                IN THE COURT OF APPEALS OF TENNESSEE
                            AT NASHVILLE
                               November 18, 2014 Session

 COMPANION PROPERTY AND CASUALTY INSURANCE COMPANY,
          ET AL. v. STATE OF TENNESSEE, ET AL.

                 Appeal from the Tennessee Claims Commission
   No. X20120824   Robert N. Hibbet, Commissioner, Tenn. Claims Commission
                               (Middle Division)




             No. M2014-00527-COA-R3-CV           - Filed January 26, 2015


Two South Carolina insurance companies challenged their Tennessee retaliatory tax
assessments. The Tennessee Claims Commission held that the Department of Commerce and
Insurance did not calculate the South Carolina tax burden correctly because it did not include
reimbursements received by the insurance companies from South Carolina’s Second Injury
Fund. The Commission also denied the Department’s motion to strike portions of an
affidavit. The Department appealed. We find that the Department’s calculation of the South
Carolina tax burden was correct and reverse that decision of the Claims Commission. We
affirm the Commission’s denial of the Department’s motion to strike.

    Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Claims Commission
                        Reversed in Part, Affirmed in Part

A NDY D. B ENNETT, J., delivered the opinion of the court, in which F RANK G. C LEMENT, J R.,
P.J., M.S., and R ICHARD H. D INKINS, J., joined.

Robert E. Cooper, Jr., Attorney General and Reporter; Joseph F. Whalen, Acting Solicitor
General; and Jonathan N. Wike, Senior Counsel, for the appellant, State of Tennessee.

G. Michael Yopp and Christopher A. Wilson, Nashville, Tennessee, for the appellees,
Companion Property and Casualty Insurance Company and Companion Commercial
Insurance Company.
                                           OPINION

                            T ENNESSEE’S R ETALIATORY T AX L AW

        This case involves Tennessee’s retaliatory tax law, Tenn. Code Ann. § 56-4-218(a).

        Generally, such statutes provide that whenever the laws of a particular state
        impose greater burdens and limitations upon companies organized in the
        enacting state, and doing business in such other state, than are imposed by the
        laws of the enacting state upon foreign companies doing business in that state,
        then the same burdens and prohibitions imposed by the foreign state will be
        imposed by the enacting state upon such companies of the foreign state.

43 A M. J UR. 2 D Insurance § 54 (2014). “[T]he principal purpose of retaliatory tax laws is to
promote the interstate business of domestic insurers by deterring other States from enacting
discriminatory or excessive taxes.” W. & S. Life Ins. Co. v. State Bd. of Equalization of Cal.,
451 U.S. 648, 668 (1981).

        Tennessee’s retaliatory tax law, Tenn. Code Ann. § 56-4-218(a), states in pertinent
part:

        When, by the laws of any other state or foreign country, any premium or
        income or other taxes, or any fees, fines, penalties, licenses, deposit
        requirements or other obligations, prohibitions or restrictions are imposed
        upon Tennessee insurance companies doing business in the other state or
        foreign country, or upon their agents in the other state or foreign country, that
        are in excess of the taxes, fees, fines, penalties, licenses, deposit requirements
        or other obligations, prohibitions or restrictions imposed upon the insurance
        companies of the other state or foreign country doing business in this state, or
        that might seek to do business in this state, or upon their agents in the state, so
        long as the laws continue in force, the same premium or income or other taxes,
        or fees, fines, penalties, licenses, deposit requirements or other obligations,
        prohibitions and restrictions of whatever kind shall be imposed upon the
        companies of the other state or foreign country doing business in this state, or
        upon their agents in this state.

                                    S OUTH C AROLINA L AW

      In South Carolina, insurance companies fund the Second Injury Fund through
assessments calculated pursuant to S.C. Code Ann. § 42-7-310(d)(2), which provides in


                                                2
pertinent part:

       Each carrier shall make payments to the fund in an amount equal to that
       proportion of one hundred thirty-five percent of the total disbursement made
       from the fund during the preceding fiscal year less the amount of net assets in
       the fund as of June thirtieth of the preceding fiscal year which the normalized
       premium of each carrier bore to the normalized premium of all carriers during
       the preceding calendar year.

The assessment rate varies from year to year. The insurance company pays the injured
employee directly and receives reimbursement from the Second Injury Fund. S.C. Code Ann.
§§ 42-9-400, 410.1

                                 F ACTS AND P ROCEDURAL H ISTORY

        Champion Property and Casualty Insurance Company and Champion Commercial
Insurance Company (collectively known as “Claimants”) are South Carolina-domiciled
insurance companies that provide property, casualty, and workers’ compensation coverage
to customers both inside and outside of Tennessee. The Tennessee Department of Commerce
and Insurance (“the Department”), after auditing Claimants’ tax returns for 2009, determined
that Claimants had not self-reported assessments for the South Carolina Second Injury Fund,
which the Department determined should have been included as part of the retaliatory tax
calculation. For tax years 2010 and 2011, Claimants listed the South Carolina Second Injury
Fund assessments in its tax returns, paying the 2011 tax liability under protest.

      Claimants filed a complaint on August 24, 2012, with the Tennessee Claims
Commission seeking a refund of retaliatory taxes paid under protest for the 2011 tax year.
They claimed that the Department failed to take into account the effect of South Carolina’s
Second Injury Fund “reimbursements” in determining the applicable burden imposed on
Tennessee insurance companies by South Carolina for retaliatory tax purposes.

        The Claimants and the Department filed cross-motions for summary judgement. After
a hearing on the motions, the Claims Commissioner granted the Claimants’ motion and
denied the Department’s motion. The Commissioner determined that the Second Injury Fund
assessments “do not constitute a classic tax imposed pursuant to a set rate.” “The effective
assessment rate itself,” stated the Commissioner, “is a variable dependent upon the gross paid
losses and Second Injury Fund reimbursements received by all insurance providers operating
within South Carolina.” The Commissioner found that Claimants, over the past ten years,

       1
           The South Carolina Second Injury Fund has been phased out. S.C. Code Ann. § 42-7-320.

                                                   3
had actually “paid less in South Carolina Second Injury Fund Assessments than they receive
in reimbursements, resulting in no net burden.” Therefore, the Commission held that the
Department “has clearly miscalculated the burden imposed by the South Carolina Second
Injury Fund . . . .” The Department appealed.

                                          S TANDARD OF R EVIEW

       Summary judgment is appropriate where the moving party is entitled to judgment as
a matter of law on the undisputed facts. T ENN. R. C IV. P. 56.04. Where the facts are
undisputed, this court reviews the grant of summary judgment de novo with no presumption
of correctness. City of Tullahoma v. Bedford Cnty., 938 S.W.2d 408, 412 (Tenn. 1997). This
matter involves a question of law.

                                                 A NALYSIS

        The Claims Commissioner seemed to indicate that the South Carolina assessments are
not part of the Tennessee retaliatory tax calculation because the assessments “do not
constitute a classic tax imposed pursuant to a set rate.” However, the Tennessee retaliatory
tax statute is much broader than a “classic tax.” It applies to “any premium or income or
other taxes, or any fees, fines, penalties, licenses, deposit requirements or other obligations,
prohibitions or restrictions” that “are imposed upon Tennessee insurance companies doing
business in the other state.” Tenn. Code Ann. § 56-4-218(a).

        Similarly, Claimants maintain that the South Carolina assessments are “a mere
allocation of a finite burden among insurance companies operating within South Carolina
based upon prior-year reimbursements and direct losses,” and contend that Tennessee is
trying to transform the assessments into a tax. We do not see it that way. A burden need not
be a “tax” to fall within the parameters of Tennessee’s retaliatory tax. The language of Tenn.
Code Ann. § 56-4-218(a) is sufficiently broad to encompass almost any burden imposed by
another state upon a Tennessee insurance company, including the assessment at issue in this
case.2



        2
            Tennessee case law notes the difference between a tax and a fee:

        A tax is a revenue raising measure levied for the purpose of paying the government’s general
        debts and liabilities. A fee is imposed for the purpose of regulating a specific activity or
        defraying the cost of providing a service or benefit to the party paying the fee.

City of Tullahoma, 938 S.W.2d at 412 (citations omitted).


                                                      4
       The main focus of this case is on the calculation of the burden imposed on insurance
companies in South Carolina. In conducting the calculation, we must keep in mind that the
issue under the Tennessee retaliatory tax statute is whether any taxes, fees, fines, penalties,
licenses, deposit requirements or other obligations, prohibitions or restrictions are imposed
upon Tennessee insurance companies doing business in South Carolina that are in excess of
the taxes, fees, fines, penalties, licenses, deposit requirements or other obligations,
prohibitions or restrictions imposed upon the insurance companies of South Carolina doing
business in Tennessee.

       When the Department determined that the South Carolina Second Injury Fund
assessments should be included for purposes of computing whether a retaliatory tax was
owed, those assessments were calculated by using South Carolina’s formula for Second
Injury Fund assessments. The Department calculated what Claimants would owe as if each
company did the same amount of business in South Carolina as it did in Tennessee.

       Claimants dispute the calculation for several reasons. First, they point to the fact that
in South Carolina insurers “remain responsible for making second injury payments.” South
Carolina law provides Claimants with reimbursements from the Second Injury Fund for the
amounts Claimants paid for qualifying injuries that occurred before July 1, 2008. S.C. Code
Ann. § 42-7-320(B). Claimants maintain that these reimbursements should be factored into
the calculation to reduce or even eliminate3 the burden of the assessments. The Claims
Commissioner agreed, stating that “the logic behind Claimant’s [sic] assertion is obvious.”

        This case is similar to Commerce & Industry Insurance Company v. Department of
Treasury, 836 N.W.2d 695 (Mich. Ct. App. 2013). In that case, Michigan was evaluating
New York’s workers’ compensation statutes to determine if assessments against the
insurance companies were to be included in Michigan’s computations of retaliatory taxes.
Commerce & Industr. Ins. Co. v. Dept. of Treasury, 836 N.W.2d at 698. Insurance
companies in New York were allowed to charge their policy holders a surcharge in an
attempt to offset or recover the assessments.4 Id. at 704. The New York assessments and
surcharges were separate payments subject to separate calculations. Id. The New York
assessments did not necessarily match the surcharges. Id. (citing Selective Ins. Co. of Am.
v. N.Y. Workers’ Comp. Bd., 953 N.Y.S.2d 368, 372 (N.Y. App. Div. 2012)). The Michigan
court found that the New York assessments were to be included in calculating the burden
imposed by New York. Id. The court did not reduce the assessment to be included in the


        3
            Both Claimants received more in reimbursements than they paid in assessments.
        4
        Thus, one could argue that the assessments were really against the policy holders and the
insurance companies were just a conduit for payment.

                                                     5
Michigan retaliatory tax by the amount of the surcharges.

       In this case, the South Carolina Second Injury Fund reimbursements are paid to the
insurance companies without regard to the amount of the assessment. S.C. Code Ann. § 42-
9-400(a). Thus, they do necessarily match.5 The assessment is expressly made a debt of the
insurance company. S.C. Code Ann. § 42-7-310(d)(2). The assessments are, in our opinion,
separate from the reimbursements.

        Tennessee’s retaliatory tax statute is concerned with “taxes, or any fees, fines,
penalties, licenses, deposit requirements or other obligations, prohibitions or restrictions . .
. imposed upon Tennessee insurance companies doing business in the other state . . . .” Tenn.
Code Ann. § 56-4-218(a). It does not address itself to the other state’s statutes which do not
impose a burden on Tennessee insurance companies. To hold otherwise would be to extend
the statute beyond the natural and ordinary meaning of its terms. See Worrall v. Kroger Co.,
545 S.W.2d 736, 738 (Tenn. 1977) (The intent of a statute “is to be ascertained primarily
from the natural and ordinary meaning of the language used, when read in the context of the
entire statute, without any forced or subtle construction to limit or extend the import of the
language.”).

      Our view of Tenn. Code Ann. § 56-4-218(a) is buttressed by comments by our
Supreme Court:

        the retaliatory or reciprocity provision . . . is a mandatory requirement that the
        same amount of tax be levied by the Commissioner upon a Kentucky Insurance
        Company doing business in Tennessee as Kentucky would levy upon a
        Tennessee Company doing business in Kentucky. This section applies to the
        levy of tax and nothing else, and means simply that, for example, if Kentucky
        levies a four per cent gross premium tax upon a Tennessee company instead
        of a two per cent gross premium tax, then Tennessee will likewise levy a four
        per cent gross premium tax upon a Kentucky company rather than a two per
        cent tax, as is provided by statute. When this equalization of the levy has thus
        been performed all requirements of this section . . . have been met.

Williams v. Thomas Jefferson Ins. Co., 385 S.W.2d 908, 911 (Tenn. 1965); see also Republic
Ins. Co. v. Oakley, 637 S.W.2d 448, 450 (Tenn. 1982) (“[A] determination whether or not
retaliatory taxes are called for is to be based solely upon a comparison of the basic tax rate
of the two states in question.”). Claimants attempt to distinguish these cases by arguing that


       5
         This makes sense because the reimbursements are not for the assessments, but for claims paid
by the insurance companies that are covered by the Second Injury Fund.

                                                   6
they addressed optional reductions in taxes due to investments, whereas this matter involves
mandatory reimbursements. We believe the principle announced in these cases is broader
than the Claimants maintain. Under the retaliatory tax statute, it is the levy, or burden,
imposed that is examined, not other statutes that may operate to reduce the effect of the
burden imposed on individual companies. Therefore, the assessments should not be reduced
or eliminated by the reimbursements. The same principles also apply to gross paid losses.

        Claimants also propose that the calculation of the Tennessee retaliatory tax must
include a recalculation of the South Carolina tax assessed because “[u]nder the immutable
laws of mathematics, the addition of another insurer, even a hypothetical one, into this
calculation results in different assessment amounts being imposed upon all insurers in South
Carolina due to the presence of additional direct losses and prior-year reimbursements
attributable to the additional insurer.”6 We do not think Tennessee is required to recalculate


       6
         The logical extent of Claimants’ argument was expressed by Claimants’ counsel at the hearing
before the Claims Commissioner:

       to really do a fair calculation in the world of the hypothetical, which is what we’re operating
       in, they [Tennessee] also need to look at how many other states out there are assessing
       retaliatory taxes against South Carolina companies. How many of those states are thus then
       having to assume that more hypothetical companies are going to operate down there? It goes
       on and on . . . .

       How many other hypothetical companies do we have to factor into this equation?

       The second prong, when we’re dealing with this type of a hypothetical scenario, is for all
       those hypothetical companies operating out there, you have to determine the amount of
       Second Injury Fund reimbursements that each of those companies would be entitled to. That
       goes into the enumerator of the calculation to determine the rate.

       Once again, you have to look at how many South Carolina companies are being assessed for
       retaliatory tax in Tennessee. That’s a whole host of hypothetical companies where you’ve
       got to look at their reimbursements that they would be entitled to under the Second Injury
       Fund for the prior year. Then you look at all the other states: How many of them are
       assessing retaliatory tax? How many hypothetical companies are there? How much in South
       Carolina Second Injury Fund reimbursements are they entitled to? All of that has to be put
       into this fraction to determine the rate.

       The State has not done that. They simply look at what’s the rate that’s been determined in
       South Carolina based on the companies actually operating there, without even going so far
       as to include factors attributable to the Plaintiffs which would be factored as part of the
       hypothetical companies that we do now know about.

       Once again, all of this information really constitutes an overwhelming burden and ultimately

                                                     7
the South Carolina rates by factoring in hypothetical companies. All Tennessee must do is
calculate what Claimants would owe if each company did the same amount of business in
South Carolina as it did in Tennessee. Claimants’ reliance on the so-called “immutable laws
of mathematics” proposes that we venture into a land of tax rate fantasy where South
Carolina’s assessments are based on numbers that are not grounded in the real world. As
Claimants’ counsel admitted, such calculations, to the extreme extent they think necessary,
are probably not possible.7 If it could be accomplished, such a trip into “Tax Wonderland”
would, incidently, have the effect of reducing Claimants’ tax liability somewhat.8 We
decline to crawl down Claimants’ rabbit hole. Tennessee’s retaliatory tax statute merely
requires a comparison of tax burdens using existing numbers.

        Claimants assert that the Department’s “arbitrary” application of the Tennessee
retaliatory tax violates the Equal Protection and Due Process Clauses of the United States
Constitution. Claimants view the Department’s computation of the South Carolina tax
burden as arbitrary because it does not take the reimbursements into account. Since we have
determined that the reimbursement should not be considered, the Department’s calculations
are correct and there is no constitutional violation.

       Finally, the Department argues that the Claims Commissioner abused his discretion
when he denied9 the State’s motion to strike paragraphs 13 through 18 of Jeffrey Brown’s
affidavit. These paragraphs address the South Carolina calculations that must be made in
order to compare South Carolina’s burden with Tennessee’s burden, such as the calculation
of assessments, the assessment rate, normalized premiums, and the use of fictional Tennessee
companies. Not surprisingly, Mr. Brown concludes that the way the Department calculated
the South Carolina burden is incorrect. The Department argues that the statements in these
paragraphs are legal conclusions and do not come from personal knowledge.

        We review the denial of the motion to strike under the abuse of discretion standard.


        results in the inability to actually determine the burden imposed by South Carolina unless
        you can obtain this information.

        Any Second Injury Fund burden or rate calculation that ignores this information is
        necessarily arbitrary . . . .
        7
            See footnote 6.
        8
         Thus, Claimants’ theory is consistent with the Duchess’s admittedly odd comment in Lewis
Carroll’s Alice in Wonderland, “The more there is of mine, the less there is of yours.”
        9
        The order of the commissioner regarding the State’s motion to strike does not appear in the
record. Both sides agree that the motion was denied. Neither side states why it was denied.

                                                    8
Biscan v. Brown, 160 S.W.3d 462, 468 (Tenn. 2005) (“We review the trial court’s decision
to admit or exclude evidence by an abuse of discretion standard.”); see also Pelts v. Int’l
Med. Servs. Corp., No. W2002-00388-COA-R3-CV, 2003 WL 22071462, at *8 (Tenn. Ct.
App. Aug. 28, 2003) (“Appellate review of a motion to strike is under the deferential ‘abuse
of discretion’ standard.”). An abuse of discretion occurs when a trial court “applies an
incorrect legal standard, or reaches a decision which is against logic or reasoning that causes
an injustice to the party complaining.” Eldridge v. Eldridge, 42 S.W.3d 82, 85 (Tenn. 2001)
(quotation and citation omitted). We find no abuse of discretion in the Commissioner’s
decision.

                                        C ONCLUSION

       We hold that the Department was correct in excluding the reimbursements from the
calculation of South Carolina’s burden for retaliatory tax purposes. Consequently, we
reverse the Claims Commission’s decision in this regard. We affirm the Claims
Commission’s decision to deny the Department’s motion to strike portions of the Brown
affidavit.

       The case is remanded for further proceedings consistent with this opinion. Costs of
appeal are assessed against the Claimants, for which execution may issue if necessary.




                                                              _________________________
                                                              ANDY D. BENNETT, JUDGE




                                              9
