioner argued that preemption in 7 U.S.C. § 1511 was meant to target the FCIC only and that the 1994 amendment was intended to codify the prohibition of any direct taxation of the FCIC. See id. at 986 (emphasis supplied). The court rejected this argument, stating that the language of the statute clearly exempts any "contract of insurance reinsured by the [FCIC]." Id. (citing 7 U.S.C. § 1511) (emphasis supplied). The court stated that the Commissioner's argument, if accepted, would render the amendments to § 1511 meaningless. See id.>/p>

The Commissioner also argued that the premium excise tax imposed under Massachusetts law was not "a tax 'on' any contract reinsured by the FCIC that would be prohibited" by § 1511, "or a tax 'on' any premium for such an insurance that would be prohibited by 7 C.F.R. § 400.352(b)(2), but rather an excise tax for the privilege of doing business in Massachusetts that is merely 'measured by' reference to the premiums for such contracts." Id. at 987. The court rejected this argument, ruling that § 1511 does not provide an exemption for the entire contract. See id. It also ruled that the actual wording of the Massachusetts law did not support the Commissioner's theory. See id. The court stated that under the Commissioner's theory, the preemption provisions would be dismembered and rendered useless. See id. at 988.

The court also analyzed Congress' authority to preempt state taxes that interfere with interstate commerce, noting that the important question is whether Congress intended for federal law to supersede state law. See id. at 985 (citations omitted). It explained that to properly discern the intent of Congress, it had to look at the "explicit statutory language and the structure and purpose of it." Id. (citations omitted).

The court stated that the clear language of § 1511, as amended, expressed Congress' intent to preempt state taxation of FCIC-reinsured policies. See id. at 985-86. It also stated that in following the Tenth Circuit decision in Todd, Congress obviously intended for the amendment of § 1511 to close the issue in favor of the "preemption regulations as they applied to the taxation of contracts reinsured under the crop insurance program." Id. at 986. The court concluded that the excise tax was preempted either by 7 U.S.C. § 1511 or by 7 C.F.R. § 400.352(b)(2) under the FCIC's preemption authority to promulgate such regulation. See id. (citing U.S.C. § 1506(l)). It added that

"Congress did not intend for the federal crop insurance program to be subject to state premium taxes that reduce the savings anticipated by Congress, that siphon away federal funds from their intended use, and that create an operating cost which would have not existed if the FCIC had issued the policy." The preemption provisions were not aimed at preventing only some particular type of tax, but were intended to preclude all forms of taxation affecting the reinsured contracts, as all such taxes, however denominated, would effectively be paid by the FCIC. The Commissioner's argument that the tax imposed by G.L. c. 63, § 23, is somehow not the kind of tax that is preempted by these provisions is contrary to the very purpose of those broadly worded preemption provisions.

Id. at 988 (quoting Todd, 79 F. Supp. at 1497).

The case was decided on June 28, 2002; this summary was posted June, 2003