ILLINOIS COMMERCIAL MEN ASSOCIATION v. STATE BOARD OF EQUALIZATION (1983)

Plaintiffs Illinois Commercial Men's Association, a corporation, and National Liberty Life Insurance Company, a corporation, filed separate actions against defendant State Board of Equalization, seeking refunds of taxes allegedly erroneously and illegally assessed and collected.   After the actions were consolidated for trial and tried on stipulated facts, judgments were entered for defendant.   Both plaintiffs have appealed.   The primary question in these cases is whether California can constitutionally impose a gross premiums tax on foreign insurance companies which solicit and negotiate insurance transactions with California residents by mail from outside the state, and which occasionally hire independent contractors within the state to facilitate the processing of claims.¹

The Facts

Both Illinois Commercial Men's Association (hereafter ICMA) and National Liberty Life Insurance Company (hereafter NL) were organized in other states;  each has its principal place of business in the state of its incorporation.²  During the years in question, both companies marketed accident, health, and life insurance policies in California by advertising in national publications and by direct mail solicitation of prospective customers;  NL advertised in local publications as well.³

Persons interested in insurance submitted applications by mail to the company's home office.   If the application was accepted, a contract of insurance was formed in the company's home state, and a policy was mailed to the applicant.   NL also utilized some solicitations containing a policy which a California resident could accept by mailing a “validating certificate” to the company.   Payment of subsequent premiums was by mail.   In most instances, ICMA applications were processed without investigation, although on an average of five or six times a year, ICMA would request independent contractors within the state to confirm application information.   Applications for policies underwritten by NL were generally processed without investigation.

Between 1963 and 1968, ICMA issued over 105,000 policies in California.   Between 1963 and 1967, approximately 3,318 claims were filed by its California policyholders.   When an insured made a claim, ICMA would send a form to be completed by the claimant and his physician;  most claims were processed upon return of those forms.   Approximately 10 percent of claims would not be processed until ICMA received confirming information from the independent contractors in California, who collected data from physicians, hospital personnel, police, and in some instances from the claimant, his family, or his representatives.   After receiving this added information, ICMA would usually process and pay the claim.   In a few difficult cases, where the above procedure did not result in claim resolution, another independent contractor in California was requested to obtain confirming information;  that contractor had authority to settle on behalf of ICMA.   Between 1965 and 1968, 124 California claims were handled in this manner.   Between 1963 and 1967, two claims resulted in lawsuits in California, both of which were settled.

Between 1963 and 1965, the estimated total number of NL's life insurance policyholders was 885, and its accident and health policyholders, 38,167.   During those years, 7,745 claims were filed by California residents.   During the processing of claims, NL occasionally asked Retail Credit Company (hereafter Retail), an independent organization, to collect necessary data by interviewing doctors, hospital personnel, police, and other persons, and by obtaining copies of documents such as physicians' and police officers' reports.   During 1963–1965, NL utilized Retail in processing about two percent of its claims.   Retail used 175 representatives to conduct approximately 153 investigations in California on behalf of NL, for which the insurance company paid fees of approximately $3,785.   Retail was not authorized to offer or make settlements on NL's behalf.

Neither ICMA, NL, nor DeMoss owned or leased any property in California.   Neither employed agents, representatives, quasi-agents, “missionary men,” nor group organizers to solicit business in the state.   The only persons who acted in California on the companies' behalf were the independent contractors whose activities have been detailed above.

Sometime in 1965, the state publicly took the position that unlicensed foreign mail-order insurers were subject to regulation by the state.   In August 1968, NL did become licensed and certificated by the state's Department of Insurance.   ICMA is not now and never has been licensed by nor had a certificate of authority from the Department of Insurance, and has ceased soliciting insurance business in this state.

In May 1968, the department notified plaintiffs of its intention to assert liability for gross premium taxes for the years 1963 through 1967 pursuant to article XIII, section 144/545 of California Constitution (renumbered § 28 in 1974), and Revenue and Taxation Code section 12201.⁴  At no time prior had the state assessed or attempted to assess a tax upon the premiums received by plaintiffs from their direct mail insurance sold to California residents.   The State Board of Equalization assessed premium taxes against NL and ICMA for the years 1963 through 1967.   ICMA paid the assessment, which totaled $23,504.54.   NL paid gross premium taxes for the years 1963 through 1965 and the interest thereon, totaling $47,747.50.   NL and ICMA subsequently filed claims for refund of premium taxes pursuant to Revenue and Taxation Code sections 12978 and 12979, which were denied.   These actions followed.

Discussion

 Plaintiffs' principal argument is that the taxes which the state has imposed violate the due process clause of the Fourteenth Amendment of the United States Constitution.   The due process clause restricts a state's power to tax income generated by the activities of an interstate business by requiring some definite link or minimum connection between those activities and the taxing state.  (Moorman Mfg. Co. v. Bair (1978) 437 U.S. 267, 273, 98 S.Ct. 2340, 2344, 57 L.Ed.2d 197;  Nat. Bellas Hess v. Dept. of Revenue (1967) 386 U.S. 753, 756, 87 S.Ct. 1389, 1391, 18 L.Ed.2d 505.)   The controlling question in determining whether a state tax is permissible is whether the state has given anything for which it can ask return.  (Ibid.)  In other words, the test is “․ whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state.”  (Wisconsin v. J.C. Penney Co. (1940) 311 U.S. 435, 444, 61 S.Ct. 246, 249, 85 L.Ed. 267.)

In general, the imposition of a tax on a foreign corporation by a state has been upheld against a due process challenge where the corporation has property or solicitors or retail outlets within that state.  (See, e.g., Moorman Mfg. Co. v. Bair, supra, 437 U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197 [corporation had over 500 salesmen and six warehouses in taxing state];  Standard Steel Co. v. Wash. Revenue Dept. (1975) 419 U.S. 560, 95 S.Ct. 706, 42 L.Ed.2d 719 [corporation had only one employee in taxing state, but he made possible realization and continuation of contractual relations between local consumer and taxpayer corporation];  Scripto v. Carson (1960) 362 U.S. 207, 80 S.Ct. 619, 4 L.Ed.2d 660 [corporation had no office, warehouse, or other place of business in taxing state and had no regular employee or agent there, but 10 independent contractors acted as representatives of corporation in the state for purpose of soliciting business].)   The Supreme Court has cautioned, however, that it will take more than the “slightest presence” of a foreign corporation to establish the requisite constitutional “nexus” or connection.   (National Geographic v. Cal. Equalization Bd. (1977) 430 U.S. 551, 556, 97 S.Ct. 1386, 1390, 51 L.Ed.2d 631.)

In contrast, in Nat. Bellas Hess v. Dept. of Revenue, supra, 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505, the Supreme Court held that Illinois could not impose use tax liability on an out-of-state seller whose only connection with customers in that state was by common carrier or mail.   National, a mail-order seller centered in Missouri, had no office, sales outlets, warehouses, salesmen, solicitors, or telephone listings in Illinois, and did not advertise in Illinois newspapers or on radio or television there.   Twice yearly it mailed catalogues to recent customers nationwide, and also mailed advertising to past and potential customers.   All customer orders were mailed to Missouri, and goods were sent to customers by mail or common carrier.  (Id., at pp. 754–755, 87 S.Ct. at pp. 1390–1391.)

The court noted that strictly speaking, the person the state sought to tax was the user of goods to whom the company sold, and that there was no question of the connection between the state and that person.   But because National was made directly liable for payment of the use tax whether collected from the user or not, the critical question was the connection between that company and the state.  (Nat. Bellas Hess, supra, at p. 757, fn. 9, 87 S.Ct. at p. 1391, fn. 9.)   To permit the tax, the court declared, would require the repudiation of “the sharp distinction which [we] have drawn between mail order sellers with retail outlets, solicitors, or property within a State, and those who do no more than communicate with customers in the State by mail or common carrier as part of a general interstate business.   But this basic distinction ․ is a valid one, and we decline to obliterate it.”  (Id., at p. 758, 87 S.Ct. at p. 1392.)   Where the out-of-state seller has solicitors or a retail outlet in the taxing state, that seller has been accorded the protection and services of the taxing state.   Where the seller's only connection with customers in a state is by common carrier or mail, however, the seller is not receiving benefits from that state for which it can exact a price.  (Ibid.)

The dissenters in Nat. Bellas Hess pointed out that National utilized Illinois' banking and credit facilities to carry on its business in that state, as a substantial part of its sales were on credit.   In addition, the dissenters thought it reasonable to assume that the company utilized local representatives to collect any delinquent accounts.  (Nat. Bellas Hess, supra, 386 U.S. at p. 762, 87 S.Ct. at p. 1394 [dis. opn. of Fortas, J.].)   As the majority ignored those local connections, however, we can only conclude that it considered them either too indirect or too insubstantial to satisfy its constitutional standard of nexus.

Plaintiffs rely on Nat. Bellas Hess to argue that because neither company had property nor agents soliciting business within California, the links between them and the state are constitutionally insufficient to allow the imposition of the taxes at issue.   In reply, the state argues that the California Supreme Court in People v. United National Life Ins. Co. (1967) 66 Cal.2d 577, 58 Cal.Rptr. 599, 427 P.2d 199, appeal dismissed 389 U.S. 330, 88 S.Ct. 506, 19 L.Ed.2d 562, has already determined that the state has power to tax mail order insurers.   The state argues that Nat. Bellas Hess is not controlling because the insurance business is different from the mail-order retail sales business, and because plaintiffs' contacts with this state were significantly greater than those of National with Illinois.

The question in People v. United National Life Ins. Co., supra, 66 Cal.2d 577, 58 Cal.Rptr. 599, 427 P.2d 199, was whether California could, in accordance with principles of due process, regulate foreign mail-order insurers who had no agents in the state and who solicited and negotiated insurance transactions with California residents exclusively by mail from offices outside the state.   In resolving that question, the court traced the development of state regulation and taxation of the insurance business, and noted that with the passage of the McCarran Act (15 U.S.C.A. §§ 1011–1015) in 1945, Congress removed all commerce clause limitations on the authority of the states to regulate and tax the insurance business.  (Id., at p. 585, 58 Cal.Rptr. 599, 427 P.2d 199;  see Western & Southern L.I. Co. v. Bd. of Equalization (1981) 451 U.S. 648, 653, 101 S.Ct. 2070, 2075, 68 L.Ed.2d 514.)   The court then analyzed federal due process clause limitations on a state's power both to regulate and to tax insurance companies, and concluded that interstate insurance transactions can properly be regulated when they have sufficient contacts with the regulating state so as to give the latter a “substantial interest” in the transactions.   The court flatly rejected the argument that the power to regulate turned on the presence of agents in the regulating state.

The court then held that in the cases before it, there were sufficient contacts with California to justify regulation.  “The insureds are, of course, residents of California.   The solicitation of insurance actually takes place in California where the advertising material and other forms are received by the individual addressees.   Thus realistically viewed the insurer through the instrumentality of the mail is for all practical purposes soliciting insurance here as manifestly as if it were to carry on such solicitation through representatives physically present within this state.  [Citations.]  In response to this solicitation, California residents complete and sign in this state the applications for insurance.   Indeed, defendant United sends to the California addressee a pre-indorsed policy which becomes effective in this state, when the policyholder deposits in the mail here the completed ‘ownership application’ for return to United's home office.   In all instances payment of premiums is made by California residents from funds or bank accounts located in California.   It is clear that any claims made under the policies will most likely be investigated in this state and that any litigation in connection with the policies will undoubtedly be commenced in California courts.   It is also forseeable [sic ] that should defendants for any reason fail to perform their obligations in accordance with the policies, California might be called upon to provide assistance for the persons within its borders who were intended to be financially assisted by the benefits under the policies.”  (People v. United National Life Ins. Co., supra, 66 Cal.2d at p. 593, 58 Cal.Rptr. 599, 427 P.2d 199, fns. omitted.)

In Conn. General Co. v. Johnson (1938) 303 U.S. 77, 58 S.Ct. 436, 82 L.Ed. 673, California sought to impose a tax on premiums received by a Connecticut insurer in that state for policies which it issued to other insurance companies, reinsuring them against loss on life insurance policies which they issued to California residents.   The state attempted to justify the tax as imposing no burden on the insurer in light of deductions which it was allowed on its other business within the state.   The court rejected that argument, stating, “[b]ut the limits of the state's legislative jurisdiction to tax, prescribed by the Fourteenth Amendment, are to be ascertained by reference to the incidence of the tax upon its objects rather than the ultimate thrust of the economic benefits and burdens of transactions within the state.   As a matter of convenience and certainty, and to secure a practically just operation of the constitutional prohibition, we look to the state power to control the objects of the tax as marking the boundaries of the power to lay it.   Hence it is that a state which controls the property and activities within its boundaries of a foreign corporation admitted to do business there may tax them.   But the due process clause denies to the state power to tax or regulate the corporation's property and activities elsewhere.  [Citations.]  It follows that such a tax, otherwise unconstitutional, is not converted into a valid exaction merely because the corporation enjoys outside the state economic benefits from transactions within it, which the state might but does not tax, or because the state might tax the transactions which the corporation carries on outside the state if it were induced to carry them on within.”  (Id., at pp. 80–81, 58 S.Ct. at p. 438, emphasis added.)

Relying heavily upon the underscored language, the state contends that at least with respect to insurance companies, its power to tax is coextensive with its power to regulate.   Therefore, the state reasons, the issue in these cases was necessarily decided in its favor years ago when the California Supreme Court rendered its decision in United National Life Ins. Co., supra, 66 Cal.2d 577, 58 Cal.Rptr. 599, 427 P.2d 199 (hereafter United National ).   We disagree.   We read the Conn. General court's reference to a state's regulatory power as marking the outer limits of its power to tax:  a state only has constitutional power to tax a foreign corporation which it also has power to regulate.   It does not necessarily follow, however, that the presence of the power to regulate is always accompanied by the power to tax.   The taxability of mail order insurers such as plaintiffs was not at issue in Conn. General, and it is axiomatic that a case is not authority for a proposition not considered therein.  (Ginns v. Savage (1964) 61 Cal.2d 520, 524, fn. 2, 39 Cal.Rptr. 377, 393 P.2d 689.)   Furthermore, the critical question in deciding whether a state has jurisdiction to tax is whether the state has given anything for which it can ask return.  (Nat. Bellas Hess, supra, 386 U.S. at p. 756, 87 S.Ct. at p. 1391;  Wisconsin v. J.C. Penney Co., supra, 311 U.S. at p. 444, 61 S.Ct. at p. 249.)   That question was neither answered nor even asked in United National.   While we recognize that the court in United National relied on cases involving taxation as well as regulation in reaching its conclusion, “ ‘[q]uestions which merely lurk in the record, neither brought to the attention of the court nor ruled upon, are not to be considered as having been so decided as to constitute precedents.’   [Citation.]”  (Canales v. City of Alviso (1970) 3 Cal.3d 118, 127–128, fn. 2, 89 Cal.Rptr. 601, 474 P.2d 417.)

We must decide, then, whether plaintiffs' contacts with California are such that the state has provided protection, opportunities, and benefits to these companies for which it can fairly ask return.  (See Wisconsin v. J.C. Penney Co., supra, 311 U.S. at p. 444, 61 S.Ct. at p. 249.)

 Neither plaintiff had any employees, agents, representatives, nor quasi-agents soliciting business in California.   Nor did either have any interest in real property here.   Nevertheless, we recognize that unlike the mail-order seller in Nat. Bellas Hess, plaintiffs were not sellers whose only connections with their California customers were by mail.   The insurance business is markedly different from the retail sales business, as the sale of an insurance policy commences a continuing relationship between the insured and the insurer which is likely to result in the filing of a claim;  investigation and negotiation may follow prior to payment or settlement.   While these plaintiffs handled the processing of insureds' claims almost exclusively by mail, each, in a small percentage of cases, used independent contractors in the state to investigate claims.   Moreover, ICMA on a few occasions authorized such independent contractors to settle claims on its behalf.   We recognize that labeling individuals as “independent contractors” is of no constitutional significance if they in fact function as salesmen in a state soliciting and securing a substantial flow of business for a foreign company.  (See Scripto v. Carson, supra, 362 U.S. at p. 211, 80 S.Ct. at p. 621.)   In these cases, however, the independent contractors had absolutely no part in the solicitation of insurance for either company, and their activities were of relatively little overall significance in the conduct of either company's business.   Ninety percent of ICMA's claims during the four years at issue were processed without any activity in this state by claims investigators.   Between 1963 and 1965, about 98 percent of NL's claims were processed without investigator assistance in this state.   We view the occasional activities in this state of independent contractors on behalf of these companies as akin to those which the Supreme Court by implication found constitutionally insignificant in Nat. Bellas Hess, and conclude that they were insufficient to establish the minimum link necessary to make the state's tax permissible.

 We also reject the state's argument that the tax is justified because plaintiffs were benefitted by the protections which the state affords to its residents, many of whom are plaintiffs' insureds.   In effect, the state argues that the mere presence of insured persons or property within a state is sufficient to justify the imposition of taxes on an insurance company by that state;  however, the law is otherwise.  (See Conn. General Co. v. Johnson, supra, 303 U.S. 77, 58 S.Ct. 436, 82 L.Ed. 673;  see also State Bd. of Ins. v. Todd Shipyards (1962) 370 U.S. 451, 82 S.Ct. 1380, 8 L.Ed.2d 620;  but see National Liberty Life Ins. Co. v. State (Wis.1974) 62 Wis.2d 347, 215 N.W.2d 26, 34.)

In sum, we conclude that neither plaintiff in these cases had the minimum connection with California necessary to justify the state's imposition of a gross premiums tax.   Accordingly, we need not consider plaintiffs' remaining contentions.

Judgments are reversed, and the trial court is directed to enter judgments in favor of plaintiffs and against defendant.

FOOTNOTES

1.   Because this issue is common to both cases, and because the facts in each case are similar, we dispose of the two appeals in this single decision.  (See Seibert v. Sears, Roebuck & Co. (1975) 45 Cal.App.3d 1, 4, 120 Cal.Rptr. 233.)

2.   ICMA was incorporated in Illinois, NL in Pennsylvania.

3.   The insurance sold by NL to California residents was actually marketed by DeMoss Associates, Inc. (hereafter DeMoss), a Pennsylvania corporation.   Pursuant to an agreement between the two, NL was to pay all premium taxes on policies which it underwrote.

4.   At all times relevant herein, article XIII, section 144/545 of the California Constitution provided in pertinent part:  “An annual tax is hereby imposed on each insurer doing business in this state ․”  Revenue and Taxation Code section 12201 provides in part:  “Every insurer doing business in this State shall annually pay to the State a tax ․”

SCOTT, Associate Justice.

WHITE, P.J., and BARRY–DEAL, J., concur.