WASHINGTON -- The Supreme Court yesterday declined to review the legality of an indirect Texas tax on self-insured employee benefit plans, leaving intact a federal appeals court ruling that the state must refund any money collected under the levy.
The case is one of a slew presented to the court this term that could affect state finances nationwide.
In striking down the Texas tax in May, the U.S. Court of Appeals for the Fifth Circuit ruled that the levy is preempted by federal law and must be refunded.
The fifth circuit's ruling had been set aside temporarily under a stay granted in August by Supreme Court Justice Antonin Scalia, who at the time said it was "probable" the high court would vote to hear arguments in the case and added there was "a substantial possibility" the lower court ruling would be overturned.
The justices offered no explanation for their decision not to review the case, which arose in 1988 after Texas began enforcing its Administrative Services TAx Act.
The law levies a tax on any fees received for administrative services performed by licensed insurance companies and others under administrative services contracts on behalf of health benefit plans.
La Quinta Motor Inns Inc., as well as E-Systems Inc. Group Hospital Medical & Surgical Insurance Plan, challenged the tax, saying it was preempted by the federal Employee Retirement Income Security Act, which prohibits states from regulating employee benefit plans.
Texas officials argued the plaintiffs should not be allowed to bring suit in federal court because of the federal Tax Injunction Act, which requires, in general, that challenges to state taxes be brought in state courts.
A federal district court, however, sided with La Quinta and E-Systems, ruling that the federal retirement law supersedes the injunction law. The court then determined that taxing the providers of administrative services ultimately would increase costs or reduce benefits for those covered by benefit plans, an outcome in conflict with the employment retirement law. The fifth circuit concurred.
In other action yesterday, the Supreme Court also declined to review an Arkansas Supreme Court ruling upholding the constitutionality of the state's gross receipts tax as applied to telephone services.
In the case, Bosworth v. Leathers, the Arkansas court upheld the tax even though the state excludes wide area telecommunications service, better known as WATS, while subjecting regular interstate long-distance services to the tax. The plaintiffs challenged the WATS exemption as a violation of the Constitution's equal protection clause.
Justice Sandra Day O'Connor did not take any part in the court's decision not to hear arguments in the case. The court did not say why.
Though the court yesterday declined to review the Texas and Arkansas tax cases, producing mixed results for state coffers, the court last Wednesday agreed to decide the constitutionality of taxes in New Jersey and Kansas. Because both states had won before lower courts, the Supreme Court's decision to hear the disputes signals the justices may be willing to draw boundaries on permissible areas for state taxation.
In the New Jersey case, Allied-Signal Inc. v. Division of Taxation, the court will decide whether states can tax the income earned by out-of-state corporations on their investments in other corporations.
Allied, a successor to the Bendix Corp., a Michigan-based manufacturer, sold a minority investment in a metal-mining firm unrelated to its business operations for a capital gain of roughly $211.5 million.
New Jersey's corporate business tax measures a firm's entire net income, regardless of its connection to the state. Consequently, the state tax division concluded that Allied's sale was subject to the tax. The New Jersey Tax Court, the Appellate Division of the Supreme Court of New Jersey, and the New Jersey Supreme Court agreed with the tax division.
In the other case, Barker v. Kansas, the court will decide whether states can tax the retirement benefits of federal military retirees while exempting from taxation benefits paid to retired state and local employees.
The case is similar to Davis v. Michigan, a dispute the high court decided in 1989 by ruling that states cannot impose higher taxes on the retirement benefits of former federal workers than they do on former state employees.
Despite the Davis ruling, a Kansas district court and the state supreme court both ruled the tax constitutional.