Opinion ID: 2187568
Heading Depth: 1
Heading Rank: 2

Heading: tax refunds

Text: Our next inquiry is whether or not the district court erred in denying the foreign insurance companies' claims for refunds of the gross premiums taxes paid in the past. In denying the claims for refunds, the district court relied on principles of sovereign immunity, voluntary payment, laches, and windfall profit. The court also applied the Sunburst Doctrine, giving the ruling pure prospective effect as of the date of the recording of the judgment. We need not address all of the bases given for the district court's denial of tax refunds, because we agree that under the circumstances, equitable considerations favor giving this decision pure prospective effect. Prospective application of judicial rulings, or the Sunburst Doctrine [ Great Northern Railway Co. v. Sunburst Oil & Refining Co., 287 U.S. 358, 53 S.Ct. 145, 77 L.Ed. 360 (1932)], has been utilized by this court in various forms on several occasions. We have applied our rulings to future cases only, excluding the case before us [ Soo Line Railroad Co. v. State, 286 N.W.2d 459 (N.D.1979); Walker v. Omdahl, 242 N.W.2d 649 (N.D.1976)], and to future cases as well as the case before us [ Kitto v. Minot Park District, 224 N.W.2d 795 (N.D.1974); Johnson v. Hassett, 217 N.W.2d 771 (N.D.1974)]. The United States Supreme Court has on many occasions held civil legislation unconstitutional and given only prospective effect to its holding in order to avoid the imposition of undue administrative or financial burdens on agencies of government. E.g., Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982); Lemon v. Kurtzman (Lemon II), 411 U.S. 192, 93 S.Ct. 1463, 36 L.Ed.2d 151 (1973); City of Phoenix v. Kolodziejski, 399 U.S. 204, 90 S.Ct. 1990, 26 L.Ed.2d 523 (1970); Cipriano v. City of Houma, 395 U.S. 701, 89 S.Ct. 1897, 23 L.Ed.2d 647 (1969). The Supreme Court's decision in Lemon II, supra, is instructive. In Lemon v. Kurtzman (Lemon I), 403 U.S. 602, 91 S.Ct. 2105, 29 L.Ed.2d 745 (1971), the Court held that a Pennsylvania statute under which the state reimbursed private sectarian schools for secular educational services was unconstitutional. After Lemon I was decided, an issue arose regarding the propriety of the state's payment for services rendered by the institutions before the date of the Supreme Court's opinion declaring the law unconstitutional. The Federal District Court enjoined payments for services rendered after the Supreme Court's decision in Lemon I, but permitted the state to pay $24,000,000 to the schools for services provided before the decision in Lemon I was rendered. The Supreme Court affirmed, stating: The process of reconciling the constitutional interests reflected in a new rule of law with reliance interests founded upon the old is `among the most difficult of those which have engaged the attention of courts, state and federal...., Chicot County Drainage Dist. v. Baxter State Bank, 308 U.S. 371, 374, 60 S.Ct. 317, 319, 84 L.Ed. 329 (1940). Consequently, our holdings in recent years have emphasized that the effect of a given constitutional ruling on prior conduct `is subject to no set principle of absolute retroactive invalidity but depends upon a consideration of particular relations ... and particular conduct ... of rights claimed to have become vested, of status, of prior determinations deemed to have finality; and of public policy in the light of the nature both of the statute and of its previous application.' Linkletter [v. Walker, 381 U.S. 618, 627, 85 S.Ct. 1731, 1736, 14 L.Ed.2d 601 (1965) ], quoting from Chicot County Drainage Dist., supra, 308 U.S., at 374, 60 S.Ct., at 319.... [S]tatutory or even judge-made rules of law are hard facts on which people must rely in making decisions and in shaping their conduct. This fact of legal life underpins our modern decisions recognizing a doctrine of nonretroactivity. Appellants offer no persuasive reason for confining the modern approach to those constitutional cases involving criminal procedure or municipal bonds, and we ourselves perceive none. Lemon II, supra, 411 U.S. at 198-199, 93 S.Ct. at 1468, 36 L.Ed.2d at 160. The Court stated that the problem essentially related to the appropriate scope of federal equitable remedies, a problem arising from enforcement of a state statute during the period before it had been declared unconstitutional, and that equitable remedies are a special blend of what is necessary, what is fair, and what is workable. Lemon II, supra, 411 U.S. at 199, 200, 93 S.Ct. at 1469, 36 L.Ed.2d at 161 [Footnote omitted]. The Court noted that reliance interests weigh heavily in the shaping of an appropriate equitable remedy [ Lemon II, supra, 411 U.S. at 203, 93 S.Ct. at 1471, 36 L.Ed.2d at 163], and added: Appellants ask, in effect, that we hold those charged with executing state legislative directives to the peril of having their arrangements unraveled if they act before there has been an authoritative judicial determination that the governing legislation is constitutional. Appellants would have state officials stay their hands until newly enacted state programs are `ratified' by the federal courts, or risk draconian, retrospective decrees should the legislation fall. In our view, appellants' position could seriously undermine the initiative of state legislators and executive officials alike. Until judges say otherwise, state officers ... have the power to carry forward the directives of the state legislature. Those officials may, in some circumstances, elect to defer acting until an authoritative judicial pronouncement has been secured; but particularly when there are no fixed and clear constitutional precedents, the choice is essentially one of political discretion and one this Court has never conceived as an incident of judicial review. We do not engage lightly in post hoc evaluation of such political judgment, founded as it is on `one of the first principles of constitutional adjudication the basic presumption of the constitutional validity of a duly enacted state or federal law.' San Antonio Independent School District v. Rodriguez, 411 U.S. 1, at 60, 93 S.Ct. 1278, at 1311, 36 L.Ed.2d 16 (1973) (Stewart, J., concurring). Lemon II, supra, 411 U.S. at 207-208, 93 S.Ct. at 1473, 36 L.Ed.2d at 165-166. Giving pure prospective relief and thereby effectively denying refunds in cases holding state taxes or assessment procedures unconstitutional is not without precedent in this jurisdiction or in others. In Soo Line Railroad Co., supra, the appellant brought actions seeking an adjudication that its 1974, 1975, and 1976 property tax assessments were void and that the amounts of the tax paid in excess of the assessment which could lawfully have been levied should be refunded. Although we remanded to the Board of Equalization for redetermination of tax assessments for those years in accordance with Chapter 28-32, N.D.C.C., our holding that all tax assessments must be uniform until such time as the Legislature provides for classification of different levels of property, was given pure prospective effect beginning with 1981 property tax assessments. In Hurd v. City of Buffalo, 41 A.D.2d 402, 405, 343 N.Y.S.2d 950, 953 (1973), aff'd, 34 N.Y.2d 628, 311 N.E.2d 504, 355 N.Y.S.2d 369 (1974), the court refused to require the city to repay taxes illegally collected under a statute violative of the state constitution because the City has relied on the additional taxes which it was able to impose because of the statute, and has spent the revenues derived thereby. The city was also allowed to retain amounts of taxes paid under protest after the date of the lower court opinion holding the tax statute unconstitutional. See Pellnat v. City of Buffalo, 59 A.D.2d 1038, 399 N.Y.S.2d 788 (1977). The Arizona Supreme Court in Southern Pacific Company v. Cochise County, 92 Ariz. 395, 406, 377 P.2d 770, 778 (1963), also ruled that although the appellant's allegations of discriminatory tax assessments stated a valid claim for injunctive relief, no refund of taxes paid under written protest would be allowed because taxing subdivisions of the state have long predicated their fiscal affairs upon the practices alleged in the complaint and [t]he refund which appellant seeks together with other similar claims threatens the financial solvency of many taxing units of the state, particularly those in rural and undeveloped areas. In Jacobs v. Lexington-Fayette Urban County Government, 560 S.W.2d 10 (Ky. 1977), the court reached a similar conclusion. Although the court held that a differential in tax rates insofar as they applied to personal property and severed mineral interests violated the state constitution, it refused to deprive the local government of its tax revenues where it reasonably could have relied on a previous judicial opinion indicating that the tax was constitutional and because it would be unjust and constitute a hardship upon all citizens of that local government. Jacobs, supra, 560 S.W.2d at 14. The Supreme Court of Florida also refused to order tax refunds totaling $7,300,000 after invalidating a statute authorizing school districts to levy an ad valorem tax in excess of 10 mills without a vote of the electors. The court in Gulesian v. Dade County School Board, 281 So.2d 325 (Fla. 1973), reasoned that pure prospective application of the ruling was proper because of the school board's good faith reliance on a presumptively valid statute and the budgetary and administrative burdens a refund would cause. See also Intern. Studio Apartment Ass'n v. Lockwood, 421 So.2d 1119 (Fla.Dist.Ct.App.1982), cert. denied, ____ U.S.____, 104 S.Ct. 244, 78 L.Ed.2d 233 (1983). Invalidating statutory sections establishing a sales tax differential for border counties, the Supreme Court of Washington also held that its opinion would be given only prospective effect beginning January 1 of the following year because [r]etroactive application of the present decision would impose a substantial hardship on the retailers in the border counties and the court would not impose such a burden upon the retailers that cannot legally be passed on to the buyers. Bond v. Burrows, 103 Wash.2d 153, 164, 690 P.2d 1168, 1174 (1984). We find particularly persuasive the New Jersey Supreme Court's decision in Salorio v. Glaser, 93 N.J. 447, 461 A.2d 1100, cert. denied, --- U.S.---, 104 S.Ct. 486, 78 L.Ed.2d 682 (1983). In Salorio, the court held that the New Jersey Emergency Transportation Tax Act (ETT), which essentially levied a higher tax on New Jersey-derived income of New York residents who commuted to work in New Jersey, violated the Privileges and Immunities Clause of the United States Constitution. The plaintiffs had sought declaratory and injunctive relief and damages based on the amount of ETT taxes they had paid. In its decision dated June 8, 1983, the court not only denied the plaintiffs reimbursement for taxes previously paid, but applied the decision prospectively only with respect to income earned on and after January 1, 1984. The court reasoned that fixing a prospective date for its decision was proper because of the fiscal and administrative problems that would be engendered if the State were compelled to surrender ETT receipts before the end of the fiscal year, and in order to allow the state a reasonable period of time to devise alternative revenue raising methods, abandon or postpone transportation projects or consider some other suitable solutions. Salorio, supra, 93 N.J. at 467, 461 A.2d at 1111. The court justified its refusal to grant reimbursement of the taxes illegally collected by noting the following factors: the court's holding with regard to the constitutionality of the ETT was the equivalent of a new rule of law; the state justifiably relied upon the availability of the ETT funds because of the presumptive validity of the statute; no one judicially challenged the ETT until June 1977, fifteen years after the ETT was enacted; the plaintiffs suffered virtually no financial harm because they received a credit for the amount paid to New Jersey against their New York income tax; and [p]ublic fiscal stability is at issue. Salorio, supra, 93 N.J. at 465, 461 A.2d at 1110. Many of the same factors are present in this case. We have consistently stated that an enactment of the Legislature is entitled to a presumption of constitutional validity. E.g., State ex rel. Lesmeister v. Olson, 354 N.W.2d 690, 694 (N.D.1984). We believe that the ruling in this case, based as it is on the United States Supreme Court's recent decision in Ward, is the equivalent of a new principle of law. Justice O'Connor, in a vigorous dissent in the Ward decision, essentially recognized the majority's holding as such. The Justice characterized the majority's holding as astonishing and an unfortunate adventure away from the safety of our precedents.... Ward, supra, ___ U.S. at ___, ___, 105 S.Ct. at 1684, 1694, 84 L.Ed.2d at 763, 775 (O'Connor, J., dissenting.) The State's reliance in the past on the constitutionality of the gross premiums tax was certainly justifiable in view of decisions such as Lincoln National Life Ins. Co. v. Read, 325 U.S. 673, 65 S.Ct. 1220, 89 L.Ed. 1861 (1945). We do not believe that the 1981 Western & Southern decision so clearly foreshadowed the outcome of Ward and the present case that the State's reliance on the validity of the tax was unjustified after that decision was rendered. In arriving at its decision in Ward, the majority found it necessary to distinguish the Western & Southern decision from the case before it. We note also that three of the justices who joined the majority opinion in Western & Southern, including its author, Justice Brennan, joined Justice O'Connor's dissent in Ward. We believe that the State was entitled to rely on the presumptive validity of the gross premiums tax and that such reliance remained justifiable after the date of the Western & Southern decision. [7] We also find it relevant that the Legislature acted promptly upon the district court's invalidation of the gross premiums tax in 1983. Rather than await the final outcome of an appeal, the Legislature eliminated the discriminatory nature of the tax and made the amendment retroactive to the prior tax year. Also significant is that the pre-1983 gross premiums tax was first enacted in 1897. The plaintiffs paid the tax without any discernible protest until the Western & Southern decision was rendered in 1981. We also agree with the district court's observation that any financial harm suffered by the plaintiffs by virtue of their payment of the tax is negligible at best. The district court stated in its memorandum opinion that an undisputed fact in this case is that the bulk of the cost of the gross premium tax is passed on by Plaintiffs to their customers in the form of higher insurance premiums. This determination is amply supported by the record. Rule 52(a), N.D. R.Civ.P. Although the testimony and reports of the expert economists differed as to the degree of forward shifting of the cost to consumers, both agreed that it occurs. Although this consideration may not in itself be sufficient to deny a refund of taxes illegally collected [ see William Clairmont, Inc. v. State, 261 N.W.2d 780, 785 (N.D.1977) ], we believe it properly may be taken into account in weighing the equities to determine whether or not a decision should be given retrospective or prospective application. The legislative and executive branches of state government relied on the gross premiums tax for decades in preparing budgets and making appropriations and expenditures. This reliance was justified by the presumptive validity of the tax statute. As the court in Salorio noted, the expenditures made from this revenue during the many years for which refunds are sought cannot be undone, and reimbursement at this point would pose a significant hardship upon the state's existing financial requirements. Having weighed the equities in this case, we conclude that the district court properly gave its ruling pure prospective application, thereby effectively denying the plaintiffs' claims for refunds. [8] For the reasons stated in this opinion, the judgments are affirmed. VANDE WALLE, GIERKE and MESCHKE, JJ., concur. PEDERSON, Surrogate Justice, sitting in place of LEVINE, J., disqualified.