A tax court judge in New Jersey has handed Johnson & Johnson (J&J), and likely other New Jersey-based businesses that operate captive insurers, a significant loss in an opinion interpreting the federal Nonadmitted and Reinsurance Reform Act (NRRA) and related changes to New Jersey law regarding taxes on insurance premiums.

For the last 10 years, New Jersey has imposed what the court called a self-procurement tax on insurance premiums paid to captive insurers, and J&J, which has its headquarters in New Jersey and pays significant premiums to a captive insurer, pays such taxes. Initially, those taxes were based only on the premiums paid for risks located in New Jersey. After the passage of the NRRA and certain related changes to New Jersey law, the New Jersey Department of Banking and Insurance took the position that J&J must pay taxes to New Jersey on all the premiums it paid its captive insurer for U.S. risks. J&J filed a claim challenging this interpretation and seeking a refund of almost $56 million, alleging that both the NRRA and the changes to New Jersey law applied only to surplus lines business, and not to self-procured insurance.

The court disagreed. The NRRA provides that "no state other than the home state of an insured may require any premium tax payment for nonadmitted insurance." This meant that New Jersey, which was previously able to tax premiums paid by out of state companies to nonadmitted insurers for risks located in New Jersey, could now only tax such premiums paid by businesses which New Jersey was their home state. The court rejected J&J's argument, which was largely based on legislative history, that "nonadmitted insurance" as used in the NRRA does not include captive insurers. The court agreed with J&J, however, that the language of the changes to New Jersey law made it appear that only surplus lines insurance was covered by New Jersey's adoption of the home state rule. And yet, after balancing what it called "the precise language" of the statute "against its true legislative intent," the court found itself "convinced that the New Jersey Legislature intended to include self-procured insurance in the adoption of the Home State Rule because it intended to include all nonadmitted insurers, and not to limit it to only surplus lines." This legislative intent thus trumped the "precise language," and the court found that J&J must pay the tax on all premiums for risks located in the United States.

Johnson & Johnson v. Dir., Div. of Taxation & Comm'r, Docket No. 13502-2016 (June 15, 2018)

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