Opposition Brief — First American American Title Insurance Insurance Co. v. Combs (No. 08-721)

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No. 08-721 OFFICE OF *-E CLERK }

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Supreme Court of the United States

FIRST AMERICAN TITLE INSURANCE COMPANY AND OLD

REPUBLIC NATIONAL TITLE INSURANCE COMPANY,

Petitioners,

Wi

SUSAN COMBS, COMPTROLLER OF PUBLIC ACCOUNTS

FOR THE STATE OF TEXAS, AND GREG ABBOTT, ATTORNEY

GENERAL OF THE STATE OF TEXAS,

Respondents.

On Petition for Writ of Certiorari to the

Supreme Court of Texas

RESYGNDENTS’ BRIEF IN OPPOSITION

GREG ABBOTT JAMES C. HO

Attorney General of Texas Solicitor General

. ' Counsel of Record

C. ANDREW WEBER f Rec

First Assistant Attorney SEAN D. JORDAN

General Deputy Solicitor General

DAVID S. MORALES BETH KLUSMANN

Deputy Attorney Genera! Assistant Solicitor General

for Civil Litigation P.O. Box 12548 (MC 059)

Austin, Texas 78711

(512) 936-1700

i

QUESTION PRESENTED

Like virtually every other State, Texas has a

retaliatory-tax statute that is designed to equalize the tax

burdens borne by its domestic and foreign-based insurance

companies. Ifa foreign insurer’s home state would impose

a greater aggregate tax burden on a Texas insurer than

Texas “directly imposes” on tke foreign insurer, Texas

applies a retaliatory tax to the foreign insurer in the

amount of the difference.

The calculation of retaliatory taxes is directly affected

by Texas’s pass-through system for collecting premium

taxes on title insurance. In Texas, title agents, which are

distinct entities from title-insurance companies, are

responsible for 85% of the premium taxes, which they

remit to title-insurance companies. Title-insurance

companies are then required to remit the entire amount of

taxes due tothe State. Because a title-insurance company

is only burdened by 15% of the premium taxes in Texas,

Texas includes only that 15% in the company’s aggregate

tax burden when calculating the retaliatory tax owed to

the State.

When calculating the retaliatory taxes owed by foreign

title-insurance companies, does the Equal Protection

Clause require Texas to credit those companies with

premium taxes that they have remitted on behalf of title

agents?

il

TABLE OF CONTENTS

eens Paeweewted ... . .. ck vives ves bene i

Dee ae aU OwNEIOS kk. a sk ee ee eee iv

DE CRC MIGGTLION 2... 6 nc ns 3 eee 1

EE PE ee re 2

.. emo... www bee he ee ee 2

A. Frome TAS ... . 03.0664 6 eee 2

S. Retalintory Tases .. 5 6s 60s sees eee 6

a. Precemural History ......5.440«s0« 00055 ee 9

A. Lower State Court Proceedings .......... 9

B. Texas Supreme Court ................. 10

Reasons to Deny the Petition ................... 12

:. There Is No Split Among Lower Courts on

bese legwe on. 26 ese 13

II. This Case Does Not Affect Nationwide

putevosts . ....s 6.5 eee 20

iil

Ill. The Texas Supreme Court Correctly

Concluded That Texas’s Retaliatory Tax

Does Not Violate the Equal Protection

oT Se a are ee Ail tee ie At es ati 23

Conclusion

iV

TABLE OF AUTHORITIES

CASES

Am. Fire & Cas. Co. v. N. J. Div.

of Taxation, 912 A.2d 126 (N.J. 2006)........ 13-15

City of Cleburne v. Cleburne Living Ctr.,

ee ar ee EE os oe oe ee he 23

Executive Life Ins. Co. v. Commonwealth,

606 A.2d 1282 (Pa. Commw. Ct. 1992) ......... 19

Gallagher v. Motors Ins. Corp.,

ly Dee ee Be bere ce 18

Hanover Fire Ins. Co. v. Harding,

ee a ee Ce oes on oe eas Caden 26

Lewis v. Jacksonville Bldg. & Loan Ass'n,

ty ee Oe ce re CO SFOs ov a ecw eed ees 6

Metro. Life Ins. Co. v. Ward,

er Br Rw eee vs eb eee eens 26, 27

Mut. Life Ins. Co. v. Washburn,

eee Pe. eee ee Eee. ROD. ne es ee awe we es 19

Premera Blue Cross v. State,

177 Foe bare CARON Be) «cos ee ee eee ees 17

Prudential Ins. Co. of Am. v. Comm of Revenue,

709 N.E.2d 1096 (Mass. 1999) B. ois 18

Vv

Stewart Title Guar. Co. v. Comm’ of Revenue,

7157 N.W.2d 874 (Minn. 2008) ................. 8

Sun Life Assurance Co. of Can. v. Manna,

Bre meee ooo Gl. 2007) ................ 16,17

TIG Ins. Co. v. Dep't. of Treasury,

629 N.W.2d 402 (Mich.), cert. denied,

re 16-17

United Servs. Auto. Ass’n. v. Curiale,

668 N.E.2d 384 (N.Y. 1996) ............... 13, 15

Western & Southern Life Ins. Co. v. State

Bd. of Equalization, 451 U.S. 648 (1981) .... passim

Wheeling Steel Corp. v. Glander,

SS OD ek ee ew eee 26

CONSTITUTIONAL PROVISIONS, STATUTES, AND RULES

U.S. CONST. amend. XIV,§ 1 ........... 6

ee Res Lf) ry 8

CAL. REV. & TAX. CODE § 12202 >,

MINN. STAT. § 270C.07, subd. 1 .. | ae -

MINN. STAT. § 2971.05(1) , or.

vi

EE 2)

ES 2-4

ES 2

ee ee re OG, Oe, SOD)... 5. ww ee eee 3

meee, soe art. 21.46, § Via) .............. passim

ee eee ee Se ees.Cl-O1) .... ww. keene. 2

gE 7

TEX. INS. one EE 22

a 4

er 3

34 TEX. ADMIN. CODE § 3.831(4)(C) .......... .. 4,6

OTHER AUTHORITIES

Act approved May 16, 1907, 30th Leg., Ist C.S., ch. 18,

§ 8, 1907 Tex. Gen. Laws 479 (amended 1981),

repealed by Act of May 22, 2003, 78th Leg., R.S.,

§ 26(a)(1), 2003 Tex. Gen. Laws 3611 ....... .. &

Vil

Act of June 1, 1987, 70th Leg., R.S., § 22,

BOG Tem. 190. EO SETO oc kc wees &

Act of May 22, 2003, 78th Leg., R.S. ch. 1274,

2003 Tex. Gen. Lawe 3G11 .............05.. Ae

California Title Insurance Tax Return Form

Instructions, available at

http://www.insurance.ca.gov/0250-insurers/

0300-insurers/0100-applications/tax-forms-

instruct-and-info/2008/index.cfm (last

ae ee: 8

Minn. Dep’t of Revenue Rev. Notice No. 2006-01

(Mar. 27, 2006), available at 2006 WL 1125895 .. 22

State Tax Automated Research System,

avatlable at http://cpastar2.cpa.state.tx.us/

index.html (last visited Mar. 27, 2009) .......... 6

Texas Net Revenue by Source, available at

http://www.window.state.tx.us/taxbud/

revenue_hist.html (last visited Mar. 27, 2009) .. 24

Underwriters Experience Reports, available at

http://www.tdi.state.tx.us/reports/report8. html

(inet visited Mar. 2/7, 2000) ..... ... 2 sce weees 24

BRIEF IN OPPOSITION

Petitioners seek review of the Texas Supreme Court’s

decision that applying Texas’s retaliatory-tax statute to

foreign-based title insurers does not violate the Equal

Protection Clause. But the case does not warrant review

for several reasons. First, Petitioners have failed to

identify any conflict among state or federal courts that is

implicated by the Texas Supreme Court’s decision.

Second, contrary to Petitioners’ assertions, the case does

not present issues of “vital interest” to the national

insurance industry, nor does it “dramatically alter the

legal landscape” concerning challenges to state retaliatory-

tax regimes. Pet. 15. Rather, the lower court’s decision

turned on interpreting Texas's unique statutes concerning

the assessment of premium taxes on title insurers and

their independent title agents. And because the decision

focused on Texas’s particular method of collecting

premium taxes from one segment of the insurance

industry—title insurers and title agents—t did not herald

any significant change concerning nationwide retaliatory-

tax regimes or challenges to those regimes.’

Finally, Petitioners have failed to demonstrate any

disharmony between the lower court’s decision and the

Court's relevant Equal Protection Clause precedent

concerning state taxation of foreign insurance companies.

In Western & Southern Life Insurance Co. v. State Board

of Equalization, the Court held that retaliatory taxes do

not generally violate the Equal Protection Clause. 451

1. It 1s therefore unsurprising that the insurance industry has

offered virtually no support for the petition. Indeed, only one amicus

brief has been filed in suppor’ of Petitioners, by a group of affiliated

title insurers, and it makes no argument that this case will result in

dire consequences to the national] insurance industry.

2

U.S. 648, 674 (1981). The Texas retaliatory tax statute, in

form and function, operates just like the California statute

upheld in Western & Southern. The crux of Petitioners’

complaint actually concerns the effect of Texas’s pass-

through system for collecting title-insurance-premium

taxes on the calculation of foreign title insurers’

retaliatory taxes. Under Texas law, title agents must

remit 85% of the premium taxes to title-insurance

companies, and the title-insurance companies must then

remit the entire amount of taxes due to the State.

Petitioners do not, and cannot, dispute that 85% of the

premium taxes do not come “out of their pocket,” so to

speak; nonetheless, they want to be credited for those

monies for retaliatory-tax purposes as if they had actually

been burdened with the tax. But because none of the

Court’s Equal Protection Clause cases stand for the

proposition that retaliatory taxes must be adjusted to

credit foreign insurance companies for tax payments

actually borne by other parties, this case presents no

conflict with the Court’s precedent warranting review.

STATEMENT

I. BACKGROUND

A. Premium Taxes

1. Texas, like most other States, imposes a tax on title

insurance premiums. TEX. INS. CODE art. 9.59, §§ 1, 4;° see

2. Texas recodified its premium-tax statutes in 2003. See TEX. INS.

Cope §§ 223.001-.011. The Legislature did not intend the

recodification to make any substantive changes to the law. Act of May

22, 2003, 78th Leg., R.S. ch. 1274, 2003 Tex. Gen. Laws 3611. For

clarity, the brief will refer to the version of the statutes in effect at the

time the facts of this case arose

3

also Pet. App. 75a-76a. Texas also regulates the division

of premiums between title agents and insurance

companies: agents keep 85% of the premiums and remit

15% to the insurance company. 28 TEX. ADMIN. CODE § 9.1

(adopting Basic Manual of Rules, Rates and Forms for the

Writing of Title Insurance in the State of Texas, which

sets the division between insurance companies and

agents). Texas’s premium tax, however, is imposed on

100% of the premiums, regardless of whether they are

retained by the agent or remitted to the insurer. TEX. INS.

CODE art. 9.59, § 8(b).

Instead of burdening one party with the entire

premium tax or creating two separate collection

mechanisms (one for insurers and one for agents), the

Texas Legislature chose to consolidate the collection

process by making title insurers pass-through entities for

title agents’ premium taxes. See id. §§ 1, 8(b). As

described by the Texas Supreme Court, “[I]n heu of

creating a separate tax collection system for insurance

agents, the Legislature implemented an integrated system

of taxation with the insurance company acting as the

central collection point.” Pet. App. lla. Title agents remit

their portion of the premium tax (85%) to title-insurance

companies who, in turn, remit the entire premium tax to

the State.

Texas has further simplified this process by building

the title agents’ tax burden into the mandated division of

premium. TEX. INS. CODE art. 9.59, § 8(b). Specifically,

Texas “set{s] the division of the premium between insurer

ana agent so that the insurer receives the premium tax

due on the agent's portion of the premium and remits it to

the State.” Jd. Texas’s premium drvision of 85/15 was set

4

by the Department of Insurance with the understanding

that the insurer’s portion would include the agent’s tax

burden. Once the insurer receives its portion of the

premium from the agent, the insurer is legally obligated

to pay the entire tax to the State. Jd. § 1. But, ifthe title

insurer does not receive the required premium from the

title agent, it is not obligated to pay the full premium tax,

as insurers and agents are separately liable for their

portions of the tax. 34 TEX. ADMIN. CODE § 3.831(4)(C).

In sum, although Texas law places a duty on the title

insurer to remit the entire premium tax to the State, that

duty arises only when the insurer receives its share of the

premium from the title agent. The only burden placed on

insurance companies with respect to the agent’s portion of

the tax is an “administrative burden of acting as a conduit

for the agents’ tax payments.” Pet. App. 12a.

The Texas Legislature has recognized that both

insurance companies and agents pay premium taxes by

exempting both from paying other taxes. Article 9.59,

§ 8(a) provides that “[t]itle insurance companies and title

insurance agents subject to the tax levied by this article

may not be required to pay any additional tax in

proportion to their gross premium receipts levied by this

state or any county or municipality ....” (emphasis

added).* Thus, Texas’s premium-tax system makes both

title-insurance companies and title agents responsible for

their proportionate burden of the premium tax and

exempts them from other taxes as a result.

3. The Texas Tax Code also exempts title insurance companies and

title agents from paying Texas's franchise tax. TEX. TAX CODE

§ 171.052.

i)

2. Texas’s premium tax system has not always existed in

its current form. Prior to 1988, Texas taxed title-

insurance premiums in accordance with a general tax

scheme that applied to multiple types of insurance and

simply imposed an annual tax on “insurance carriers.”

TEX. INS. CODE art. 4.10, § 1, Act approved May 16, 1907,

30th Leg., Ist C.S., ch. 18, § 8, 1907 Tex. Gen. Laws 479,

482-84 (amended 1981), repealed by Act of May 22, 2003,

78th Leg., R.S., § 26(a)(1), 2003 Tex. Gen. Laws 3611,

4138. In 1987, the Texas Legislature enacted article 9.59,

separating the taxation of title insurance from that of

other insurance. Act of June 1, 1987, 70th Leg., R.S., § 22,

1987 Tex. Gen. Laws 3610, 3638-40. This article created

the same pass-through system described

above—facilitating the collection of premium taxes by

including the agent’s taxes within the division of premium

and exempting insurers and agents from other taxes. Id.

In 1996, the Texas Comptroller of Public Accounts

issued a letter interpreting article 9.59 in response to

questions from the State of Oregon. 2.R.585-86.* The

Comptroller took the position that both title-insurance

companies and title agents are taxpayers under Texas's

premium-tax system and, therefore, title insurers would

be allowed to adjust their tax filings if title agents failed

to remit the required portion of premiums. 2.R.585. The

Comptroller reserved the right to take enforcement action

against delinquent title agents to collect the premium

taxes due. Jd. Thus, the Comptroller concluded that a

title insurer's premium-tax liability is based only on its

4 Citations to the record are in the form [volume number].R.[page

num ber}

6

portion of the premiums. 2.R.586. Four years later, in

2000, the Comptroller made her position publicly available

by including it in a letter published on the Comptroller’s

online State Tax Automated Research System (STAR

system).° 2.R.588-90.

In 2001, the Comptroller reinforced her view that title

agents are taxpayers of the premium tax by amending the

relevant administrative rule to state that insurers and

agents are “separately liable for the [premium] tax.” 34

TEX. ADMIN. CODE § 3.831(4)(C); see also Lewis uv.

Jacksonville Bldg. & Loan Ass’n, 540 S.W.2d 307, 310

(Tex. 1976) (stating that properly enacted administrative

rules have the force and effect of law in Texas). Therefore,

title insurers are not guarantors of the entire premium

tax. Rather, they are responsible for 15% of the tax and

bear only an administrative burden of remitting the

agent’s 85% of the tax to the State once it is received from

the agent.

B. Retaliatory Taxes

1. In Western & Southern, the Court considered the

constitutionality of California’s retaliatory-tax statute and

determined that it did not violate the Equal Protection

Clause because it was rationally related to the legitimate

state interest of “promot[ing] . . . domestic industry by

deterring barriers to interstate business.” 451 U.S. at 671;

see also U.S. CONST. amend. XIV, § 1. As described by the

Court, retaliatory taxes under California’s statute were

5 The STAR system is located at http://cpastar2.cpa.state

> ee

tx us/index. htm! (last visited Mar. 27, 2009), and the letter reterenced

is No. Z00009751L

7

computed by comparing the taxes owed by a foreign

insurance company in California with the total taxes that

would be imposed on a hypothetical California insurance

company doing business in the foreign company’s state of

origin. Western & Southern, 451 U.S. at 650-51. If the

taxes on the hypothetical California company were higher

than those of the foreign company in California, California

imposed a retaliatory tax in the amount of the difference

between the two. Id. at 651. Use of the retaliatory tax

thus “applf{ied] pressure on other States to maintain low

taxes on California insurers.” Id. at 669-70.

2. Texas’s retaliatory-tax statute is similar in form and

effect to California’s retaliatory-tax statute. Compare CAL.

INS. CODE § 685(a) with TEX. INS. CODE art. 21.46, § 1(a).®

Texas's retaliatory law, like that of all other States, does

not demand a line-by-line comparison of tax rates and

fees, but rather requires a comparison of aggregate tax

burdens. TEX. INS. CODE art. 21.46, § 1(a); see also Pet.

App. 73a-74a. Specifically, Texas compares the “aggregate

.. . taxes, including maintenance or similar regulatory

fees, income and corporate franchise, licenses, fees, fines,

penalties, deposit requirements or other obligations,

prohibitions or restrictions” directly imposed on a foreign

insurance company in Texas with those imposed on a

hypothetical Texas insurance company doing business in

the foreign insurer’s state. TEX. INS. CODE art. 21.46,

§ l(a). For example, if a Califormia title-insurance

6. Texas has also recodified its retalatory-tax statute without

substantive change. see TEX. INS. CODE § 281.004: Act of Mav 22,

2003, 78th Leg., R.S., ch. 1274, 2003 Tex. Gen. Laws 3611. The brief

will refer to the version of the statute in effect at the time the facts in

this case arose

8

company’s tax burden in Texas is $800, but an identical

Texas company operating in California would face a tax

burden of $1000, the amount of retaliatory tax in Texas is

$200.

Comparing the aggregate dollar amount owed by a title

insurer is critical, because each State has its own unique

tax system. Consider the tax burdens in the three states

involved here: California, Minnesota, and Texas. The tax

rate on title-insurance premiums in California is 2.35%,

CAL. REV. & TAX. CODE § 12202; however, California’s

premium tax does not apply to the premiums retained by

the title agent, but only to the net premiums remitted to

the insurer. See California Title Insurance Tax Return

Form Instructions, available at http://www.insurance.ca.

gov/0250-insurers/0300-insurers/0100-applications/tax-f

orms-instruct-and-info/2008/index.cfm (last visited Mar.

27, 2009) (instructing insurers to deduct sum retained by

underwritten tile companies). Minnesota, by contrast,

requires title-insurance companies to pay a 2% tax on

100% of the premiums. MINN. STAT. § 2971.05(1); Stewart

Title Guar. Co. v. Comm ’r of Revenue, 757 N.W.2d 874, 877

(Minn. 2008). Texas, as described above, makes title-

insurance companies responsible for 15% of the 1.35% tax

on the total premiums. See supra, at 2-4.

Although California has the highest tax rate of the

three states, Minnesota imposes the greatest burden on

insurance companies. For example, using a $1000

premium and an 85/15 split between agent and insurer,

the insurance company’s tax burden would be $3.53 in

9

California, $20.00 in Minnesota, and $2.03 in Texas.’

Texas’s retaliatory tax statute, like that of other States,

focuses on the dollar amount owed by each title-insurance

company, rather than a comparison of tax rates, thereby

taking into account the tax structure of each State.

Therefore, a Minnesota company operating in Texas—or

California—would owe retaliatory taxes.

3. The calculation of retaliatory taxes in Texas was

altered by the Comptroller’s conclusion that title agents

are responsible for 85% of the premium tax. Prior to 2000,

Texas did not prohibit title insurers from including 100%

of the premium tax as part of their premium-tax burden in

Texas when calculating retaliatory taxes. Pet. App. 38a-

39a. But, after concluding that agents are liable as

taxpayers for 85% of the premium tax, the Comptroller

‘amended the retaliatory-tax forms to provide that insurers

should include only their 15% premium-tax burden in

calculating whether retaliatory taxes were owed. Id. at

5a. In the case of Petitioners, this change increased the

amount of retaliatory taxes they were required to pay. Id.

at Ga.

II. PROCEDURAL HISTORY

' A. Lower State Court Proceedings

In 2002, as a result of audits, the Comptroller

determined that Petitioners owed additional taxes because

they had incorrectly included taxes borne by title agents

in the calculation of their retaliatory taxes. Petitioners

7. The calculations are as follows: California = (($1000 x 0.15) x

0.0235), Minnesota = ($1000 x 0.02), and Texas = (($1000 x 0.0135) x

0.15). Other taxes and fees are set aside for purposes of this example.

10

paid the disputed taxes under protest and then filed

separate suits for refunds, arguing that (1) the

Comptroller misinterpreted Texas law, and (2) the

Comptroller’s interpretation violated the equal protection

clauses of both the United States and Texas constitutions.

The trial court granted summary judgment for the

Comptroller in each suit, id. at 6la-64a, and the cases

were consolidated on appeal. The Austin Court of Appeals

affirmed, rejecting Petitioners’ interpretation of state law

and concluding that the application of the retaliatory tax

was constitutional. Id. at 36a-60a.

B. Texas Supreme Court

Petitioners sought discretionary review from the

Supreme Court of Texas. The court affirmed the judgment

in favor of the Comptroller, concluding that the

Comptroller’s interpretation of the premium-tax system in

article 9.59 was “reasonable and in harmony with the

statute’s plain meaning.” Jd. at 10a.

The court began by reviewing article 9.59 as a whole

and noting that it taxed title agents on their portion of the

premiums. Id. at 8a-12a. Focusing on the requirement

that the premium be divided in such a way that the

insurer receives the agent’s portion of the premium tax,

the court reasoned that there would be no need to ensure

that the insurer receives the agent’s portion of the tax if

the agent was not taxed in the first place. Id. at 10a-11a.

The court concluded that, with respect to a title agent’s

portion of the premium tax, the Texas Legislature

intended a title-insurance company to be a “pass-through

entity” and “a conduit for the agents’ tax payments.” ld.

at 12a. The court compared this arrangement to federal]

personal income taxes that are imposed on individual

1]

employees, even though the employer remits the bulk of

the taxes. Jd. at lla n.40. In response to Petitioners’

argument that title-insurance companies alone bore the

responsibility for any tax deficiency, the court recognized

that the Comptroller had alleviated that concern by

promulgating a rule that made agents and insurers

separately liable for their own taxes. Jd. at 12a-13a.

The court concluded that, because title agents bore 85%

of the premium-tax burden, only 15% of premium taxes

were “directly imposed” on the title-insurance company for

purposes of calculating the retaliatory tax. Id. at 12a (“At

most, the only compulsion or obligation required of the

insurer with regard to 85% of the premium tax is to write

a check drawn on the money remitted by the agent—at the

end of the day, the insurer's bank account is not negatively

burdened.”). That is, the court approved the Comptroller's

interpretation under state law.

The court then turned to Petitioners’ constitutional

arguments and posed the two questions required under

the rational-basis review set forth in Western & Southern:

“(1) Does the challenged legislation have a legitimate

purpose? and (2) Was it reasonable for the lawmakers to

believe that use of the challenged classification would

promote that purpose?” Jd. at 20a (internal quotation

marks omitted).

As to the first question, the court held that the

statute’s purpose was the same as that in Western &

Southern—to deter barriers to interstate commerce. Id. at

Zla. In so holding, the court confined itself to considering

the legitimacy of the statute's purpose and refused to

second-guess the wisdom of the Texas Legislature. /d. at

22a. The court rejected Petitioners’ argument that the

12

increase in retaliatory taxes necessarily demonstrated an

impermissible purpose of revenue-raising, concluding that

the tax still exerted some downward pressure on foreign

taxes. Id. at 2la-22a.

Likewise, the court also held that the second prong of

the equal-protection analysis was met. The court “ha[d]

no trouble” concluding that the Comptroller could

rationally have believed that lowering tax burdens in

Texas would encourage other States to lower their burdens

as well. Id. The court countered the dissent’s argument

that Texas was comparing 15% of its taxes to 100% of

other States’ taxes by noting that the proper comparison

is between tax burdens on individual companies, not tax

rates on industries. Id. at 22a-23a.

The dissenting justices did not dispute the majority’s

conclusion that Texas law created a pass-through system,

stating several times that insurance companies and agents

“together” pay the premium tax and that 15% of the tax is

the “insurer’s share.” Id. at 27a-28a. Instead, the

dissenters argued that the retaliatory tax comparison

should be at an industry level, without regard to whether

the tax is paid by an insurer or an agent. Id. at 33a-34a.

REASONS TO DENY THE PETITION

Petitioners do not challenge the constitutionality of

Texas's retaliatory-tax statute itself, but rather Texas’s

interpretation of it in light of the unique premium-tax

Structure enacted by the Texas Legislature. The Court

should decline to hear their petition for several reasons.

First, there is no split or confusion among lower courts

regarding the Court’s retaliatory-tax jurisprudence.

Second, there 1s no pressing need to hear this case: no tax

13

war is imminent and the case affects Texas alone. And

third, the Texas Supreme Court correctly followed the

Court’s precedent in ruling that the Comptroller’s

interpretation of the retaliatory-tax statute did not violate

the Equal Protection Clause.

I. THERE IS NO SPLIT AMONG LOWER COURTS ON THIS

ISSUE.

Although asserting that retaliatory taxes are the

subject of much litigation, Petitioners fail to identify any

division among lower courts on this issue—and for good

reason. The cases cited by Petitioners are uniform in their

understanding and application of the Court’s equal-

protection precedent as applied to retaliatory taxation,

and none concerns the issue ovresented in this

case—payment of a premium tax by someone other than

the title-insurance company.

1. Petitioners focus on two cases in suggesting that this

case implicates a conflict among the lower courts:

American Fire & Casualty Co. v. New Jersey Division of

Taxation, 912 A.2d 126 (N.J. 2006), and United Services

Automobile Association v. Curiale, 668 N.E.2d 384 (N.Y.

1996). Pet. 16-19. But neither case addresses the

constitutional issue raised by this case, much less reaches

a decision conflicting with the reasoning or judgment of

the Texas Supreme Court.

American Fire concerned the effect of New Jersey’s

premium-tax cap on the calculation of retaliatory taxes.

912 A.2d at 128. New Jersey law provided that, if an

insurance company’s receipt of New Jersey premiums was

at least 12.5% of the company’s worldwide total, New

Jersey would tax only 12.5% of the company’s total

14

premiums, regardless of whether the company received

more than 12.5% of its total premiums in New Jersey. Id.

at 129. Because the cap was not available to New Jersey

insurers operating in other States, applying New Jersey’s

retaliatory tax to foreign insurers could erase the cap’s

benefits. Id. at 132-33. The question was whether to

apply the retaliatory tax to the capped or uncapped

amount of premium taxes.

The New Jersey Supreme Court decided the case on

state-law grounds and described its goal as reconciling the

tax-cap and retaliatory-tax statutes so as to give effect to

both. Jd. at 136. The court ultimately concluded that the

cap’s benefits should not be taken into account in the

retaliatory-tax calculation, thereby promoting business in

New Jersey while still exerting some downward pressure

on other States’ premium taxes. Id. at 138. The court did

not reach the insurer’s claim that using the capped

amount would violate the Equal Protection Clause, but

simply mentioned in dicta that doing so would raise

“significant constitutional questions.” Id.

American Fire is not contrary to the Texas Supreme

Court’s decision: it involved acompletely different statute,

did not consider the effect of premium taxes imposed on

someone other than the insurer, and failed to decide any

constitutional question. The New Jersey court’s rationale

8 For example, if a foreign insurer received 30% of its total

premiums from New Jersey insureds, New Jersey would only tax

12.5% of the company’s premiums. But, unless the foreign company’s

home State had a similarly applicable tax cap, the hypothetical New

Jersey company would be taxed on all 30% of its premiums, which

would hkely create a higher tax burden, resulting in a retaliatory tax

on the foreign company.

15

also comports with that of the Texas court. Petitioners

refer to the statement in American Fire that using the

capped amount could result in retaliatory taxes from

States “‘with a lower tax rate than New Jersey’s [stated

rate]” and claim it is contrary to the Texas Supreme

Court’s decision. Pet. 19 (quoting Am. Fire, 912 A.2d at

137). But that statement was part of the court’s state-law

analysis that attempted to balance the goals of the tax-cap

and retaliatory-tax statutes. Further, regardless of how

New Jersey may describe its statute, Texas’s retaliatory-

tax statute explicitly apphes to aggregate tax burdens on

title-insurance companies—not tax rates. See TEX. INS.

CODE art. 21.46, § l(a).

Curiale, the other case examined by Petitioners, also

does not conflict with the lower court’s decision here. In

Curiale, the Court of Appeals of New York held that

prohibiting foreign-based insurers from including a

particular surcharge in the retaliatory-tax calculation

violated those insurance companies’ equal-protection

rights. 668 N.E.2d at 315. There was no question that the

insurers paid the surcharge, and the only rationale for

excluding it was to “protect” various state funds. Z/d. at

314. Applying the Western & Southern analysis, the court

recognized that protecting the State's treasury was not a

legitimate purpose that justified discriminating against

foreign insurance companies. Id. at 313-15.

The principle identified by Curiale, that retaliatory

taxes may tax only to the point of equalization between

the States, 1d. at 313, is fully realized in the Texas

Supreme Court’s ruling. Although it is true that, when

retaliatory taxes are due, foreign title-insurance

companies will remit to Texas an amount larger than the

16

premium-tax burden in their own State, the amount

remitted includes not only the title insurer’s taxes, but

also the title agent’s taxes that the title insurer is simply

passing on to the State. When the title agent’s burden is

removed, the title insurer's tax burden is the same in

Texas and its home State, consistent with the court’s

opinion in Curiale.” There is no conflict in either the

results or reasoning between the Texas Supreme Court’s

decision and the cases cited by Petitioners.

2. Unable todemonstrate a genuine split among the lower

courts, Petitioners suggest that the Court should

nonetheless review this case because “other [state courts]

similarly have rejected challenges to retaliatory taxes

under the Equal Protection Clause or analogous state

provisions—even though some of the applications of the

taxes were constitutionally dubious.” Pet. 19. But even

assuming that the cases cited by Petitioners did indeed

involve “constitutionally dubious’ taxes, Petitioners fail to

identify any link between the issues in this case

concerning Texas’s pass-through system for collecting

premium taxes on title insurance and the entirely

different taxes and state tax regimes at issue in those

cases—other than the fact that Petitioners consider them

all “constitutionally dubious.”

Petitioners initially refer to three other state-court

decisions: Sun Life Assurance Co. of Canada v. Manna,

9 Using Petitioners’ example of Minnesota's 2% tax rate, Pet. 8, a

Minnesota title insurer would be required to remit to Texas 3.147% of

the title-insurance premium in taxes. However, 1.147% of that

amount is the title agent's 85% tax burden of Texas's 1.35% premium

tax. When the agent's burden is removed, the title insurer is left

paying a 2% tax in Texas—exactly what it would pay in Minnesota

17

879 N.E.2d 320 (Ill. 2007), Premera Blue Cross v. State,

171 P.3d 1110 (Alaska 2007), and 77G Insurance Co. v.

Department of Treasury, 629 N.W.2d 402 (Mich.), cert.

denied, 534 U.S. 1056 (2001). Pet. 19. Of those decisions,

only T]G Insurance addressed the federal equal protection

clause as applied to retaliatory taxes and, even then, ina

context different from this case. In TIG Insurance, the

court considered a Michigan law that precluded insurers

from including payments to certain associations in their

tax burdens. 629 N.W.2d at 407. Those associations

provided insurance for high-risk or otherwise un’ :surable

individuals, arguably benefitting insurers in Michigan.

Id. at 408. The Michigan Supreme Court applied the

two-prong test from Western & Southern and concluded

that the law excluding the payments had a legitimate

purpose—encouraging States to create similar

associations, which could benefit Michigan insurers in

those States—and that the law was reasonably related to

that purpose. Jd. at 408-09.

The other two cases were decided solely on state-law

grounds. In Sun Life, the Illinois Supreme Court held that

it was permissible under Illinois law to treat a Canadian

insurance company as if it were from Michigan—tts port

of entry—for purposes of imposing a retaliatory tax. 879

N.E.2d at 325-28. And in Premera, the Alaska Supreme

Court held that it was permissible to impose a lower

premium tax on non-profit corporations, even if the lower

rate lead to higher retaliatory taxes. 171 P.3d at 1121-24

(using Alaska’s equal protection law, which is “more

exacting” than its federal counterpart).

None of these cases concerns the constitutional! issue

presented in the petition—whether to include taxes paid

18

by a title agent in the title insurer’s calculation of

retaliatory taxes—and none is contrary to the Texas

Supreme Court’s decision. Moreover, there is no reason to

believe that a decision by the Court in this case would

provide any guidance regarding the validity of unrelated

state tax schemes such as those at issue in 77G, Sun Life,

and Premera.

3. Petitioners further assert that, because “[o]ther cases

abound” concerning “the scope and nature of the equal

protection constraints on retaliatory taxes,” the Court

should review this case because it also concerns retaliatory

taxes, a “hotly disputed” issue that is “of substantial

importance to the industry.” Pet. 20. But the fact that

retaliatory taxes generate litigation generally does not

mean that this case warrants the Court’s review. And the

other “hotly disputed” cases cited by Petitioners concern

either applying underlying tax regimes different from that

at issue in this case or generic challenges to retaliatory-

tax statutes that do not survive a_ straightforward

application of the Court’s decision in Western & Southern.

See, e.g., Prudential Ins. Co. of Am. v. Comm’r of Revenue,

709 N.E.2d 1096, 1098, 1102-03 (Mass. 1999) (upholding

state tax regime providing that tax liability for life-

insurance premiums would not be aggregated with tax

liability for other premiums in calculating foreign

insurers’ retaliatory taxes); Gallagher v. Motors Ins. Corp.,

605 So.2d 62, 70-71 (Fla. 1992) (rejecting general

challenge to Florida's retaliatory-tax statute, which was

similar in form and operation to the California retaliatory-

tax statute upheld in Western & Southern).

Indeed, Petitioners’ cases actually demonstrate that

state courts have consistently applied the principles of

19

Western & Southern to the unique tax structures at issue

in each case. For example, in Mutual Life Insurance Co.

uv. Washburn, the Illinois Supreme Court rejected an

argument that retaliatory taxes should be imposed only

when a foreign state’s taxes were “on average’ greater

than Illinois’s taxes. 561 N.E.2d 29, 34-35 (Ill. 1990). In

doing so, the court affirmed the principle that the

comparison should be on a company-by-company basis. Jd.

The court then used the rationale in Western & Southern

to affirm its interpretation under Illinois’s equal protection

clause. Id. at 37-38.

Similarly, in Executive Life Insurance Co. ov.

Commonwealth, the Commonwealth Court of

Pennsylvania upheld an application of its retaliatory-tax

statute under the federal equal protection clause. 6U6

A.2d 1282, 1285-86 (Pa. Commw. Ct. 1992). There, when

calculating an insurer's hypothetical burden in California,

Pennsylvania included California's tax on annuities if the

insurer scid annuities, even though Pennsylvania did not

tax annuities. Jd. at 1283. The court found this

reasonable, as it would act tu deter California from taxing

annuities, id. at 1286, and noted that the retaliatory-tax

statute was designed to equalize the “burdens or

prohibitions” on domestic and foreign companies. Id. at

1284.

In sum, the state-court cases cited by Petitioners do not

demonstrate any split among the lower courts concerning

application of the Court’s equal-protection precedent to

retaliatory-tax laws. Likewise, none of these cases reflects

a conflict with the decision at issue here warranting the

Court's review.

20

II. THIS CASE DOES NOT AFFECT NATIONWIDE

INTERESTS.

Petitioners also argue that the Court should grant

review of this case because the Texas Supreme Court’s

decision threatens the stability of the retaliatory-tax

system and will “herald a retaliatory tax war.” Pet. 14.

Significantly, this dire prediction is premised entirely on

Petitioners’ underlying contention that the Comptroller’s

interpretation of Texas’s premium-tax statutes means that

foreign-based title-insurance companies will now pay

unconstitutionally discriminatory retaliatory taxes in

Texas. Because that underlying contention is untrue, and

mischaracterizes how Texas’s retaliatory-tax statute

applies to foreign title insurers, it provides no basis for

granting review.

1. Petitioners’ complaint that title-insurance companies

in Texas now have to pay unconstitutionally

discriminatory retaliatory taxes, Pet. 22-23, is based on

their erroneous assertion that out-of-state insurers will

pay retaliatory taxes even if their home States impose

lower premium taxes than Texas. Jd. at 22. However, the

proper comparison for retaliatory-tax purpases is not

between tax rates, but between aggregate tax burdens

imposed on title insurers. See supra, 7-9; see also TEX. INS.

CODE art. 21.46, § l(a). Because the only burden

Petitioners bear with respect to title agents’ taxes is the

administrative burden of remitting those taxes to the

State, Pet. App. 12a, title agents’ taxes are not part of

Petitioners’ aggregate tax burden and should not be taken

into account when calculating retaliatory taxes.

And although it is true that foreign-based title insurers

may pay increased retaliatory taxes because they will no

21

longer be credited with premium-tax payments borne by

title agents, that does not mean that the increased

retaliatory taxes are unconstitutional. To the contrary,

because the change in calculation of retaliatory taxes

merely reflects more accurately the actual financial

burden imposed on foreign title insurers by Texas’s

premium taxes, Petitioners’ characterization of the change

in retaliatory tax calculation as an attempt to impose

unconstitutionally discriminatory taxes on foreign

insurers is simply wrong.

2. Equally without merit is Petitioners’ claim that the

Texas Supreme Court’s decision, if left undisturbed, could

result in counter-retaliation leading to a “tax war.” Pet.

24-25. The Court in Western & Southern did not discuss

the prospect of counter-retaliation in its constitutional

analysis. But, put in its proper’ context,

counter-retaliation or a “tax war” informs the second

prong of the rational-basis test—whether the legislature

could have reasonably believed its retaliatory tax statute

would support the state interest of discouraging other

States from enacting excessive taxes. See Western &

Southern, 451 U.S. at 668.

Retaliatory taxes and decisions interpreting them have

existed for many years, and yet the Comptroller is

unaware of any prior “tax wars,” nor have Petitioners

identified any. Further, the Comptroller's interpretaticn

of the statutes in dispute here has been in place since 2001

and there has been no effect on the nationwide retaliatory-

tax system. Thus, there is no evidence that disputes over

retaliatory taxes have led to tax wars in the past or that

the Comptroller's chailenged interpretation of Texas's tax

statutes will cause a tax war.

22

indeed, the only evidence of possible counter-

retaliation offered by Petitioners is a revenue notice issued

by the Assistant Commissioner for t'ax Policy and

External Relations in Minnesota. See Minn. Dep't of

Revenue Rev. Notice No. 2006-01 (Mar. 27, 2006),

available at 2006 WL 1125895. In that notice, the

Assistant Commissioner submits that if a State requires

an insurance company to pay a tax on 100% of the

premiums and another tax on the agents’ portion of the

premiums, Minnesota will consider the tax burden to

include both taxes. Jd. But Minnesota’s notice is not even

on point because it does not describe Texas’s premium-tax

system, in which a title imsurer acts only as a pass-

through entity for the title agent’s taxes. Further, revenue

notices in Minnesota “do not have the force and effect of

law and have no precedential effect ... .”. MINN. STAT.

§ 270C.07, subd. 1. Moreover, to the extent the notice was

intended to implicate Texas, it was written without the

benefit of the Texas Supreme Court’s subsequent

authoritative interpretation of Texas’s law. Thus, the

notice provides no credible indication of any impending

“tax war.”

Finally, even if Minnesota’s opinion letter is presumed

to be a sign of things to come, the Texas Legislature has

provided a means for the Compiroiler to negotiate with

other States to resolve differences on applying retaliatory

taxes, further negating Petitioners’ speculation that the

Court must intervene here to prevent a tax war. Section

281.008 of the Texas Insurance Code, enacted in 2007,

provides that the Comptroller may, by rule, agree with

another State to “set aside retaliatory provisions’ if use of

the retaliatory statutes is not the preferred way to avoid

excessive taxation. This statute allows the Comptroller to

23

resolve differences with Minnesota or any other State

concerning retaliatory taxes. For all of these reasons,

Petitioners’ claim that the Court’s intervention is needed

to prevent a hypothetical nationwide tax war is unfounded

and provides no basis to grant review.

lil. THE TEXAS SUPREME COURT CORRECTLY

CONCLUDED THAT TEXAS’S RETALIATORY TAX

DOES NOT VIOLATE THE EQUAL PROTECTION

CLAUSE.

Finally, the Court should decline to hear the petition

because the Texas Supreme Court correctly applied the

Court’s equal-protection precedent to the facts of this case.

1. The Texas Supreme Court properly subjected the

Comptroller's interpretation of Texas’s retaliatory tax to

a rational-basis review. “The general rule is that

legislation is presumed to be valid and will be sustained if

the classification drawn by the statute is rationally related

to a legitimate state interest.” City of Cleburne uv.

Cleburne Living Ctr., 473 U.S. 432, 440 (1985). Thus, as

described in Western & Southern, the Court asks two

questions: “(1) Does the challenged legislation have a

legitimate purpose? and (2) Was it reasonable for the

lawmakers to believe that use of the challenged legislation

would promote that purpose?” 451 U.S. at 668.

Turning to the first question, the Court has recognized

that retaliatory-tax statutes serve a _ legitimate

purpose—deterring excessive and discriminatory taxation.

Id. The Comptroller’s interpretation of Texas’s statutes

does just that—it imposes retaliatory taxes on title-

insurance companies from States that impose higher

premium taxes on Texas title-insurance companies,

24

thereby encouraging those States to lower their taxes on

Texas companies. TEX. INS. CODE art. 21.46, § l(a).

Any argument by Petitioners that the Comptroller

intended her interpretation to be a revenue-raising

measure is unfounded. Indeed, examining the premium-

tax revenue on title insurance in Texas and Texas's total

revenue during the years ati issue makes clear that

increasing revenue could not have been the Comptroller's

purpose.

Between 1998 and 2002, premium-tax revenue on title

insurance in Texas ranged from $12,417,556 to

$17,721,447.°° During that same time period, total

revenue from all sources in Texas was between

$44,497,247,142 and $55,221,546,458."' Thus, title-

insurance-premium taxes account for 0.025% to 0.037% of

Texas’s revenue, with retaliatory taxes constituting an

even smaller percentage than that.’ Therefore, any

revenue gained from the retaliatory tax is, at most,

“relatively modest”—an amount that the Court in Western

& Southern deemed too small to call into question the

legitimate purpose behind the tax. 451 U.S. at 669-70.

10. Texas’s premium-tax revenue on title insurance may be found in

the Underwriters Experience Reports on the Texas Department of

Insurance's website: http://www.tdi.state.tx.us/reports/report8.htm]

(last visited on Mar. 27, 2009).

11. Information regarding Texas’s historical revenues by source is

available on the Comptroller’s website: http://www.window.state.tx.us/

taxbud/revenue_hist.html (last visited Mar. 27, 2009).

12. Also during that time, title-insurance-premium taxes amounted

to only 1.6% to 2.2% of insurance-occupation taxes. See supra, n.11.

25

As for the second prong of the equal-protection

analysis, it was certainly reasonable for the Comptroller

to believe that her interpretation of the tax statutes will

encourage lower taxation, as it operates exactly like every

other retaliatory-tax statute. Petitioners can have no

constitutional complaint that the statute encourages their

home States to lower their taxes, as all retaliatory-tax

statutes have that effect. Petitioners instead claim that

Texas’s premium-itax burden is too low to allow for a

retaliatory tax. Pet. 28. This argument suggests that

there is some numerical threshold embedded in the Equal

Protection Clause—1.e. if a State’s premium tax deviates

too far below the national average, then, in Petitioners’

view, it is unconstitutional to apply a retaliatory tax.

That concern was never raised by the Court in Western

& Southern, and indeed such a limit would not make

sense. The purpose of retaliatory taxes is to keep tax

burdens low. Western & Southern, 451 U.S. at 668. Texas

has lowered its premium-tax burden on title-insurance

companies, thus applying pressure on other States to

lower their burdens. Whether other States choose to act

has no bearing on the constitutionality of Texas's actions.

That they might reasonably choose to act is sufficient for

equal-protection purposes. Id. at 671-72 (“But whether in

fact the provision will accomplish its objectives is not the

question: the Equal Protection Clause is satisfied if we

conclude that the California Legislature rationally could

have believed that the retaliatory tax would promote its

objective.”).

The Texas Supreme Court properly applied the Court’s

equal-protection analysis to the facts of this case and

26

reached the correct conclusion. There is no need for the

Court to revisit the decision.

2. Petitioners’ argument that the Texas Supreme Court's

decision violates the Court’s precedent is also without

merit. Pet. 25-27. All of the cases cited by Petitioners

concern laws that apply higher taxes or fees to foreign

corporations simply because they are foreign. Id.

For example, in Metropolitan Life Insurance Co. uv.

Ward, 470 U.S. 869 (1985), the Court struck an Alabama

premium-tax statute because it applied one tax rate to

domestic companies and a higher rate to foreign

companies, regardless of other States’ tax burdens. The

Court held that Alabama’s statute lacked the legitimate

purpose identified in Western & Southern of attempting to

influence other States’ policies. Jd. at 877-78. Instead, the

statute simply created obstacles for foreign companies in

order to promote domestic business. Id.

Similarly, the other cases cited by Petitioners struck

down statutes that discriminated against foreign

companies or individuals only because they were foreign.

See, e.g., Wheeling Steel Corp. v. Glander, 337 U.S. 562

(1949) (holding unconstitutional a tax that applied only to

foreign corporations); Hanover Fire Ins. Co. v. Harding,

272 U.S. 494 (1926) (same).

The Court has recognized that retaliatory taxes do not

fall within this line of cases because they serve a different

purpose. Retaliatory taxes promote interstate commerce

by deterring excessive taxation. Metro. Life, 470 U.S. at

876-77. Taxes that discriminate against foreign

companies only because they are foreign promote domestic

industry by penalizing foreign companies and erecting

27

barriers to interstate commerce. Id. at 877-78. The

former purpose is legitimate; the latter is not. Id. at 878.

Texas's retaliatory-tax statute and the Comptroller’s

interpretation of it come within the constitutionally

permissible scope of Western & Southern. The statute

applies only to foreign companies whose home States

impose a higher tax burden on title insurers than Texas

does. TEX. INS. CODE art. 21.46, § l(a). Texas does not

discriminate against foreign title insurers simply because

they are foreign. Id.

Because the Comptroller’s interpretation of Texas’s

premium-tax and retaliatory-tax laws is consistent with

the Court’s precedent, the Court should decline to hear the

petition.

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted,

GREG ABBOTT

Attorney General of Texas

C. ANDREW WEBER

First Assistant Attorney

General

DAVID S. MORALES

Deputy Attorney General

for Civil Litigation

March 2009

28

JAMES C. HO

Solicitor General

Counsel of Record

SEAN D. JORDAN

Deputy Solicitor General

BETH KLUSMANN

Assistant Solicitor General

OFFICE OF THE ATTORNEY

GENERAL

P.O. Box 12548 (MC 059)

Austin, Texas 78711

(512) 936-1700