Five Pennsylvania insurance companies recoup $16 million in tax payments after Tennessee Supreme Court holds that retaliatory taxes were improperly assessed

By Daniel A. Horwitz

The American insurance industry is unique in many ways.[1]  Included among its quirks is an interlocking, state-by-state “retaliatory tax” framework that ensures that equally low taxes will be levied on insurance companies across the country no matter where they do business.  The gist of this “retaliatory tax” system is that if one state decides to impose a comparatively more onerous tax on insurance companies, then every other state will punish that state’s insurance companies by imposing a retaliatory tax against them in response.  With the sole exception of Hawaii, every state has enacted a retaliatory insurance tax statute for this purpose.[2]

To illustrate the practical effect of this framework by way of example, suppose that Alabama and Tennessee each tax insurance companies in exactly the same way, and further, that some number of Alabama insurance companies do business in Tennessee (and vice versa).  To close a budget deficit, however, Alabama decides to raise taxes on insurance companies that do business in Alabama.  Thereafter, in response, Tennessee’s “retaliatory tax” statute authorizes Tennessee’s insurance commissioner to levy a punitive tax on all of the Alabama insurance companies that do business in Tennessee.[3]  Additionally, every other state (except Hawaii) would punish Alabama’s insurance companies in exactly the same way.[4]  Considered broadly, this practice has been described as “holding hostages to coerce another sovereign to change its policies.”[5]

Strictly from Tennessee’s perspective, the purpose of Tennessee’s retaliatory tax statute “is to protect Tennessee insurance companies by encouraging foreign jurisdictions not to impose heavier burdens on Tennessee companies than Tennessee imposes upon their companies who come here to do business.”[6]  On a national level, though, the effect of having such a statute in every state is predictable:  because any individual state’s insurance companies will be retaliated against if the state decides to raise insurance taxes or increase insurance regulation, insurance taxes and regulations consistently remain below a national ceiling everywhere.  Unsurprisingly, this system is also strongly supported by insurance companies themselves, even though they are technically the subjects of the contemplated retaliation.[7]

Enter Pennsylvania’s insurance regime.  Specifically at issue were three Pennsylvania workers’ compensation statutes known as the Workmen’s Compensation Administration Fund, the Subsequent Injury Fund, and the Workmen’s Compensation Supersedeas Fund.[8]  Each of these three Pennsylvania statutes provides for a direct tax on insurance companies that Tennessee does not have.  Thus, in response, Tennessee assessed a retaliatory tax penalty against five Pennsylvania insurance companies that were operating in Tennessee, all of which paid the tax under protest and then sued the state to get their money back.  The Court of Appeals ultimately affirmed the tax penalty – which totaled $16 million – on the basis that the three Pennsylvania statutes imposed tax obligations on insurance companies that were more onerous than those in Tennessee, and the Tennessee Supreme Court granted review.

For reasons that are not entirely clear, the Court of Appeals was apparently never alerted to the fact that a subsequent Pennsylvania statute effectively repealed the three direct tax provisions referenced above.[9]  The new law provided that the taxes in question “shall no longer be imposed on insurers[,] but shall [instead] be imposed, collected and remitted through insurers[.]”[10]  Thus, rather than being directly liable for the three insurance taxes, insurance companies doing business in Pennsylvania “ha[ve] the responsibility of acting as a tax collector on behalf of the Department[.]”[11]   Ultimately, however, “the liability for payment of the assessments [] lies with the employer-policyholders,”[12] rather than with the insurers themselves.

Based on this work-around, the Tennessee Supreme Court unanimously concluded that “the Pennsylvania Workers’ Compensation Act, as amended . . . does not impose a direct financial burden upon insurance companies doing business in that state.”[13]  Thus, it held that Tennessee “had no authority to impose a retaliatory tax” upon the five Pennsylvania companies, and it ordered that their $16 million worth of tax payments be returned as a result.[14]

Read Justice Wade’s unanimous opinion in Chartis Casualty Company v. Tennessee here.

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[1] See, e.g., Richard D. Pomp, Analysis of Issues Proposed by Multistate Tax Commission (March 3, 2010), available at (“the insurance industry raises sui generis issues of tax policy that are different from other industries. The unique features of insurance taxation, especially the retaliatory tax and the in lieu provisions, require a re-thinking of traditional approaches.”).  The late George “Citizen” Barrett – famed civil rights and plaintiffs’ attorney – was also fond of stating that American insurance companies “exist for only two reasons: one, to collect premiums; two, to deny claims.”  See The Irish Times, Tennessee lawyer and champion of US civil rights (Sept. 27, 2014),

[2] See First Am. Title Ins. Co. v. Combs, 258 S.W.3d 627, 630 (Tex. 2008) (“Retaliatory taxes are ubiquitous, having been a common feature of insurance taxation for over a century, and they exist in every state except Hawaii.”) (internal citations and quotations omitted).

[3] See Tenn. Code Ann. § 56-4-218.

[4] This framework has been analogized to “[t[he practice of

[5] W. & S. Life Ins. Co. v. State Bd. of Equalization of California, 451 U.S. 648, 674 (1981) (Stevens, J., dissenting).

[6] Republic Ins. Co. v. Oakley, 637 S.W.2d 448, 451 (Tenn. 1982).

[7] See generally, Carl R. Erdmann & Robert F. Montellione, Maximizing Tax Incentive Benefits in the Insurance Industry, 2000 J. Multistate Tax’n & Incentives 1, 2.

[8] 77 Pa. Stat. Ann. § 1000.2 (2002); 77 Pa. Stat. Ann. § 517 (2002); 77 Pa. Stat. Ann. § 999 (2002).

[9] 71 Pa. Cons.Stat. Ann. § 578 (2012).

[10] Chartis Cas. Co. v. State, No. M-2013-00885-SC-R11-CV, 2015 WL 5766279, at *8 (Tenn. Oct. 2, 2015) (emphasis added).

[11] Id. at n. 11.

[12] Id.

[13] Id. at *7.

[14] Id. at *8.  The court expressly “decline[d] to consider” whether imposing a tax-collection burden on insurance companies that do business in Pennsylvania qualified as an additional “obligation” for purposes of Tennessee’s retaliatory tax statute.  See id. at n. 13.  The author isn’t quite sure why not.