Plain Meaning of Statute Wins in Maryland
Too often we hear states assert that the company’s view cannot be correct because if it was correct the company would owe less or no tax. Maryland’s intermediate appellate court told the Comptroller in an unreported decision that such an argument is not how laws are interpreted. Comptroller v. Leadville Insurance Co., No. C-02-CV-17-001285 (Md. Ct. Spec. App. Aug. 29, 2022). When determining the meaning of a statute we first look at the plain meaning of the statute itself and if there is no ambiguity we must follow the words of the statute (when a statute’s plain meaning is ambiguous other aids of statutory construction can be considered). Having to pay less or no tax does not make the statute ambiguous, the Maryland court understood that, so the company won.
The Facts: The Comptroller audited Macy’s, Inc. One of its subsidiaries (Macy’s Retail Holding, Inc.) paid amounts to Leadville Insurance Company (“Leadville”). Leadville was established under the laws of Vermont to provide insurance to Macy’s subsidiaries for excess earthquake risks if the subsidiaries were unable to obtain market coverage for such risks. Leadville qualified as a captive insurance company under Vermont law and insured risks, some of which were held by Macy’s department stores in Maryland.
Leadville wrote its policies in Vermont, not in Maryland, and paid premiums tax in Vermont, not in Maryland. Leadville was not located in Maryland. In most of the years audited, Leadville did not pay premiums tax in Maryland and, for all the years audited, it did not pay corporate income tax in Maryland.
Macy’s Retail Holding, Inc. (“MRHI”) deducted premium and interest expense that it paid to Leadville for 1996 to 2003. For 1997 to 2003, Leadville earned no Maryland premiums. The Comptroller denied the deductions to MRHI (it added them back to MRHI’s income) and asserted that the denied deductions could be attributed to, and tax, interest, and penalty assessed against, Leadville in June of 2010. (This backwards assessment is really an end run around the statute of limitations on assessment that was condoned in a much earlier case for another company regarding payment of royalties to a related party and the Comptroller’s loophole for such actions needs to be closed.)
As a Vermont insurer that writes its policies in Vermont, Leadville did not hold a certificate of authority from the Maryland Insurance Commissioner making it an “unauthorized insurance company.” When an unauthorized insurance company effects, continues, or renews insurance on a property in Maryland it “shall pay” a premium receipts tax of three percent of the gross premiums charged. The same statute provides that: “The premium receipts tax under this section is instead of all other State taxes.” Md. Code Ann., Ins. Sec 4-209(b)(1); (c).
The Decision: Leadville said that being subject to the premiums tax meant that it was not subject to corporate income tax under the plain meaning of the specific words used by the legislature in the statute. The Comptroller asserted that if Leadville is correct and if the statute is given its plain meaning, the statute would create a “tax shelter for unauthorized insurance companies operating in Maryland that do not generate income from premiums.” The Comptroller continued reasoning that the statute is an exemption from the corporate tax, exemptions should be construed against the company, and because the premiums tax statute’s words are ambiguous, the construction should go in favor of the Comptroller to assert corporate income tax. The court agreed with Leadville that the statute is clear that the premiums tax “is instead of all other State taxes.”
The takeaway is that just because the company would owe more tax if the State ignores the plain meaning of a statute, it does not make the statute ambiguous. Don’t back down when the State says it is because we say it is!
This article is one in a series of articles written for the September 2022 edition of The BR State + Local Tax Spotlight.