Mercury Casualty Co. v. State Board of Equalization

Opinion

KINGSLEY, J.

Plaintiff appeals from an adverse judgment in an action involving the validity of a tax. We reverse.

I

Plaintiff is an insurance company, doing business in California, writing only so-called “casualty” insurance. As such', it is taxable by the State of California at a rate based on the “gross premiums” received by it from its business in this state. Plaintiff offers to prospective insureds the option of either paying, in advance, in cash, the annual premiums on policies written by it, or of paying part of such premiums in cash and partly by an installment note for the

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balance. In the latter case, the insured is charged an amount calculated to cover the increased overhead to plaintiff for handling the notes and collecting them, plus a sum equal to interest at the going rate on the principal of the notes.

Plaintiff treats the face of the note as part of the “gross premium” and pays the “gross income” tax thereon; it also treats the “service charge” as part of the premium and pays the tax thereon. It regards the interest charged as not being part of the “gross premium” and, in this litigation, resists the board’s position that it is a third element of the “gross premium.” We agree with the plaintiff.

The term “gross premium” has an accepted meaning in this area. It consists of two elements: (1) a sum calculated to provide the insurer with a reserve adequate to pay claims when and as they accrue (“net premium”); and (2) a sum (“the load”) calculated to cover the day-to-day operating costs of the insurer, including sales commissions. The sum of those elements form the “gross” premium on which the tax is based, Plaintiff has, correctly, treated the “service charge” on the notes as part of the “load” above referred to.

However, the state tax law on insurers is limited to the tax on “gross premiums” (although all corporate income is taxable by the federal government). Thus it is admitted that any income to plaintiff from investments is not includable in the state’s tax base. It follows that, in those cases where an insured pays the entire advance premium in cash, plaintiff could, and would, invest the “nonload” part of the premium and earn a nontaxable income therefrom. It is the position of plaintiff that, in computing the gross premium it has satisfied its full obligation by its treatment of the “service charge” and the face value of the note as part of the “gross premium” and that the interest it collects is no more than income from an investment—i.e., a loan to the insured. We agree.