Johnson & Johnson Successful on Appeal of New Jersey Tax Court Decision

Johnson & Johnson (J&J) had paid New Jersey independent procurement tax on the full amount of premium paid (i.e., premium relating to both New Jersey risk and non–New Jersey risk) to its Vermont captive, Middlesex Assurance Company Limited, since enactment of the Nonadmitted and Reinsurance Reform Act (NRRA). This was based on J&J's determination that New Jersey was the home state on its policies. Prior to the enactment of the NRRA, J&J paid independent procurement tax only on the portion of the premium related to New Jersey risk, based on New Jersey legislation.

New Jersey, however, passed legislation adopting the NRRA, but, notwithstanding that the NRRA applies to both surplus lines tax and independent procurement tax, the New Jersey law only referred to the surplus lines tax.

The New Jersey Tax Court that first heard the case concluded that the legislature "intended" to include both independent procurement and surplus lines taxes, but the New Jersey Superior Court, Appellate Division disagreed, noting the New Jersey statute adopting the NRRA did not refer to the independent procurement tax and that there was no legislative history that supported the position to include independent procurement tax.

As such, the court concluded that J&J was only subject to tax based on the law relating to independent procurements that was in effect prior to the New Jersey legislature's adoption of the NRRA, and, accordingly, found J&J liable only for independent procurement tax on New Jersey risk.

Look out for the December edition of Captive Insurance Company Reports (CICR) for a more in-depth look at the Johnson & Johnson appeal.