Connecticut General Life Insurance Company v. Johnson/Opinion of the Court
Appellant is a Connecticut corporation, admitted to do an insurance business in California. In addition to its business conducted within that state it has entered into contracts with other insurance corporations likewise licensed to do business in California, reinsuring them against loss on policies of life insurance effected by them in California and issued to residents there. These reinsurance contracts were entered into in Connecticut where the premiums were paid and where the losses, if any, were payable. The question for decision is whether a tax laid by California on the receipt by appellant in Connecticut of the reinsurance premiums during the years 1930 and 1931, infringes the due process clause of the Fourteenth Amendment.

In suits brought in the state court by appellant against respondent, state treasurer, to recover the taxes paid, the Supreme Court of California sustained demurrers to the complaints and gave judgments for the respondent. The cases, having been consolidated, come here on a single appeal under section 237(a) of the Judicial Code, 28 U.S.C. § 344(a), 28 U.S.C.A. § 344(a).

Section 14 of article 13 of the California Constitution, as supplemented by Act of March 5, 1921 (Stats.1921, c. 22, pp. 20, 21, Political Code, § 3664b), fixing the rate of tax, lays upon every insurance company doing business within the state an annual tax of 2.6 per cent. 'upon the amount of the gross premiums received upon its business done in this state, less return preiums and reinsurance in companies or associations authorized to do business in this state.' The Supreme Court of California has declared that the constitutional provision imposes 'a franchise tax exacted for the privilege of doing business' in the state. Consolidated Title Securities Co. v. Hopkins, 1 Cal.2d 414, 419, 35 P.2d 320, 323; compare Carpenter v. People's mutual Life Insurance Co., Cal.Sup. 74 P.2d 708.

Although in terms the 'gross premiums received upon * * * business done in this state,' less the specified deductions, are made the measure of the tax, the state court in this, as in an earlier case, Connecticut General Life Insurance Co. v. Johnson, 3 Cal.2d 83, 43 P.2d 278 (appeal dismissed for want of a properly presented federal question, 296 U.S. 535, 56 S.Ct. 103, 80 L.Ed. 380), has held that the measure includes the premiums on appellant's reinsurance policies effected and payable in Connecticut. In this case it has declared also that the policy of the state, expressed in the constitutional provision, is 'to avoid double taxation without any loss of revenue to the stae.' To accomplish that end the deduction of reinsurance premiums paid to companies authorized to do business within the state is allowed, it is said, on the theory that the benefit of the deduction will be passed on to the reinsurer who, being authorized to do business within the state, may be taxed on the reinsurance premiums as a means of equalizing the tax and as an offset against the benefit of the deduction which he ultimately enjoys.

No contention is made that appellant has consented to the tax imposed as a condition of the granted privilege to do business within the state. Nor could it be, for it appears that appellant had conducted its business in California under state license for many years before the taxable years in question and before the taxing act was construed by the highest court of the state, in Connecticut General Life Insurance Co. v. Johnson, supra, to apply to premiums received in Connecticut from reinsurance contracts effected there. A corporation which is allowed to come into a state and there carry on its business may claim, as an individual may claim, the protection of the Fourteenth Amendment against a subsequent application to it of state law. Hanover Fire Insurance Co. v. Harding, 272 U.S. 494, 47 S.Ct. 179, 71 L.Ed. 372, 49 A.L.R. 713, compare Kentucky Finance Corporation v. Paramount Auto Exchange Corporation, 262 U.S. 544, 43 S.Ct. 636, 67 L.Ed. 1112.

It is said that the state could have lawfully accomplished its purpose if the statute had further stipulated that the deduction should be allowed only in those cases where the reinsurance is effected in the state or the reinsurance premiums paid there. But as the state has placed no such limitation on the allowance of deductions, the end sought can be attained only if the receipt by appellant of the reinsurance premiums paid in Connecticut upon the Connecticut policies is within the reach of California's taxing power. Appellee argues that it is, because the reinsurance transactions are so related to business carried on by appellant in California as to be a part of it and properly included in the measure of the tax; and because, in any case, no injustice is done to appellant since the effect of the statute as construed is to redistribute the tax, which the state might have exacted from the original insurers but did not, by assessing it upon appellant to the extent to which it has received the benefit of the allowed deductions.

But the limits of the state's legislative jurisdiction to tax, prescribed by the Fourteenth Amendment, are to be ascertained by reference to the incidence of the tax upon its objects rather than the ultimate thrust of the economic benefits and burdens of transactions within the state. As a matter of convenience and certainty, and to secure a practically just operation of the constitutional prohibition, we look to the state power to control the objects of the tax as marking the boundaries of the power to lay it. Hence it is that a state which controls the property and activities within its boundaries of a foreign corporation admitted to do business there may tax them. But the due process clause denies to the state power to tax or regulate the corporation's property and activities elsewhere. Union Refrigerator Transit Co. v. Kentucky, 199 U.S. 194, 26 S.Ct. 36, 50 L.Ed. 150, 4 Ann.Cas. 493; New York Life Insurance Co. v. Head, 234 U.S. 149, 34 S.Ct. 879, 58 L.Ed. 1259; New York Life Insurance Co. v. Dodge, 246 U.S. 357, 38 S.Ct. 337, 62 L.Ed. 772, ann.Cas.1918E, 593; St. Louis Cotton Compress Co. v. Arkansas, 260 U.S. 346, 43 S.Ct. 125, 67 L.Ed. 297; Compania General de Tabacos v. Collector, 275 U.S. 87, 48 S.Ct. 100, 72 L.Ed. 177; Home Insurance Co. v. Dick, 281 U.S. 397, 50 S.Ct. 338, 74 L.Ed. 926, 74 A.L.R. 701; Hartford Accident & Indemnity Co. v. Delta & Pine Land Co., 292 U.S. 143, 54 S.Ct. 634, 78 L.Ed. 1178, 92 A.L.R. 928; Boseman v. Connecticut General Life Ins. Co., 301 U.S. 196, 57 S.Ct. 686, 81 L.Ed. 1036, 110 A.L.R. 732; People ex rel. Sea Insurance Co. v. Graves, 274 N.Y. 312, 8 N.E.2d 872; compare Provident Savings Life Assurance Society v. Kentucky, 239 U.S. 103, 36 S.Ct. 34, 60 L.Ed. 167, L.R.A.1916C, 572. It follows that such a tax, otherwise unconstitutional, is not converted into a valid exaction merely because the corporation enjoys outside the state economic benefits from transactions within it, which the state might but does not tax, or because the state might tax the transactions which the corporation carries on outside the state if it were induced to carry them on within.

Appellant, by its reinsurance contracts, undertook only to indemnify the insured companies against loss upon their policies written in California. The reinsurance involved no transactions or relationship between appellant and those originally insured, and called for no act in California. Connecticut General Life, insurance Co. v. Johnson, supra, 3 Cal.2d 83, 87, 43 P.2d 278; compare Morris & Co. v. Skandinavia Insurance Co., 279 U.S. 405, 408, 49 S.Ct. 360, 361, 73 L.Ed. 762. Apart from the facts that appellant was privileged to do business in California, and that the risks reinsured were originally insured against in that state by companies also authorized to do business there, California had no relationship to appellant or to the reinsurance contracts. No act in the course of their formation, performance, or discharge, took place there. The performance of those acts was not dependent upon any privilege or authority granted by it, and California laws afforded to them no protection.

The grant by the state of the privilege of doing business there and its consequent authority to tax the privilege do not withdraw from the protection of the due process clause the privilege, which California does not grant, of doing business elsewhere. Western Union Telegraph Co. v. Kansas, 216 U.S. 1, 30 S.Ct. 190, 54 L.Ed. 355; International Paper Co. v. Massachusetts, 246 U.S. 135, 38 S.Ct. 292, 62 L.Ed. 624, Ann.Cas.1918C, 617; Louisville & Jeffersonville Ferry Co. v. Kentucky, 188 U.S. 385, 398, 23 S.Ct. 463, 47 L.Ed. 513. Even though a tax on the privilege of doing business within the state in insuring residents and risks within it may be measured by the premiums collected, including those mailed to the home office without the state, Equitable Life Assurance Society v. Pennsylvania, 238 U.S. 143, 35 S.Ct. 829, 59 L.Ed. 1239, and though the writing of policies without the state insuring residents and risks within it is taxable because within the granted privilege, Compania General de Tabacos v. Collector, supra, 275 U.S. 87, 98, 48 S.Ct. 100, 104, 72 L.Ed. 177, there is no basis for saying that reinsurance which does not run to the original insured, and which from its inception to its termination involves no action taken within California, even the settlement and adjustment of claims, is embraced in any privilege granted by that state. Provident Savings Life Assurance Society v. Kentucky, supra, 239 U.S. 103, 112, 36 S.Ct. 34, 60 L.Ed. 167, L.R.A.1916C, 572; Compania General de Tabacos v. Collector, supra, 275 U.S. 87, 96, 48 S.Ct. 100, 103, 72 L.Ed. 177; compare Equitable Life Assurance Society v. Pennsylvania, supra, 238 U.S. 143, 147, 35 S.Ct. 829, 59 L.Ed. 1239; Compania General de Tabacos v. Collector, supra, 275 U.S. 87, 98, 48 S.Ct. 100, 104, 72 L.Ed. 177. All that appellant did in effecting the reinsurance was done without the state and for its transaction no privilege or license by California was needful. The tax cannot be sustained either as laid on property, business done, or transactions carried on within the state, or as a tax on a privilege granted by the state.

Reversed.

Mr. Justice CARDOZO took no part in the consideration or decision of this case.