Hanover Fire Insurance v. Carr

The constitutional objections to section 30 of the act to incorporate and govern fire, marine and inland navigation insurance companies doing business in this State presented for decision in this case have not been presented or decided in any of the cases involving the construction of said section heretofore considered by us. People v. Barrett, supra, was amandamus proceeding brought by the city of Chicago, an agency of the State which spends public funds raised by taxation, against the board of review of Cook county, a tax-assessing agency of the State. No insurance company or other tax-paying person was a party to that litigation, and therefore the question here presented could not have been presented in the proceeding. The validity of an act can only be questioned by a party to a suit whose interests will be adversely affected by a judgment or decree. Nowhere in the opinion is the question of uniformity discussed, and it is clear from reading the opinion that the question was not there considered by the court. In People v. Kent, supra, the action was a mandamus proceeding brought by the city of Chicago against the agent of nineteen foreign insurance companies, which were named. The constitutional questions presented in this case could have been presented in that case, but it is clear that the only questions presented by the parties and decided by the court were whether the tax involved was a property tax or excise tax and whether the agent could be compelled by mandamus to make the return required by section 30. The court held specifically that the tax involved was a tax on the business of insurance, which is authorized by the second division of section 1 of article 9 of our State constitution. It was said in the discussion of the question that this section of the constitution requires such tax to be fixed by general law uniform as to the class on which it operates, but whether the tax authorized by section 30 is a uniform tax was not considered, discussed or decided. In Walker v. City ofSpringfield, supra, the sole question before the court was the validity of a city ordinance imposing a tax based on premiums received by foreign insurance companies. The court expressly held that the tax was one referred to in the proviso to section 30, and that the tax mentioned in the first part of the section, which is the tax involved in the case at bar, was a different tax authorized for a dissimilar purpose. The only constitutional questions raised by the parties and considered by the court in the Walker case were that the tax imposed by the ordinance was double taxation and that it was not uniform. The court held that the tax there under consideration was a privilege tax or license fee and that it was not double taxation and that it was uniform on the class on which it operated. No reference was made to the business tax mentioned in the part of section 30 here under consideration, and such a tax not being involved in the proceeding, manifestly no ruling was made with respect to it. No case is cited in support of the opinion filed where the objection here presented for decision was considered or decided and we are of the opinion none can be found. It will appear from the discussion which follows that we do not agree with the construction given to section 30 of the act of 1869, nor with the construction given to other acts relating to the business of insurance which bear indirectly on the question before the court.

Our constitution recognizes a distinction between a tax on the insurance business, which is an occupation tax, and a tax on the corporation using the privilege of doing an insurance business, generally called a franchise tax. In 1919 the legislature passed an act in relation to the taxation of non-resident insurance companies. This act provides: "That each non-resident corporation, company and association licensed and admitted to do an insurance business in this State shall, except as herein otherwise provided, pay an annual State tax for the privilege of doing an insurance business in this State, equal to two percentum on the gross amount of premiums received during the preceding calendar year on contracts covering risks within this State. * * * The tax herein provided for shall be in lieu of all license fees or privilege or occupation taxes levied or assessed by any municipality in this State, and no municipality shall impose any license fee or privilege or occupation tax upon any such corporation, company or association, or any of its agents, for the privilege of doing an insurance business therein; but this act shall not be construed * * * to prevent the levy and collection of the tax authorized by section 30 of an act entitled, 'An act to incorporate and to govern fire, marine and inland navigation insurance companies doing business in the State of Illinois.' " (Smith's Stat. 1923, p. 1157.) Other sections of the act provide the method of computing the amount of the annual tax and of collecting it, and section 12 makes the penalty for failing to comply with the provisions of the act a revocation of the license to do an insurance business in this State. The title and the body of the act indicate clearly that this is a franchise tax collected from foreign insurance companies as compensation to the State for the privilege granted by it to the company to do an insurance business in this State. The provisions of section 1 of the act clearly indicate that it is to be the only franchise tax collected by the State or any of its agencies; but the right of local taxing authorities, granted by other statutes, to collect from such companies an occupation tax and a tax on the real and personal property located within the several taxing districts is specifically preserved.

No reference is made in the title of the act of 1869, of which section 30 is a part, to taxation, nor is there any provision in the act levying a tax or providing a penalty for the non-payment of a tax. The act is one "to incorporate and govern fire, marine and inland navigation insurance companies doing business in the State of Illinois." The first twenty-one sections of the act relate to the incorporation and government of domestic companies. Section 22 relates to the method by which foreign companies may be admitted to do business in the State and to the government of companies so admitted. Before there is granted to a foreign insurance company the right to do business in this State, section 22 requires (1) proof that a certain specified capital has been subscribed and paid, (2) the appointment of a resident attorney in fact and the filing of a certificate of such appointment, (3) the filing of a certified copy of its charter and a verified statement showing details of its organization, assets and liabilities, (4) the deposit with the insurance department of securities, and (5) the securing of a certificate of authority for its agents; and its right to continue to do business here depends upon the filing of an annual statement of its financial condition. Compliance with the provisions of section 30 is not made a prerequisite for admission to do an insurance business in this State nor to continue such a business. The section does not require any act on the part of the company at any time. It requires the agent of a foreign insurance company to return to the proper taxing authorities the amount of the net receipts of his agency. In order to prevent a circumvention of the legislative intent there was passed in 1893 an act providing a penalty for violation of section 30. This act makes it unlawful for any insurance company to do an insurance business in this State except through legally authorized resident agents and penalizes any company writing insurance otherwise than through resident agents possessing proper certificates of authority by revoking its license to do business in this State. (Smith's Stat. 1923, p. 1157.) This statute acts directly upon the foreign insurance companies, and a compliance with the act of 1893 is an additional prerequisite to the right of such companies to do an insurance business in this State. Section 30 acts directly upon the agent of foreign insurance companies, and if such agent fails or refuses to make the return required by the section he may be compelled by mandamus to make the return. (People v.Kent, supra.) Section 30 does not levy a tax on net receipts or on any other property of foreign insurance companies. It simply requires the agent to return to the proper taxing authorities the amount of the net receipts of his agency for the preceding year, so that the taxing authorities may enter this amount on the tax list for the purpose of determining the amount of tax to which the particular insurance business shall be subjected in the particular taxing district. The method of collecting the tax is not fixed by section 30 or any other section of the act of 1869.

That the tax on net receipts, to which the provisions of section 30 relate, is not a tax levied as compensation for the privilege of doing an insurance business in this State is no longer an open question. In City of Chicago v. James, 114 Ill. 479, and in Walker v. City of Springfield, supra, it was held that the portion of section 30 preceding the proviso relates to a tax on the business of insurance as distinguished from a fee for a license to exercise the privilege of conducting an insurance business. In People v. Kent, supra, it was held that this tax is a charge made upon the business of insurance for the purpose of compelling that business to bear its just proportion of the burdens of government. The amount of the net receipts of the business is used as a measure for determining the amount of the annual tax, and the tax is levied without regard to the value of the assets or physical property of the insurance company within the State and without regard to the number of policies issued or the value of the property insured. In People v. Cosmopolitan Fire Ins. Co. 246 Ill. 442, we held that the tax on net receipts collectible under section 30 is not a fee for a license to do an insurance business in this State. Section 30 does not assume to exact a fee as a prerequisite to the granting of authority to do an insurance business in this State, but it assumes that the authority to do such a business exists independently of its provisions. There is a clear distinction between the privilege to transact a business within the limits of a State and the actual operation of the business itself. The one looks to preparation for engaging in the business, and the other is the actual engagement in it. (Greene v. Kentenia Corp. 175 Ky. 661,194 S.W. 820.) It is just as clear that there is a distinction between a tax on a particular business and a tax on the person exercising the privilege of engaging in that business. The payment of the latter is a condition precedent to the right to engage in the business, while the former is merely a charge on the business for the purpose of raising revenue for the maintenance of government. The right of a foreign corporation to do business in this State is a privilege, and the tax levied against the corporation as compensation for the right to enter or remain in the State is what is commonly called a privilege or franchise tax. It may be imposed for the grant of a privilege which is never exercised by the licensee. On the other hand, a tax on the business of the corporation is a charge upon the result of exercising the privilege when exercised. This distinction between a business tax and a privilege tax was recognized and applied inNebraska Telephone Co. v. City of Lincoln, 82 Neb. 59,117 N.W. 284.

A State has the right to prohibit a foreign insurance company from exercising any part or all of its charter powers within its borders, to impose such terms and conditions upon its right to do business in the State as it may see fit, or to entirely exclude it from the State. (Alpena Portland Cement Co. v.Jenkins Reynolds Co. 244 Ill. 354; Hartford Fire Ins. Co. v.City of Peoria, 156 id. 420.) The privilege of doing an insurance business in this State accorded to a foreign corporation being distinct and different from the privilege accorded to a domestic corporation, the legislature, in fixing the tax on the privilege of doing business, has the power to place foreign corporations in one class and domestic corporations in another, (Hughes v. City of Cairo, 92 Ill. 339, ) and also to subdivide foreign corporations into different classes. (Home Ins. Co. v. Swigert, 104 Ill. 653.) On the other hand, in exercising its power to tax a business, the legislature is specifically required by section 1 of article 9 of our State constitution to tax "by general law, uniform as to the class upon which it operates," and under the fourteenth amendment to the Federal constitution the State cannot "deny to any person within its jurisdiction the equal protection of the laws." These provisions apply to a foreign corporation which has complied with all the conditions of admission prescribed by the State and which has been granted the privilege of engaging in business within the State. The law is settled that after a foreign corporation gets into the State its burdens shall be no more onerous than those of domestic corporations for exercising the same character of privileges. (8 Fletcher's Cyc. of Corporations, sec. 5755; Southern Railway Co. v.Greene, 216 U.S. 400, 30 Sup. Ct. 287; Security Savings andLoan Ass'n v. Elbert, 153 Ind. 198, 54 N.E. 753.) The question of making classifications for the purpose of enacting laws concerning matters within its jurisdiction is primarily for the legislative department, and it can become a judicial question only when the action of the law-making body is clearly unreasonable, arbitrary and discriminatory. But such classifications must rest upon some ground of difference having a fair and substantial relation to the object of the legislation, so that all persons similarly circumstanced shall be treated alike. (McGrath v. City of Chicago, 309 Ill. 515;Royster Guano Co. v. Commonwealth of Virginia, 253 U.S. 412,40 Sup. Ct. 560.) The power of taxation is an essential and inherent attribute of sovereignty, belonging, as a matter of right, to every independent government. Therefore the legislature, subject to constitutional restrictions, may tax all property or only certain kinds of property, all occupations or only certain occupations, and all privileges or only certain privileges. Constitutional provisions relating to the power of taxation do not operate as grants of the power of taxation to the government but instead merely constitute limitations upon a power which would otherwise be practically without limit. The limitations fixed by our State constitution are (1) that all taxes levied on property shall be by valuation, and (2) that all excise taxes levied (a) on business or (b) on persons using a privilege shall be by general law, uniform as to the class upon which it operates. The legislature may classify businesses for the purpose of taxation, but when the classification is made, all, which by the existence of the facts on which the classification is made fall within it, must be subjected to the tax imposed. Pullman Palace Car Co. v. State, 64Texas, 274; 53 Am. Rep. 758; Hager v. Walker, 128 Ky. I, 107 S.W. 254; Mutual Reserve Fund Life Ass'n v. Augusta,109 Ga. 73, 35 S.E. 71.

The Hanover Fire Insurance Company derives its receipts from premiums paid on policies issued on the following among other classes of insurance: (1) Fire, (2) lightning, (3) tornado, (4) navigation and transportation, (5) fire apparatus and damage by same, (6) crop and livestock, (7) explosion, and (8) automobile. Domestic insurance companies derive their receipts from identically the same classes of insurance business. Casualty companies, both domestic and foreign, write insurance covering four of the same classes, namely, fire apparatus, crop and livestock, explosion and automobile. Unincorporated entities permitted by the laws of this State to do an insurance business under regulations prescribed by law are engaged in the same insurance business as the incorporated companies mentioned in section 30. In transacting the business of insurance these four groups of persons or corporations are in direct competition with each other in this State, and under the authorities cited all of them are entitled to the equal protection of the laws of this State. Every tax levied on the business of insurance, under the limitation fixed by the second division of section 1 of article 9 of our constitution, must be "by general law, uniform as to the class upon which it operates." An occupation tax on the business of insurance, to be valid, must operate alike upon all persons or corporations engaged in the same class of insurance business. Section 30, operating upon insurance companies incorporated by the authority of other States or governments and licensed to do business in this State, and not upon insurance companies incorporated under the laws of this State and other companies and persons doing identically the same class of insurance business, contravenes the Federal and State constitutions and is void.