WESTERN & SOUTHERN L. I. CO. v. BD. OF EQUALIZATION
Legal provision: Article 1, Section 8, Paragraph 3: Interstate Commerce Clause
ORAL ARGUMENT OF ALAN R. VOGELER, ESQ., ON BEHALF OF THE APPELLANT
Chief Justice Burger: We will hear arguments in the case of Western and Southern Life Insurance Company v. California.
Mr. Vogeler, you may proceed whenever you are ready.
Mr. Vogeler: Thank you, Mr. Chief Justice.
May it please the Court:
The Western and Southern Life Insurance Company is one of 1,957 legal reserve life insurance companies that as of January 1, 1980, were licensed to do business in one of the states or the District of Columbia.
Western and Southern was incorporated as a stock company in 1888 and in 1948 became a mutual company.
At January 1 of 1981 it had assets in excess of $3 billion, and life insurance in force of over $14 billion and thus according to Best's Insurance Reports, it ranks 25th in size of companies and 45th of companies in size of life insurance in force.
It's licensed to do business in 41 states, including the State of California.
It obtained the certificate of authority to do business in California as of July 1, 1956, and has carried on its business under that certificate of authority granted in 1956 for the last 25 years.
The California constitutional provisions and the retaliatory tax laws of California, when Western and Southern became qualified to do business there, levied a tax upon out-of-state insurers which was called a retaliatory tax if the state from which the foreign insurer to California came levied a higher tax on California insurers doing business in those foreign states than it did upon its own insurers.
And when the State Legislature implemented that statute in 1959, Western and Southern went to court, and it was determined in the Los Angeles County Superior Court in 1962 that no retaliatory tax could be assessed against Western and Southern under the California constitutional provision and law then in effect because the State of Ohio did not levy higher taxes on foreign insurance companies doing business in Ohio than they did on foreign insurance companies coming into the State from outside.
However, in November, 1964, the California constitution was amended to authorize a retaliatory tax on out-of-state insurers in California merely when the state of origin of that insurance company levied a tax on foreign insurance companies that was higher than California levied.
Unidentified Justice: Now, in using this term retaliatory throughout, how would you distinguish that from the traditional reciprocity statute?
Mr. Vogeler: Reciprocity, Your Honor, is a situation in which one state recognizes and defers to legislation or some comity in another state.
Unidentified Justice: Well, as it's typically, we'll treat your corporations the same way you treat ours, isn't it?
Mr. Vogeler: That's correct, Your Honor.
That is not what our situation here is, because California does not lower its tax if a foreign state has a lower tax.
It merely raised their tax up to a foreign state's tax.
There is no reciprocity.
But this is what, of course, the Attorney General of California would like this Court to believe.
We will expand on the fact that this is not reciprocity, this is not comity.
California taxes, whether or not Ohio discriminates on California corporations, and levies a higher tax on the foreign insurance company doing business in California.
The California constitutional amendment in 1964 had the effect of levying this tax on out-of-state insurers when the out-of-state, the foreign state of origin of the company doing business in California had a higher tax rate than California did.
Now, California's tax rate, actually, is higher than 32 other states.
But Ohio's tax rate is higher than California's.
So the question of the validity of this California retaliatory tax is therefore at issue in this case.
We claim, and the Los Angeles County Superior Court found, that this kind of a tax, which he referred to as a comparative retaliatory tax where the tax burdens of different states were compared, is unconstitutional.
Unidentified Justice: Mr. Vogeler?
Mr. Vogeler: Yes, Mr. Justice Rehnquist?
Unidentified Justice: In the opinion of the California Court of Appeal, the taxes are variously referred to as discriminatory, comparative, and new you characterize it as retaliatory.
Mr. Vogeler: Yes, Your Honor.
The discriminatory tax is one which levies a tax when the foreign state discriminates.
The retaliatory tax, the comparative retaliatory tax, is one that is levied when the foreign state merely levies a higher burden.
The discriminatory tax is one which is aimed at the foreign state which levies higher taxes on foreign companies than on its own companies.
That is the anti-discriminatory retaliatory tax.
That is no longer the tax we have in California, Your Honor.
We have the comparative tax, the comparative retaliatory tax which merely measures the comparative tax burdens in Ohio and California.
And this is the tax which is in effect in most of the states of the Union.
We claim that this tax in California is invalid, violating not only the Interstate Commerce Clause, but also the Due Process and Equal Protection of the Law.
And this is also what the judge found in the trial court.
Now, the Court of Appeal reversed that.
The Court of Appeal reversed it on the basis of its understanding of the decisions by this Court in Prudential v. Benjamin and Prudential v. Hobbs.
Unidentified Justice: But it is only one tax that we're talking about?
Mr. Vogeler: It is one tax, Your Honor.
It is a retaliatory tax.
A return is filed and an amount is paid.
It is a retaliatory tax.
It is not the premiums tax which all insurance companies pay.
It is not the real property tax, which all of the insurance companies pay.
It is a retaliatory tax determined by the use of a retaliatory form which measures the tax burden of California against the tax burden of the state of origin of the incoming company.
Unidentified Justice: Well, what if the tax in the other jurisdiction on California companies is lower?
California still keeps its tax the way it is?
Mr. Vogeler: California still levies its normal tax.
It does not reciprocate, Your Honor.
Now, there is another issue in this case and that's another provision of California law in which California granted, a law that is now repealed as of 1977, granted a credit against the premiums tax for all California insurers for their real property taxes that they paid on their home office buildings in California.
They also granted a credit to foreign companies against their gross premium tax if the foreign company had an office in California and occupied 75 percent or more of the office.
Unidentified Justice: But that washes out if the other one goes one way?
Mr. Vogeler: That is correct, Your Honor.
That is what the California Court of Appeal has said, but that is not, however, Your Honor, what the local court, the Los Angeles Superior Court, said.
Unidentified Justice: But that's been repealed, hasn't it?
Mr. Vogeler: It has been repealed, but in all of the years in issue in this case it's presently in effect.
It affects the years we have before the Court.
Unidentified Justice: It affects the judgment in this case?
Mr. Vogeler: Yes, Your Honor.
The Los Angeles Superior Court also found that that was an undue discrimination, it violated due process, and it violated equal protection for the California companies to get this credit against their premiums tax and for a company like Western and Southern who did have an office building... it's a lovely office building on Wilshire Boulevard which it spent a lot of money for and pays a lot of taxes for, but it doesn't get the same credit that the California companies get, because Western and Southern didn't occupy 75 percent of the building, and therefore was limited to a credit equal to the percentage of its real property taxes, equal to the percentage of the building occupied by itself.
Now, as Mr. Justice Blackmun has stated, the Court of Appeal of California reversed the Los Angeles County Superior Court, and it is the validity of that reversal which we are concerned with today.
Now, the legal issues we think are twofold.
One, did this Court in Prudential Insurance Company v. Benjamin and Prudential Insurance Company v. Hobbs in 1945 give free rein in 1946 to the states to levy whatever burden they wanted to on insurance companies doing business in interstate commerce?
And if that question is answered in the affirmative, then did those two cases also authorize the states to violate the due process of law and equal protection as guaranteed by the Fourteenth Amendment to the Constitution?
Unidentified Justice: Well, the equal protection issue was in Benjamin, wasn't it?
Mr. Vogeler: --I'm sorry; I did not hear, Your Honor.
Unidentified Justice: There was an equal protection issue in Benjamin.
Mr. Vogeler: Well, I will explain where I think--
Unidentified Justice: All right.
Mr. Vogeler: --where I think that there may not have been the equal protection issue that is before Court.
Unidentified Justice: The words were there, anyway.
Mr. Vogeler: The words may have been there, Your Honor.
Unidentified Justice: And Congress does have power under Section 5 of the Fourteenth Amendment to enact legislation out the Amendment, does it not?
Mr. Vogeler: That is correct, Your Honor, but this Court has said it has not done that in McCarran-Ferguson Act.
There isn't any question that the trial court found this California retaliatory tax to be discriminatory, and nobody says that it isn't discriminatory.
Neither the appellee, the Attorney General of California, nor any of the amici on their side say that this isn't discriminatory.
What they say is that this Court authorized this discrimination when it interpreted the McCarran-Ferguson Act in 1946.
Now, what they say really is that this type of discrimination was approved by this Court in Hobbs, Prudential Insurance Company v. Hobbs.
Now, the Hobbs case, decided on June 10, '46, before any of the members of this Court had come to the Court either as Justices or as clerks, said as follows:
"The entire case #"--
Unidentified Justice: But not long, though.
Mr. Vogeler: --A couple of years.
"Appeals for the Supreme Court of Kansas. "
"June 10, 1946. "
"Per curiam, the judgments are affirmed. "
"Prudential Insurance Company v. Benjamin, 328 U.S. 408; Robertson v. California 328 U.S. 440. "
That's the entire language of this Court.
Now, let's go down below to the Kansas Supreme Court.
There were 16 insurance companies who had cases involved in the court entitled,
"In re Kansas, in re insurance tax cases, at 160 Kansas 300. "
There were three types of taxes involved.
They were a fireman's relief fund tax, a premiums tax, and a retaliatory tax.
None of the companies subject to the retaliatory tax had qualified to do business in Kansas before the retaliatory tax was enacted.
And what did the Kansas Supreme Court say with respect to all of these laws?
Here's what they said in their own syllabus:
"(1) Our statutes pertaining to insurance were not rendered void by the decision of the Supreme Court of the United States in United States v. Southeastern Underwriters Association. "
That was their first premise of law.
"Congress did not exceed its powers in passing Public Law No. 15 of the 79th Congress, First Session. "
"That's the McCarran-Ferguson Act. "
"Mandamus will not be allowed to compel an executive officer. "
--they wanted a license to be issued.
"Mandamus will not be allowed to compel an executive officer to do something contrary to a statute unless it is is clear that the statute is void. "
So the memorandum opinion issued by this Court in Hobbs could do no more than affirm the foregoing propositions of law.
Unidentified Justice: What did the jurisdictional statement raise as an issue?
Mr. Vogeler: My jurisdictional?
Unidentified Justice: No, no, in Hobbs?
Mr. Vogeler: Well, they... they--
Unidentified Justice: What were the questions presented here?
Mr. Vogeler: --The questions presented in Hobbs, Your Honor, were whether or not the Kansas laws were valid.
Unidentified Justice: Including the--
Mr. Vogeler: --retaliatory law.
Unidentified Justice: --Retaliatory?
Mr. Vogeler: Retaliatory tax.
Unidentified Justice: There was a retaliatory tax there?
Mr. Vogeler: There was a retaliatory tax, Your Honor, absolutely.
However, the Kansas Supreme Court said in its decision,
"We find no evidence that the tax burden on the foreign states doing an insurance business in Kansas are any higher than they are on the Kansas insurance companies who are doing business as native companies. "
So there is no retaliation, there is no discrimination... pardon me, Your Honor.
There is no discrimination that was found to be existing in the Kansas Supreme Court.
Unidentified Justice: Are you sure there weren't discriminations among foreign companies?
Mr. Vogeler: The Kansas Supreme Court, Your Honor, in that case--
Unidentified Justice: No, that isn't what you said just now.
I'll put it to you another way.
Would all foreign insurance companies doing business in Kansas pay the same tax under that law?
Mr. Vogeler: --No, Your Honor, because the tax is somewhat the same--
Unidentified Justice: Well, then, there is discrimination in the case.
Mr. Vogeler: --Your Honor, the cases... there were only... the only companies in the Kansas cases which paid a retaliatory tax were Texas companies.
There were three of them.
They were the only ones that were subject to the retaliatory law.
And there was no evidence that those companies paid a higher tax than Kansas companies paid.
Unidentified Justice: But there's evidence that they paid more than some other companies paid.
Mr. Vogeler: Well, there is no--
Unidentified Justice: Non-Kansas and non-Texas companies.
Other foreign insurance companies paid a lower tax than the Texas companies did.
Mr. Vogeler: --Yes, Your Honor.
Unidentified Justice: Yes.
Mr. Vogeler: Yes, Your Honor.
The question is not whether there is discrimination--
Unidentified Justice: And the Supreme Court of the United States said that was quite legal to do.
Mr. Vogeler: --It has been interpreted that way.
Your Honor, and it's certainly urged in that way by the California Attorney General, Your Honor.
Unidentified Justice: Mr. Vogeler, in the Hobbs jurisdictional statement, was there an equal protection issue raised?
Mr. Vogeler: To my best knowledge, Your Honor, it was not.
Unidentified Justice: And you said earlier in response to Justice White that there was an equal protection issue in Benjamin.
What equal protection issue was raised in Benjamin?
Mr. Vogeler: Well, Your Honor, that's a--
Unidentified Justice: You were going to get to that, so go ahead.
Mr. Vogeler: --What I wanted to say about both Benjamin and Hobbs is that in the Benjamin case we were dealing with a South Carolina premium statute.
We were not dealing in Benjamin with a retaliatory statute.
So there was no question in the Benjamin case of the validity of retaliatory tax laws.
Unidentified Justice: No, but there was a tax which for purposes of decision was assumed to discriminate against interstate companies as opposed to South Carolina companies, because it was levied only on the premiums paid or collected by the out-of-state companies.
Mr. Vogeler: That is correct, Your Honor.
Unidentified Justice: But that was done in an interstate commerce context.
Mr. Vogeler: --That is also true, Your Honor.
The doctrine of Lincoln Life Insurance Company v. Read was still in effect, and the question is whether or not a corporation could be charged coming into a state a different fee or a different tax than a creature of that own state.
When a company is coming into a state standing on the threshold, it may be valid for a corporate tax to be placed on that corporation which is higher or different from the tax that is levied on the local corporation.
Now, we are getting into somewhat of a discussion of the unconstitutional conditions doctrine which this Court I believe is now fostering, and it may be that the Lincoln Life Insurance Company case v. Read may not again be decided in the same way that it was decided at that time.
But this is the concept that was involved in the Benjamin case, namely, a company coming into the State of Carolina was subjected to a higher tax than Carolina companies--
Unidentified Justice: Was it argued in that case that that violated the Equal Protection Clause?
I thought you suggested to Mr. Justice White that it was so argued, and I'm not sure it was.
Well, whether it was or not, didn't Mr. Justice Rutledge say it didn't violate the Equal Protection Clause either?
Did he say that or did he say the McCarran Act didn't violate the Equal Protection Clause?
Mr. Vogeler: --I think he said that the McCarran Act did not, Your Honor.
Unidentified Justice: And--
Mr. Vogeler: And I urge--
Unidentified Justice: --And, therefore?
Mr. Vogeler: --Therefore that there could be discrimination?
Unidentified Justice: No; and therefore there wasn't any Equal Protection violation here on this statute, either.
Mr. Vogeler: Well, I think that is what he said, Your Honor; yes.
Unidentified Justice: Yes.
Mr. Vogeler: I confess to the Court that my position is stronger with my second point which is, on the Fourteenth Amendment, Due Process, and Equal Protection of the Laws.
In any event, we suggest that this Court is the final arbiter of the meaning and effect of its decisions.
As I say, we believe the California Court of Appeal interpreted Prudential v. Benjamin and Prudential v. Hobbs incorrectly, but if we are wrong we urge this Court to reexamine those cases and to distinguish them on the basis that the McCarran-Ferguson Act does not authorize discriminatory taxation against interstate commerce where such discrimination constitutes a denial of Equal Protection of Laws.
Apart from the Commerce clause, Equal Protection of Laws.
Then as our second--
Unidentified Justice: You're not asking us to reconstrue or reexamine the construction of the McCarran-Ferguson Act, but simply to say, contrary to what we said some years ago, that that Act does constitute any violation of Equal Protection of the Laws?
Mr. Vogeler: --No, Your Honor, I am saying that I want you to distinguish your former treatment of the McCarran-Ferguson Act so that it does not apply to the other constitutional guarantees.
I feel that if the McCarran-Ferguson Act takes away all protections to foreign insurance companies of the Interstate Commerce Clause, which is what the Attorney General of California would have you say and what you may already have said, then it seems to me it is particularly important that this Court be zealous in reserving and protecting the only remaining rights that there are to these foreign insurance companies under the Constitution, and those are the rights guaranteed to them under the fourteenth Amendment: Due Process, Equal Protection--
Unidentified Justice: Mr. Vogeler, in your equal protection argument, has the California statute had any impact on tax laws in Ohio, to reduce them or?
Mr. Vogeler: --I believe it has not, Your Honor.
Unidentified Justice: Are they the same tax, same rate of tax, whether it's a domestic or foreign corporation?
Mr. Vogeler: Oh, no, Your Honor.
Ohio levies on foreign companies into the State a premiums tax of 2.5 percent.
California levies a tax of 2.35--
Unidentified Justice: Well, what's Ohio do as to domestic corporations?
Mr. Vogeler: --With request to domestic corporations, Your Honor, there is a complicated formula and it--
Unidentified Justice: Different from the foreign?
Mr. Vogeler: --has been held that the use of that formula, in three different cases, meant that Ohio did not discriminate against foreign insurance companies in Ohio.
Unidentified Justice: But the California laws had no impact on reducing the tax rates for either domestic or foreign corporations?
Mr. Vogeler: No, Your Honor.
No, Your Honor.
And that is, of course, one of the things that we discuss here, because we feel that contrary to what the Attorney General would have you believe, and contrary to what the amici in support of the California statute would have you believe, this type of legislation, this retaliatory legislation does not promote comity.
It doesn't promote equal-handed treatment, evenhanded treatment.
It doesn't promote even taxation of foreign corporations.
Let's look at the California law.
They say that 17 states only levy higher taxes on foreign insurance companies than California, and therefore it indicates that there's a great leveling of taxes on foreign corporations.
But 31 states levy a lower tax on foreign insurance companies than California does, so that when those companies which are created in California come into any one of the other 32 states they have a retaliatory tax to pay.
So there's nothing magic about what California's doing.
The only time you've got comity is because you've got Oklahoma.
In Oklahoma that's the highest tax of all, four percent.
So every Oklahoma company that does business in any other state pays a retaliatory tax.
In California, Western and Southern pays a tax of the difference between 2.35, the California rate, and the Ohio rate, 2.5, or 0.15 of a percent of their premium income.
Oklahoma pays a 1.65 percent, companies from Oklahoma pay a 1.65 percent of premium tax, eleven times what Ohio pays.
Unidentified Justice: I don't follow you now, Mr. Vogeler.
Oklahoma companies that go into California don't pay any--
Mr. Vogeler: Oklahoma companies have a four percent--
Unidentified Justice: --Because they have the highest tax, you said?
Mr. Vogeler: --They have a four percent tax levied in Oklahoma on a foreign insurance company.
Unidentified Justice: Right.
Mr. Vogeler: And, consequently, when they go into California, which levies only a 2.35 percent tax, the retaliatory tax picks up--
Unidentified Justice: It's 1.65, I see.
Mr. Vogeler: --The 1.65, eleven times higher than Ohio pays.
Unidentified Justice: I see.
Mr. Vogeler: If we look at the Exhibit B in the Jerome Hellerstein brief which lists all the tax rates of all the states, we could come up with all sorts of combinations of what kinds of taxes are paid by the various companies from different states doing business in other states.
Unidentified Justice: And your due process argument emphasizes what, Mr. Vogeler?
Mr. Vogeler: The due process argument, Your Honor, emphasizes that the mere incorporation of a state in another state is no warrant or authority for the imposition of discriminatory taxation.
And you, Mr. Justice Brennan, said that yourself in the Allied Stores case and I think your language discussed the matter of our federalism, the comity that we have between states, and you said, our Constitution is an instrument of federalism.
You referred to the common and continuing problem of constitutional interpretation, of adjusting the demands of individual states to regulate and tax enterprises in light of the multi-state nature of our federation.
The Equal Protection Clause, among its other roles, operates to maintain this principle of federalism.
And you pointed out that the Wheeling Steel case held a tax law unconstitutional because it discriminated against an out-of-state company, whereas the Allied Stores case was held valid because Ohio was discriminating against its own citizens in favor of a foreign corporation.
I would like to reserve five minutes.
Chief Justice Burger: Mr. Laddish.
ORAL ARGUMENT OF TIMOTHY G. LADDISH, ESQ., ON BEHALF OF THE APPELLEE
Mr. Laddish: Mr. Chief Justice, and may it please the Court:
I think first we should clear the record as to one question which I do not think is determinative of this case or actually, strictly relevant to the case.
But it's been raised many times by the other side and in an effort to apparently color the case in the favor of Western and Southern, and that is the question as to whether Ohio law itself discriminates against foreign insurers.
Now, from the presentation we have heard today and the presentation in the briefs, one would understand that Ohio does not discriminate against out-of-state insurers when they come in.
This is not the case.
I would draw attention to the brief filed by the American Insurance Association and their fellow associations, and particularly the Appendix A of that brief.
There is set forth the Ohio statutes which set forth what Mr. Vogeler has characterized as this complex formula as far as Ohio domestic insurers.
It's clear, as Mr. Vogeler says, that foreign insurance companies coming into Ohio will be taxed at a rate of 2.5 percent of their premiums' measure.
That's certainly clear under Section 5729.03.
That's on page 2a of this Appendix.
For domestic insurers Sections 5725.18 and.19 cover the tax that is to be charged.
There there is a choice excuse me, it's not a choice; there are alternatives given as far as how the tax will be computed for an Ohio insurance company.
One of those alternatives is the alternative, the only basis upon which California companies or any other state's companies will be taxed.
It works out so that if you multiply the revenue, the premiums measured by the 8-1/3 figure that's given in subparagraph (b) of 5725.18, multiply the premiums measure by that 8-1/3, and then multiply that result again by the.03 that is given in the 5725.19, you end up with exactly the same 2.5 percent rate that's charged out-of-state insurers.
That's only one of the alternatives that's given to the domestic companies.
5725.18 says you shall take the lesser of two alternatives.
The other alternative is based on the surplus and capital of the company.
You arrive at a figure and multiply that by the.03 that is given in Section 5725.19.
Unidentified Justice: But in any event you've told us that the Ohio tax is irrelevant?
Mr. Laddish: They are irrelevant, Your Honor.
Unidentified Justice: What we're concerned with here is the California tax?
Mr. Laddish: California tax; that is true.
My point, however, Your Honor, I think it's as important in that it colors the arguments from the other side, including the Solicitor General's brief, emphasizes in its question presented and several times during the course of the brief, including four separate times on page 10 of its brief, that the Ohio tax is nondiscriminatory and there is a very serious question in my mind from reading in that brief as to whether the Solicitor General would be in this case if he understood what Ohio law actually provides.
Unidentified Justice: But General Laddish, is it not true that the discrimination in Ohio is between domestic companies and all foreign insurance companies?
Mr. Laddish: That is true.
Unidentified Justice: Whereas in California the discrimination is, say, between an Oklahoma insurance company and an Ohio insurance company and a Georgia insurance company; might pay three different tax rates?
Mr. Laddish: Yes, Your Honor.
Unidentified Justice: Quite a different problem.
Mr. Laddish: Right.
Unidentified Justice: That is, the former claim that we had in the Benjamin case.
Mr. Laddish: But, Your Honor, I think where we need to keep things straight is the fact of whether we're talking about the basic premiums tax law or talking about the retaliatory tax law.
Here, the Ohio law I'm referring to is the basic Ohio law.
Unidentified Justice: I understand.
But the issue we have, as I understand the equal protection issue we have, is whether California may treat a group of insurance companies from different states differently because they're from different states, not a distinction between local and foreign corporations?
Mr. Laddish: That's correct, Your Honor, and I will move on to the--
Unidentified Justice: And while I've interrupted you, would the issue be the same if, say, we thought of it in terms of individual income tax and the State of Virginia used a retaliatory scheme against, say, Maryland and West Virginia, and so that a Maryland citizen working in Virginia paid one tax rate to Virginia and a West Virginia citizen working across the, commuting across, might pay a different rate.
Is that the same issue?
Mr. Laddish: --Well, it would certainly be a different case, Your Honor, because there's--
Unidentified Justice: But in equal protection terms, would it be the same issue?
Mr. Laddish: --Equal protection terms, when we get into that, it would be--
Unidentified Justice: The idea being that--
Mr. Laddish: --very similar, and yet you cannot ignore the fact that here we have an interstate business, that the business of insurance is an interstate, is in interstate commerce, where the Congress has removed the Commerce Clause... upon the state.
Unidentified Justice: --I'm assuming the McCarran Act has taken all the Commerce Clause issues out of the case.
We just have an equal protection issue.
Mr. Laddish: But remaining, Your Honor, is what is left, and what can the states do to perhaps take up the slack a bit and protect this interstate commerce on their own behalf?
And there is where you find a very strong interest here of the retaliatory tax in trying to encourage interstate insurance commerce and in trying to keep the rates somewhat uniform and--
Unidentified Justice: California is trying to encourage interstate insurance commerce by charging out-of-state companies more?
Mr. Laddish: --That's what I have to convince you of, Your Honor, and I think--
Unidentified Justice: Well, may I ask--
--I just want to just leave one question, and then I'll be still.
Is it the same... would you contend that it would not violate the Equal Protection Clause for Virginia to discriminate between Maryland and West Virginia nonresidents working in Virginia, for the same purpose underlying the statute, to try and induce those states to lower their income tax rates?
Mr. Laddish: --Your Honor, I have not considered that out of the current context of the case, which I think is a very special case.
And we, of course, under those circumstances there are privileges and immunities would also be applying, and this sort of thing.
But in the equal protection standard, I think this is a very special case because of the Commerce Clause facts, which I will refer to.
Unidentified Justice: Mr. Laddish, I just want to be clear in your response to my brother Stewart a moment ago.
Is it your position that appellant's equal protection argument is neither helped nor hurt by whatever the situation may be in Ohio?
Mr. Laddish: Your Honor... for purposes of the California tax, it is not a part of the mechanism that there must be a determination in Ohio.
That was changed in 1964.
Unidentified Justice: Well, the reason I asked--
Mr. Laddish: I think it is to the opinion of this Court as to whether or not... it certainly, the retaliatory tax is certainly more than one purpose, which I will be getting to.
One of the purposes is to counteract discrimination where it exists.
The point I was making right now was that it does indeed exist--
Unidentified Justice: --Well, what that means to me, Mr. Laddish, is that California's purpose is, if possible, to get Ohio... since we're dealing with Ohio corporations doing business in California... so to adjust its tax structure as to... over it, so that you don't have to charge the higher rate, is that right?
Mr. Laddish: --That's part of it, Your Honor, yes, sir.
And the... also, it's to keep the lid on from Ohio doing anything more and charge any higher charges upon the California companies.
Unidentified Justice: Well, Mr. Vogeler suggested that he did not think that the California tax had had any impact whatever on the Ohio tax structure, to change it in any way.
Do you agree with that?
Mr. Laddish: There has not been a change in the Ohio tax since the current California retaliatory tax statutes came into effect.
Now, whether it has kept the lid on and kept Ohio from doing more and increasing its insurance tax rate, I would say that's a very, very good question as to whether or not Ohio's insurance tax rate on foreign companies might be quite a bit greater.
Unidentified Justice: Well, do you think it's a sufficient defense for the California tax if the only purpose were to try to get other states to lower theirs?
Mr. Laddish: Yes, Your Honor.
Unidentified Justice: You think that's enough of a defense against--
Mr. Laddish: Well, excuse me, Your Honor, I sprang to that answer.
What I mean is, I do not think that discrimination, internal discrimination in the other state, is necessary to support a tax such as ours.
There are these other issue, Your Honor, other than just the reducing.
The point I... and I'll get off this now, as far as the Ohio taxes go, the Court is... the past practice of the Court has been to take judicial notice of matters in appeals from state courts that that state appellate court could take judicial notice of, and in the current case, I would cite the Court to Section 452(a) for taking judicial notice of the... this is Evidence Code of the State of California... taking judicial notice of the Ohio laws, and also Section 452 (c) which permits California courts to take judicial notice of the official acts of the executive department of the states involved.
I mention that one because the amicus, American Insurance Association, has also lodged with the Court in this document the tax forms upon which the examiner for the Superintendent of Insurance of Ohio, pursuant to the Ohio statute, to 5725.9, has computed Western and Southern's tax liabilities for the past few years.
If one follows through this form, one will easily see that Western and Southern itself has paid only 36 percent of the taxes due Ohio that a California company would pay to Ohio under the basic Ohio insurance tax.
Now, Western and Southern has mentioned in its briefs the stipulation that we reached as to these earlier California trial court decisions about Ohio law.
I would just merely point out that the mechanics of the California retaliatory tax means that those decisions were reached on the basis of the level of business Western and Southern was doing in California at that time, and presumably this lower alternative was not available to Western and Southern, would not be available to Western and Southern under those facts for years 1959 and 1960.
Until now there's been nothing in the record to show any later years after 1960.
Now, I'll move on from what I have said that's irrelevant to begin with.
The purpose of the California retaliatory tax is not to raise revenue.
That, as the California courts have recognized, is purely incidental.
Any revenue that is raised is purely incidental.
In fact, the more successful the tax is... as Mr. Justice Brennan pointed out... the less revenues will be raised in that if it were successful those foreign taxes will tend to lower.
Now, that is true because the true purpose, which is a multi-faceted purpose of this tax, is to help California insurance companies attain evenhanded tax treatment when they do business in the other states.
If this is fully achieved, everyone's tax level will be the same--
Unidentified Justice: --Are you arguing now Equal Protection or Commerce or both?
Mr. Laddish: --Right now I am trying to... I will tie in all the rules.
I really would... I'm presenting in abstract what the purpose is and what the mechanics are.
And I think if we understand that, then the constitutional rules and standards are easily applied to show the constitutionality of the tax.
The purpose that I mentioned as fully achieved... if it is, then there is no retaliatory tax collectible, and I would point out that the California premiums tax, the basic tax California applies to all insurers would only have to be raised 0.01 percent from 2.35 percent to 2.36 percent in order to take up the slack, if the retaliatory tax were repealed.
So the revenue is purely incidental.
The further purposes of the tax are to counteract discrimination between... internal discrimination of other states that California companies might experience, such as could be experienced in Ohio.
They are to encourage... retaliatory taxes are to encourage uniformity of tax burdens throughout the United States and thus to encourage interstate insurance commerce.
Now, this is not the purpose that one normally finds behind a state tax, although as pointed out in the briefs there are other state statutes and there are federal statutes in the Internal Revenue Code that have similar purposes.
The existence of that purpose as being the valid purpose in this case and the relative effectiveness with which it is carried out is demonstrated here by who is supporting the State of California in this case as to the insurance tax that is at issue.
In addition to the--
Unidentified Justice: Mr. Laddish, you have dealt at some length with the purpose of the Ohio tax.
Mr. Laddish: --No, this is the purpose of the California retaliatory tax.
Unidentified Justice: Or of the California tax, and ordinarily in a state tax case it's presumed, you know, one state may tax income at ten percent, another at 30 percent, and we don't inquire into why one state chose to tax at ten percent and another at 30 percent.
So, why is your purpose argument relevant here?
Mr. Laddish: Well, it certainly will become clear when we get to the equal protection argument, Your Honor, and also it is I think quite important here because I don't know if your reaction was the same as mine when I first heard of the California retaliatory tax.
It was imposed upon some foreign insurers and not upon California insurers.
My reaction was, that sounds like it might be a rather touchy issue.
I am trying to show that the retaliatory tax is in fact an equalizing tax.
It does have reciprocal... reciprocity elements, very strong reciprocity elements.
It does have this purpose that it is not a revenue purpose.
Now, as I was pointing out, the states have joined us... Tennessee; Arizona; Wisconsin, as you might expect; New York has come in against us for reasons I will mention in a little bit.
But very significant and emphatic amicus support comes to the State for this state tax by the nationwide insurance industry.
The bulk of the life insurers the bulk of the property and casualty insurers and the largest casualty, property and casualty insurer in the United States, have all come in in favor of this state tax, which to me illustrates that they recognize that the elimination of this tax will indeed disrupt the relative uniformity that we now have amongst state tax burdens in the insurance area, and will soon result... if the retaliatory tax were to to be abolished... in a significant increase in their tax bills.
Unidentified Justice: But we're not candidates for honorary membership in any of those amicus organizations.
We have to decide according to the law, I take it.
Mr. Laddish: Well, I know, Your Honor, but there have been questions as to whether or not the California stated purpose, whether it actually works is just pie-in-the-sky rhetoric?
I say, showing who is supporting us... I'm not trying to impress you by the personages that are supporting us, I am trying to indicate that these are companies that have their own auditors and they work things out as far as what is to their benefit.
You don't often have insurance companies coming in and say, please save this insurance tax.
Unidentified Justice: Well, how many states have taxes similar to yours?
Mr. Laddish: There are... I count 49 states that have taxes similar to ours.
North Carolina has the statutory discretion as to whether or not it's going to be applied and it does not apply it.
Forty-eight states have taxes similar to ours.
That would include New Mexico which has a retaliatory tax it imposes upon brokers and agents, not upon the companies.
Unidentified Justice: Do you think if you lose this case, all of those laws will--
Mr. Laddish: Yes, Your Honor.
I see no reason why it would not.
The appellant has tried to indicate that since we reimposed the retaliatory tax after appellant received an indefinite term of a license to do business, that that might somehow distinguish.
I'm sure that attempt at distinguishing this case would fall by the wayside soon if this Court were to knock down the California tax.
It's clear that this tax conforms with all constitutional standards, and it's also clear that the California license involved was conditioned upon continuing to conform with the law.
Unidentified Justice: --General Laddish, I was unsuccessful with regard to the income tax.
Would the principle that underlies this tax, namely motivating other legislatures to keep their tax rates down, also apply to say, a sales tax, where we're talking about sales by out-of-state corporations, and you might... could you have a retaliatory sales tax that would be equally justified, or is there something special about the insurance?
Mr. Laddish: Under the Equal Protection law, Your Honor, yes.
I'm not sure how long it would survive under the Commerce Clause.
I am not arguing here, although my sister state Tennessee does argue in its brief that this tax would be valid under the Commerce Clause without the McCarran Act, so I don't feel as if I can concede that point and argue against my co-state.
Unidentified Justice: But you're not arguing that there's anything unique about insurance, other than the history with the McCarran Act?
So, in terms of equal protection, it would be the same with an automobile business or steel business or whatever it might be?
Mr. Laddish: --It depends on exactly what we're grouping in the McCarran Act milieu there.
I think it's important to remember that with the Commerce Clause not applying in this area, then if these California insurance companies are to avoid this sort of discriminatory taxes that this Court affirmed in Prudential v. Benjamin, where it assumed that the tax was discriminatory against interstate commerce, if they're going to try and keep a lid on that it's going to be up to the states to do it.
And it's important to realize that this does create a special context even in the equal protection issue in that if the Equal Protection Clause is seen as having a federalistic element, this is a tax that is trying to keep that sort of discrimination and an overburdening of the insurance industry down.
Unidentified Justice: As I understand the Equal Protection principle, it is that that discrimination that would otherwise be impermissible may be justified as rational if the motivation of it is to motivate the legislature of the state from which the nonresident comes to take some special action.
You discriminate against residents of California and Ohio because you want to put pressure on that legislature to take favorable action.
Mr. Laddish: Yes, Your Honor, it's very similar to the case of Hawkins v. Moss that is cited on page 27 of the American Insurance Association brief.
There was a case where we will not require your candidates for the bar to take a law exam, bar exam, if you will reciprocate.
And that is certainly putting a burden on those individuals saying, you have to take a bar exam--
Unidentified Justice: That's giving a... excusing a requirement, that you make them take a six-hour exam when nobody else did because they had a six-hour exam elsewhere.
Mr. Laddish: --I don't see any difference, Your Honor, between saying you have to take this exam, and saying you have to take a six-hour exam.
I think if two people walk in, one from West Virginia and one from Colorado, and the Clerk was there and says, let's see your law.
You have to take the exam; you don't have to take the exam.
I think it's exactly the same sort of point we have here.
It is also the same concern and same purpose and same sort of mechanisms that you have in the federal cases, or federal statutes, under the Internal Revenue Code where there are at least five statutes set forth in the American Insurance Association brief that indicate that if you... that as to foreign countries, other sovereigns, the Congress by imposing burdens or withholding benefits... they go both ways on those statutes... they attempt to achieve evenhanded tax treatment for those U.S. citizens and corporations under the other sovereign's laws and they're... although these are set forth, by the way, at pages 23 though 26 of the American Insurance Association brief.
There the equal protection standards under the Fifth Amendment would apply to the Federal Government giving the rights to aliens and yet the Federal government has done this.
One of the statutes in original form was enacted in 1918, and the Federal Government in at least one of those statutes, 896(b), talks about... excuse me; it was 896(a)... is triggered by exactly the same thing, more burdensome taxes, not discrimination or anything else, but more burdensome taxes.
Another one of the statutes, 896(b), is the result or the action as being, we will impose the same tax that you're imposing on our people.
So we have other sections and other statutes, including these federal statutes in the Internal Revenue Code.
The mechanics of the tax, I think, are relatively simple.
We take... and this is what happened in this case.
Western and Southern is an Ohio corporation, and so once the California basic premiums tax liability is computed, we look to Ohio and see what a California company doing the level of business done by Western and Southern in California and doing the same type of business, being the same type of company as Western and Southern, what its burden in Ohio would be.
Now, if that burden is less or the same, there is no retaliatory tax on Western and Southern.
If that burden is more, which the record is clear and there's no dispute here, the Ohio burden would be more on the California company, then there is the tax, but only to the extent that the burden would be more.
If Western and Southern were to convince Ohio to lower the burden on the California insurers say to the... or give the California insurers the same alternatives that they're giving to the domestic insurers in Ohio, then the California retaliatory tax, as long as that Ohio burden was the same or below what California's burden would be, would disappear.
And I say this is reciprocal action.
Unidentified Justice: In other words, it wouldn't be enough, as I understand it, to prevent the application of the California tax that Ohio increased the rate for both domestic and foreign companies to the same level, but higher than California?
Mr. Laddish: That's correct, Your Honor.
Unidentified Justice: You'd still tax the Ohio corporation in California on the difference.
Mr. Laddish: That's correct, Your Honor, because of the purposes, in addition to discrimination, it's to--
Unidentified Justice: So the only thing that would satisfy California is if your tax law had the impact of compelling the Ohio Legislature or leading them, in any event, to reducing the tax on at least the foreign corporation below the California tax?
Mr. Laddish: --Or below.
That's when the retaliatory tax would disappear.
Unidentified Justice: It would be satisfactory if Ohio only reduced the tax on California companies?
Mr. Laddish: It would be satisfied if Ohio reduced the tax on California companies--
Unidentified Justice: Not on foreign corporations?
If they pick California companies out--
Mr. Laddish: --Well, they could.
But, Your Honor, remember we have 96 percent of the states having the same retaliatory taxes.
Now, if I could just run through, as far as the constitutional standards that need to be applied, Western and Southern and its supporters have often cited authorities from the Privileges and Immunities Clause.
Now, obviously, those do not apply here; we're dealing with a corporation.
As to the Commerce Clause, I submit that Prudential v. Benjamin is entirely clear, the McCarran Act is entirely clear, and the application of Prudential and the McCarran Act to a substantially similar retaliatory tax is clear through the decision in Prudential v. Hobbs.
So I leave to my briefs the arguments as to the Commerce clause, unless there are questions of the Court.
One point is that Congress, if it were unhappy with the Prudential v. Benjamin case or Hobbs case, or if it were unhappy with what the states were doing now as to retaliatory taxes, could change the system at any time by amending the McCarran Act or repealing it, or taking over the field itself of state regulation and taxation of insurance companies.
This has not happened.
As to the Equal Protection Clause, we have a valid state purpose.
I don't think anybody would contest the fact that the purpose I have outlined is a valid purpose.
Unidentified Justice: --I take it that your argument on the Equal Protection Clause is wholly aside from the McCarran Act.
If the McCarran Act had never been passed, your case would be... in here would be exactly the same.
Mr. Laddish: It's slightly different, Your Honor, in that Prudential v. Benjamin pointed out that here the states and Congress have acted together and that it would add even more strength to the presumption that the state tax statute is constitutional as against an equal protection challenge or any other constitutional challenges.
Unidentified Justice: Well, but that's... it barely mentioned equal protection.
Mr. Laddish: They do mention, Your Honor--
Unidentified Justice: I know.
I'm saying, barely.
Mr. Laddish: --They barely mention--
Unidentified Justice: But it wasn't one of the questions even raised and presented in the state courts or here.
Mr. Laddish: --It was not raised by Prudential; no, Your Honor.
But the Court did take care to say,
"No conceivable violation of the Commerce Clause in letter or in spirit is presented nor is contravention of any other limitation. "
--This is on page 436.
Unidentified Justice: Yes, I know.
Mr. Laddish: It does not... I'm sure you and I are both aware... but I am not relying upon Benjamin for--
Unidentified Justice: Nor the McCarran Act.
Mr. Laddish: --Nor the McCarran Act, Your Honor, directly.
I think, as I have pointed out with Mr. Justice Stevens, that the context of the McCarran Act is quite important.
But here, with the Equal Protection Clause, you have the purpose and you have the classification, which is certainly reasonably related to the attaining of that purpose.
This is not a classification where all foreign insurers are lumped together and suffer discrimination.
Unidentified Justice: And it's only the rationale of the level of scrutiny that applies.
Mr. Laddish: Yes, Your Honor.
There has been no claim that this is in the special level.
Here only those companies whose home states would discriminate or would raise a higher burden against California insurers will suffer the retaliatory tax.
And as soon as that burden is adjusted down to the California level, the retaliatory tax will disappear.
Unidentified Justice: But the tax depends on residence?
Is that it?
Mr. Laddish: Yes, Your Honor, the state of incorporation.
Unidentified Justice: It doesn't make any difference where the principal office is?
Mr. Laddish: That issue has never arisen, Your Honor, and it does not arise in this case.
We have an Ohio company with its home office in Ohio.
Unidentified Justice: Well, I don't know why it wouldn't arise, if you're talking about equal protection, if you're talking about rationality to have your tax determined on just where you happen to be incorporated.
I'm sure you insist that's a rational basis for discriminating between foreign corporations.
Mr. Laddish: I think, Your Honor, you'll find that that's usually the case with insurance companies.
I do not know.
I have not... there is no study in this case.
Unidentified Justice: That's the... I suppose you say that is the determining factor in all these 49 laws?
Mr. Laddish: I believe so, Your Honor; yes.
In this case we have an Ohio company with an Ohio office.
May it please the Court, I believe that if the briefs are fully followed through with the standards, the regular standards that are applied in equal protection cases, I think it is very clear that there is a reasonable basis and a reasonable basis for classification made in this case.
I submit that the decision of the Court of Appeal should be affirmed.
Chief Justice Burger: Thank you.
Do you have anything further, Mr. Vogeler?
Mr. Vogeler: Yes.
Chief Justice Burger: You have three minutes remaining.
ORAL ARGUMENT OF ALAN R. VOGELER, ESQ., ON BEHALF OF THE APPELLANT -- REBUTTAL
Mr. Vogeler: Thank you.
First, let me say that if we are in error about the Ohio law not discriminating against foreign corporations, it is an error that has been propounded by the California courts which on three different occasions in suits to levy taxes upon Western and Southern because of the Ohio law, found that the Ohio law did not discriminate, and those cases are referred to in our brief.
Now, I don't know what the purpose is for talking about Western and Southern's income taxes are, and the materials which has been submitted by the brief for the property insurers are obviously not Western and Southern tax returns but they are work-ups from, perhaps those returns, by employees of the Ohio Department of Insurance.
The question of discrimination is obvious in this legislation.
Not only do we have discrimination between states, we have discrimination within states.
For example, under the California retaliatory tax law a life insurance company from Virginia doing business in California pays no retaliatory tax at all, but a property insurance company from Virginia doing business in California pays a 0.4 percent of premium retaliatory tax.
Is that equal protection?
Unidentified Justice: What do you do with sun belt non-reciprocative admissions to the bar?
You can't get admitted to the bar in California or Arizona or Florida without taking a test, although in most other states, if you've been admitted to practice in one of them, you can get admitted to the other simply on motion.
Mr. Vogeler: Yes, Your Honor.
As in every case, in every state with respect to attorneys, the jurisdiction of the supreme court of the state which has the right to control the practice of law within that state.
So I don't think that the same principle is involved.
Unidentified Justice: Well, but we're talking about state power whether it's exercised by a court or by a legislature.
Mr. Vogeler: That's correct, Your Honor.
But we're talking about in that case, I say, police power where there is a particular interest within the state.
Now what interest does the State of California have as to what a tax levy is in the State of Ohio?
I say to you that no state should have to conform its own revenue statutes to the configuration of another state.
And this Court has said so also, in Austin v. New Hampshire.
No state should try to impose its insurance tax structure on another state.
A state should be free to levy its insurance taxes on insurance companies in accordance with its own needs, not because the State of California wants to equalize the taxes all over the country, or wants to equalize taxes among companies that are going to be doing business there but are from California.
The discrimination inherent in retaliatory taxation found to exist in the unchallenged findings of the Superior Court of California that it is unconstitutional should be upheld by this Court.
It is fundamentally wrong.
Chief Justice Burger: Thank you, gentlemen.
The case is submitted.