On September 24, 2020, the Texas Court of Appeals upheld the Texas insurance premium tax on insurance policies for bales of cotton temporarily stored at Texas warehouses.  The court rejected the taxpayer’s arguments that: (1) the tax violated the Commerce Clause and the Import-Export Clause of the United States Constitution; and (2) the insurance at issue was nontaxable “export property,” rather than taxable surplus lines insurance.

First, the court dismissed the Commerce Clause challenge because the McCarran-Ferguson Act removed any restrictions on a state’s authority to “regulate and tax” the insurance business. Further, the assessed tax was not unconstitutional because the taxpayer was unable to show that the tax failed any of the criteria required under Complete Auto Transit, Inc. v. Brady and Japan Line, Ltd. v. County of Los Angeles.

Second, relying on the test articulated by the U.S. Supreme Court in Michelin Tire Corp. v. Wages, the court dismissed the Import-Export Clause challenge because the tax did not “usurp the federal government’s authority to regulate foreign relations, deprive the federal government of import revenues, or disturb harmony by allowing coastal states to tax goods coming through their ports.”  Ultimately, the court concluded that: (1) the tax applies equally to insurance covering goods that are exported or domestically consumed and does not create a special tariff that favors or disfavors exports to certain countries; (2) the taxpayer did not allege that the tax deprives the federal government of import revenues; and (3) the tax did not violate the foreign Commerce Clause test (which is equivalent to the Import-Export Clause test’s third prong).  In support of its conclusions, the court found relevant that the taxpayer is a Texas corporation, the insurance policies were negotiated in Texas, the cotton was stored in Texas warehouses, and the premiums were paid by the Texas warehouses. The court further reasoned that the tax did not create a substantial risk of international multiple taxation because the taxpayer did not provide a basis for another state to impose an insurance premium tax; and, the tax did not prevent the federal government from speaking with one voice when regulating commercial relations with foreign governments.

Finally, the court rejected the taxpayer’s argument that the premiums were not subject to the tax because the policies should have been characterized as marine cotton insurance (a subset of export property) instead of taxable surplus lines insurance. While a July 2011 statutory amendment required that for the tax to apply Texas must be the insured’s home state, all but two of the policies were effective before that date.  As a result, the tax was due as long as the insurance was written on property or risks located in Texas.  Therefore, the court held that the tax satisfied the post-amendment requirement because each policy was written, procured, or received at a Texas office and insured cotton stored in Texas warehouses. Moreover, the court determined it was also irrelevant whether the insurance was marine cotton insurance; as that determination matters only for whether the insurance is subject to rate regulation, not whether it is subject to the premium tax.

Rekerdres & Sons Insurance Agency, Inc. v. Hegar, No. D-1-GN-16-006194 (Tex. Ct. App. Sept. 24, 2020).