The New Jersey Tax Court has upheld the denial of Johnson and Johnson’s (J&J) request for a $55 million refund on self-procurement tax.
The court granted a summary judgement in favour of the New Jersey Department of Banking and Insurance (DOBI) and John Ficara, the director of the Division of Taxation, and denied J&J’s motion.
The summary judgement required the court to interpret the insurance premium statutes and the calculation of self-procurement tax under N.J.S.A. 17:22-6.64.
J&J contended that the Nonadmitted and Reinsurance Reform 2010 (NRRA) and the 2011 legislative changes to the insurance premium statutes didn’t alter the calculation of self-procurement tax, on which basis they would be entitled to a refund of $55 million, plus interest.
J&J has a Vermont-domiciled captive, Middlesex Assurance, but is itself based in New Jersey and has paid self-procurement tax in the state since 2008.
In 2011, the method for determining self-procurement tax changed due to Congress’s enactment of the Nonadmitted and Reinsurance Reform 2010 (NRRA). Following this change J&J began to calculate and remit self-procurement tax based on total US premiums as a precautionary method.
J&J filed a claim with DOBI and Ficara in November 2015 seeking a refund of $55 million, plus interest, for self-procurement tax.
The refund claim was based on J&J’s argument that NRRA and the legislative changes made in response to it in New Jersey in 2011 did not alter the method of calculating self-procurement tax.
According to J&J’s argument, the NRRA was intended to only apply to surplus lines insurance and reinsurance, not to self-procured insurance.
J&J also argued that the statutory changes made to N.J.S.A. 17:22-6.64 by the New Jersey Legislature in 2011 didn’t alter the calculation of self-procurement tax because the amendment only refers to surplus lines policies and the original statutory language allocating the tax to risks located in New Jersey remained untouched.
In January 2016, DOBI determined that J&J’s refund claims were unwarranted and not supported by prevailing law.
DOBI referred to the NRRA’s use of the term “nonadmitted insurance”, which is defined as including both SPT and surplus lines insurance.
In response, J&J filed a complaint with the tax court in October 2016, alleging that the denial of the refund was incorrect on the basis that “the Surplus Lines Law expressly provides that a captive insurance company is not a “surplus lines insurer” as defined in the statute”.
In February 2017, following DOBI and Ficara reply to the complaint, J&J filed a motion for a summary judgement and in October 2017, DOBI and Ficara filed a cross-motion for a summary judgement.
But, ruling in favour of DOBI and Ficara, the court found that the “New Jersey Legislature intended to incorporate the authority afforded it under the NRRA through the enactment of amendments to both the Surplus Lines Law and the self-procurement statute”.
The court added that the legislature’s intent is “clear and purposeful”, despite the “problematic” addition of a paragraph in the self-procurement statute relating to surplus lines policies.
J&J did not immediately reply to a request for comment.