Case Name: MILWAUKEE SAFEGUARD INSURANCE COMPANY et al., Appellees, v. STEPHEN F. SELCKE, Director of Insurance, et al., Appellants
Court: Illinois Supreme Court
Jurisdiction: Illinois
Decision Date: 1997-10-23
Citations: 179 Ill. 2d 94
Docket Number: No. 82047
Parties: MILWAUKEE SAFEGUARD INSURANCE COMPANY et al., Appellees, v. STEPHEN F. SELCKE, Director of Insurance, et al., Appellants.
Judges: 
Reporter: Illinois Reports, Second Series
Volume: 179
Pages: 94–121

Head Matter:
(No. 82047.
MILWAUKEE SAFEGUARD INSURANCE COMPANY et al., Appellees, v. STEPHEN F. SELCKE, Director of Insurance, et al., Appellants.
Opinion filed October 23, 1997.
Rehearing denied December 1, 1997.
BILANDIC, J„ joined by FREEMAN, C.J., and McMORROW, J., dissenting.
James E. Ryan, Attorney General, of Springfield (Barbara A. Preiner, Solicitor General, of Chicago, and Robert E. Wagner, Special Assistant Attorney General, of Springfield, of counsel), for appellants.
Richard Bromley, R. Lee Christie, Mary Kay McCalla Martire, Bruce W. Doughty, Tracy D. Williams and John T. Hildy, of Hopkins & Sutter, of Chicago, for appellees Milwaukee Guardian Insurance Co. et al.
Michael J. Hayes and John A. Simon, of Gardner, Carton & Douglas, of Chicago, for appellees American Economy Insurance Co. et al.
Sharon Doherty and Steven B. Belgrade, of Belgrade & O’Donnell, P.C., of Chicago, for appellees American Continental Insurance Co. et al.
David A. Hughes, of Horwood, Marcus .& Braun, of Chicago, for appellees Motors Insurance Corp. et al.
Cornelius E. McKnight, of Condon & Cook, of Chicago, for appellee Pharmacists Mutual Cos.
Michael T. Trueco and Jane W. Grover, of Stamos & Trueco, of Chicago, for appellee Royal Macabees Life Insurance Co.
William T. Barker and Mark L. Hanover, of Sonnenschein, Nath & Rosenthal, of Chicago, for amici curiae Allstate Insurance Co. et al.
Beth Anne Janicki, of Springfield, for amicus curiae Illinois Municipal League.

Opinion:
JUSTICE HEIPLE
delivered the opinion of the court:
Defendants, the Director of Insurance and the Treasurer of the State of Illinois, contend that the circuit court erred in declaring unconstitutional section 409 of the Illinois Insurance Code (215 ILCS 5/409 (West 1992)), which imposes an annual privilege tax on foreign or alien insurance companies. For the reasons that follow, we affirm the circuit court's judgment.
FACTUAL AND PROCEDURAL HISTORY
Plaintiffs are insurance companies doing business in Illinois but incorporated in other states. As foreign companies, plaintiffs are required by section 409 of the Illinois Insurance Code (the Code) to pay a tax equal to 2% of their net premium income "for the privilege of doing business in this State." 215 ILCS 5/409(1) (West 1992). Plaintiffs each paid the privilege tax under protest. See 30 ILCS 230/2a.1 (West 1992). They then brought numerous suits alleging that the privilege tax is facially unconstitutional under the uniformity clause of the Illinois Constitution of 1970 (Ill. Const. 1970, art. IX, § 2) and the equal protection clauses of the Illinois Constitution (Ill. Const. 1970, art. I, § 2) and the United States Constitution (U.S. Const., amend. XIV). Plaintiffs sought a refund of payments they had made under the privilege tax. The circuit court consolidated the suits.
Plaintiffs then successfully moved for partial summary judgment. In a memorandum decision, the circuit court declared that section 409 of the Code violates the uniformity clause of the Illinois Constitution (Ill. Const. 1970, art. IX, § 2) because it exempts domestic insurance companies who meet certain qualifications from payment of the privilege tax, but requires foreign companies who meet those same qualifications to pay the tax. The court held that this requirement violates the uniformity clause because it is not rationally related to any real and substantial difference between foreign and domestic insurance companies. The court also ruled that section 409 violates the equal protection clauses of the Illinois Constitution (Ill. Const. 1970, art. I, § 2) and the United States Constitution (U.S. Const., amend. XIV).
ANALYSIS
A trial court may render summary judgment if the record shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. 735 ILCS 5/2 — 1005(c) (West 1992). In an appeal from a grant of summáry judgment, we conduct a de novo review. Crum & Forster Managers Corp. v. Resolution Trust Corp., 156 Ill. 2d 384, 390 (1993).
Article IX, section 2, of the Illinois Constitution provides as follows:
"In any law classifying the subjects or objects of non-property taxes or fees, the classes shall be reasonable and the subjects and objects within each class shall be taxed uniformly. Exemptions, deductions, credits, refunds and other allowances shall be reasonable." Ill. Const. 1970, art. IX, § 2.
To survive scrutiny under the uniformity clause, a non-property tax classification must (1) be based on a real and substantial difference between the people taxed and those not taxed, and (2) bear some reasonable relationship to the object of the legislation or to public policy. Allegro Services, Ltd. v. Metropolitan Pier & Exposition Authority, 172 Ill. 2d 243, 250 (1996); Searle Pharmaceuticals, Inc. v. Department of Revenue, 117 Ill. 2d 454, 468 (1987).
The party attacking a tax classification is not required to negate every conceivable basis which might support it. Searle, 117 Ill. 2d at 468. Rather, upon a good-faith uniformity challenge, the taxing body bears the initial burden of producing a justification for the classifications. The party challenging the classification
then has the burden of persuading the court that the justification offered is unsupported by the facts or insufficient as a matter of law. Allegro Services, 172 Ill. 2d at 255; Geja's Cafe v. Metropolitan Pier & Exposition Authority, 153 Ill. 2d 239, 248-49 (1992).
Section 409 of the Code provides in pertinent part:
"(1) Every foreign or alien company doing an insurance business in this State, except fraternal benefit societies, shall, for the privilege of doing business in this State * pay to the Director for the State treasury a State tax equal to 2 per cent of the net taxable premium income *. Every domestic insurance company, except a fraternal benefit society, which fails to comply with all the requirements of subsection (4) of this Section must pay to the Director for payment into the State Treasury a State tax equal to 2 per cent of the net taxable premium income *
(4) A domestic company must pay the State tax in subsection (1) of this Section unless:
(a) it maintains its principal place of business in this State; and
(b) it maintains in this State officers and personnel knowledgeable of and responsible for the company's operation, books, records, administration, and annual statement; and
(c) it conducts in this State substantially all of its underwriting, policy issuing, and serving operations relating to Illinois policyholders and certificate holders; and
(d) it complies with the provisions of Section 133(2) of this Code." 215 ILCS 5/409 (West 1992).
Section 2 of the Code defines a "domestic company" as a company incorporated or organized under the laws of Illinois, and a "foreign company" as a company incorporated or organized under the laws of any state of the United States other than Illinois. 215 ILCS 5/2(f), (g) (West 1992).
The circuit court held that section 409 violates the uniformity clause because it allows domestic companies to avoid payment of the privilege tax if they meet the requirements contained in paragraph (4), but does not allow foreign companies to avoid payment of the tax even if they meet those same requirements.
Defendants offer the following justification for allowing domestic but not foreign companies to avoid payment of the privilege tax. Defendants assert that regulation of foreign insurance companies presents greater regulatory and administrative burdens than regulation of domestic companies. Specifically, defendants note that the Illinois Department of Insurance has certain regulatory powers over domestic companies which it does not have over foreign companies. For example, the Department is authorized to conduct the liquidation of insolvent domestic, but not foreign, companies. See 215 ILCS 5/188 (West 1992). The Department also has power to issue corrective orders to financially troubled domestic companies with regard to such activities as underwriting, marketing, and use of company assets, but it does not have such power over foreign companies. See 215 ILCS 5/186.1 (West 1992). Furthermore, the department's revocation of a domestic company's certificate of authority requires that company to cease operating, while such a revocation against a foreign company merely prohibits the company from doing business in Illinois. See 215 ILCS 5/119 (West 1992). Defendants contend that these regulatory powers which the Department exercises over domestic companies are crucial to guaranteeing the solvency of insurers doing business in Illinois. Defendants assert that the Department's lack of such powers over foreign companies constitutes a real and substantial difference between foreign and domestic companies.
We agree with defendants' contention that the disparity in the Department's powers over foreign and domestic insurance companies constitutes a real and substantial difference between those who pay the privilege tax and those who do not. Foreign insurance companies stand in a different relationship to the Illinois regulatory regime than do domestic companies. Even if a foreign company were to comply with the requirements of section 409(4), it would not be identically situated to a complying domestic company because the department would nevertheless lack the aforementioned regulatory powers over the foreign company.
Having determined that the classification of foreign and domestic insurance companies found in section 409 is based on a real and substantial difference between those companies who pay the privilege tax and those who do not, we must next consider whether that classification bears a reasonable relationship to the object of the legislation or to public policy. Searle Pharmaceuticals, 117 Ill. 2d at 468.
Although defendants assert that foreign insurance companies pose greater regulatory burdens than domestic companies, we note that, in addition to the privilege tax, foreign companies are required to pay all expenses incurred by the Illinois Department of Insurance in examining those companies, including lodging and travel expenses. See 215 ILCS 5/132.4(d), 408(3) (West 1992). The privilege tax is therefore obviously not intended to compensate the state for any additional expenses associated with regulating foreign insurance companies, since those companies are already required to pay such expenses.
Defendants contend, however, that taxing foreign insurance companies for the privilege of doing business in Illinois encourages those companies to incorporate in Illinois, either directly or through a subsidiary. This in turn advances the interests of Illinois policyholders, defendants argue, because the Department of Insurance possesses greater regulatory authority over Illinois companies. Defendants thus assert that imposing the privilege tax on foreign companies as an inducement to incorporate in Illinois bears a reasonable relationship to the legislative objective of enhancing the security of Illinois policyholders.
Before evaluating the merits of this argument, we first note the unique nature of the constitutional provision at issue in this case. Article IX, section 2, of the Illinois Constitution of 1970 was intended to serve as a specific limitation on the taxing power of the Illinois General Assembly. Searle, 117 Ill. 2d at 466-67. The provision "was not made to duplicate the limitation on the taxing power contained in the equal protection clause." Searle, 117 Ill. 2d at 467. Rather, the uniformity clause was meant to insure that "taxpayers * receive added protection in the state constitution" based on "standards of reasonableness which are more rigorous than those developed under the federal constitution." 7 Record of Proceedings, Sixth Illinois Constitutional Convention 2062, 2074 (Report of the Committee on Revenue and Finance, Section 1 — State Revenue Power).
Applying these more rigorous standards of reasonableness, we conclude that imposing the privilege tax on all foreign insurance companies does not bear a reasonable relationship to the object of the legislation or to public policy. As noted above, the privilege tax is not necessary to compensate the state for the additional costs of regulating foreign companies, since those companies are already required to pay such additional costs. Furthermore, while the Department of Insurance lacks certain regulatory powers over foreign companies which it enjoys over domestic companies, simply collecting a privilege tax from foreign companies does not bestow such powers on the Department. Foreign companies pose the same regulatory obstacles to the Department with or without the tax.
Although defendants assert that the privilege tax promotes the interests of Illinois policyholders by inducing foreign companies to incorporate in Illinois, we believe that such an approach to achieving regulatory control imposes an unreasonable burden upon foreign insurance companies under the uniformity clause. Foreign companies which meet all of the recordkeeping and business requirements of section 409(4), and which pay all expenses of their regulation by the Department of Insurance, must nevertheless pay the privilege tax. Assessing the tax does not bear a reasonable relationship to protecting the interests of Illinois policyholders because the tax is imposed on all foreign companies regardless of their financial strength or their level of compliance with the requirements of section 409(4). Furthermore, if the domestic regulatory powers lauded by defendants are as effective as asserted, an irresponsible foreign company has a strong incentive to escape such Illinois regulation indefinitely by merely continuing to pay the privilege tax and remaining incorporated outside of Illinois. In light of the rigorous standards mandated by the uniformity clause, we believe that imposing the privilege tax on foreign companies solely because they are not incorporated in Illinois is not a permissible use of the General Assembly's taxing power.
Defendants also contend that there are genuine issues of material fact in this case which preclude the entry of summary judgment. Specifically, defendants dispute the allegation contained in plaintiffs' motion for summary judgment that all foreign insurance companies are required to pay the privilege tax. .Defendants point out that many foreign companies have formed Illinois subsidiaries which qualify for the tax exemption afforded to domestic companies.
We do not believe that this issue constitutes a factual dispute precluding summary judgment. As the circuit court noted, Illinois subsidiaries are entitled to exemption from the tax because they are legally independent entities incorporated under the laws of Illinois. Companies incorporated under the laws of states other than Illinois, such as plaintiffs, must still pay the tax if they themselves wish to conduct business in Illinois. Thus, no genuine fact issue exists on this point.
Defendants also contend that the circuit court erred in failing to consider their own motion for summary judgment. The court's granting of plaintiffs' summary judgment motion, however, obviated the need to rule on defendants' motion. Furthermore, as defendants themselves acknowledge, the circuit court considered defendants' arguments in the course of ruling on plaintiffs' motion.
Finally, defendants contend that plaintiffs lack standing to challenge the privilege tax because plaintiffs have not demonstrated that they meet the qualifications outlined in section 409(4) allowing domestic companies to avoid payment of the tax. This contention mistakenly assumes that plaintiffs' objection to the privilege tax depends on the exemption granted to domestic companies in section 409(4). Plaintiffs' argument, however, is simply that the privilege tax is facially unconstitutional because it is imposed on all foreign insurance companies based solely on their state of incorporation. This facial challenge applies regardless of the operation of section 409(4). The fact that certain domestic companies are allowed to avoid payment of the tax under section 409(4) merely serves to illustrate the absence of a reasonable relationship between the taxing classification and the object of the legislation. See Searle, 117 Ill. 2d at 468.
For the reasons stated, we hold that section 409 of the Illinois Insurance Code (215 ILCS 5/409 (West 1992)) violates article IX, section 2, of the Illinois Constitution of 1970. Because of this holding, it is unnecessary for us to address the circuit court's ruling that section 409 also violates the equal protection clauses of the Illinois and United States Constitutions.
The cause is remanded to the circuit court for further proceedings consistent with this opinion.
Affirmed and remanded.
Plaintiffs also sought a declaration that if the privilege tax were declared unconstitutional, they would not be required to pay any additional retaliatory tax under section 444 of the Insurance Code (215 ILCS 5/444 (West 1992)). This issue was not included, however, in plaintiffs' motion for partial summary judgment, and the circuit court thus did not address it.
Section 133(2) requires that corporate books, records, documents, accounts and vouchers be preserved and kept available in Illinois. 215 ILCS 5/133(2) (West 1992).