By Huy “Mike” Le and Andrew Appleby

The New York State Tax Appeals Tribunal (Tribunal) held that the Department’s assessment of two non-admitted German insurance companies violated the United States-Germany Tax Treaty’s anti-discrimination clause and the US Constitution’s Foreign Commerce Clause.

The alien non-admitted non-life insurance companies had no premiums from sources in the United States. The insurance companies’ activities in New York and the United States were limited to holding interests in limited partnerships that owned real estate in New York and throughout the United States. The insurance companies did not challenge whether they had nexus with New York. An Administrative Law Judge (“ALJ”) previously determined that the insurance companies, as non-admitted non-life insurance corporations, were properly subject to insurance franchise tax, not premium tax. The ALJ also affirmed the Department’s alternative allocation method, which applied an entity theory and imposed tax only on the distributive share from the partnerships using the partnerships’ allocation factors. See previous coverage here. 

The Tribunal affirmed the ALJ’s reasoning. However, the Tribunal ultimately reversed the ALJ’s final conclusion based on an argument that the insurance companies had not raised at the ALJ level. The Tribunal concluded that the Department’s assessment discriminated against the insurance companies based on their status as alien insurers, which violated the United States-Germany Tax Treaty and the Foreign Commerce Clause. Although treaties generally do not apply to state and local taxes, the anti-discrimination provision generally does apply. 

The Tribunal compared the alien insurance companies’ treatment to the treatment of an otherwise similarly situated domestic, non-New York insurance company. The Tribunal determined that the Department’s assessment imposed a more burdensome tax treatment on the alien insurance companies. A crucial fact in these cases was that the alien insurance companies had zero premiums in the United States, and zero United States effectively connected income from premiums. 

The Tribunal also briefly noted that, although it did not have to decide the issue, the Department’s assessment would impede the federal government from “speaking with one voice” in regulating foreign trade, which would violate the Foreign Commerce Clause. In re Bayerische Beamtenkranekenkasse AG, DTA No. 824762 (N.Y. Tax App. Trib. Sept. 11, 2017); In re Landschaftliche Brandkasse Hannover, DTA No. 825517 (N.Y. Tax App. Trib. Sept. 11, 2017).