VALENTINE CO. v. COMMONWEALTH, 973 A.2d 1101 (Pa.Commw. 2009)

No. 562 F.R. 2006.Commonwealth Court of Pennsylvania.Argued March 31, 2009.
Decided June 8, 2009.

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Maura Fay McIlvain, Philadelphia, for petitioner.

John J. Butchar, Sr. Deputy Attorney General, Harrisburg, for respondent.

BEFORE: LEADBETTER, President Judge, and PELLEGRINI, Judge, and KELLEY, Senior Judge.

OPINION BY Senior Judge KELLEY.

I. Background
Valentine Company (f/k/a Nichols Associates, Inc.) (Valentine) petitions for review of the order of the Pennsylvania Board of Finance and Revenue (Board)[1] refusing Valentine’s petition for review of the Pennsylvania Department of Revenue’s (Department) determination of its surplus lines tax obligation imposed on gross premiums for the tax year ending December 31, 2004 (2004 tax year) pursuant to the provisions of Article XVI of The Insurance Company Law of 1921 (Insurance Law).[2] We affirm.

Valentine is an insurance company licensed to carry surplus lines of liability insurance in Pennsylvania.[3] An excess healthcare professional liability policy in the amount of $25,000,000.00, Policy No. 6791291 (Policy), was issued by Lexington Insurance Company through Valentine for the policy period July 1, 2004 through July 1, 2005. Temple University — of the Commonwealth System of Higher Education, the Temple University Health System, and a number of their subsidiaries, unincorporated divisions, and employees (collectively,

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Temple) were included as some of the named as insureds on the Policy.[4] Temple paid the premiums for the Policy, totaling $6,800,000.00 for the relevant policy period. On January 7, 2005, Valentine filed a timely Surplus Lines Tax Report with the Department for the 2004 tax year. Although Valentine reported the gross premiums for the Policy, it deducted those premiums from the gross premiums taxable in the report.[5]

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II. Determinations
On September 23, 2005, the Department mailed a settlement to Valentine for the 2004 tax year. The settlement assessed an additional tax due in the amount of $204,000.00, representing the 3% surplus lines tax imposed under Section 1621(a) of the Insurance Law on the gross premiums of $6,800,000.00 for the Policy.

On October 18, 2005, Valentine filed a timely petition for resettlement with the Department, arguing that Temple was immune from the surplus lines tax because it is an instrumentality of the Commonwealth. On March 20, 2006, the Department issued a decision and order denying Valentine’s petition for resettlement.

On May 1, 2006, Valentine filed a petition for review of the decision and order with the Board. On September 15, 2006, the Board issued an opinion and order disposing of Valentine’s petition in which it made the following relevant conclusion:

[Valentine]’s gross premiums tax shall not be resettled. Temple University, its numerous affiliated entities, and the individuals employed or contracting with Temple and its affiliated entities are not governmental entities entitled to a presumption of tax immunity. See Mooney v. Temple University Board of Trustees, 448 Pa. 424[, 292 A.2d 395] (1972); see also Doughty v. City of Philadslphia, 141 Pa.Cmwlth. 659, 596 A.2d 1187 [(1991)]. As the statute does not exempt any premiums from tax and government tax immunity does not apply, the premiums received by [Valentine] from policy # 6791291 are subject to the surplus lines tax.

Board Opinion at 6. Based on the foregoing, the Board issued an order refusing Valentine’s petition for review, and sustaining the Department’s decision and order. Id., at 7. Valentine then filed the instant petition for review in this Court from the Board’s order.

III. Issues
In this case, Valentine claims: (1) that the Board erred in refusing its petition for review and sustaining the Department’s decision and order because Temple is immune from the surplus lines tax as it is a Commonwealth instrumentality under the provisions of the Temple University — Commonwealth Act (Temple Act)[6] ; and (2) that even if it is assumed that Temple is not immune from the surplus lines tax, any change in Temple’s immunity from the tax should only be prospectively applied.[7]

IV. Discussion
Valentine first claims that the Board erred in refusing its petition for review and sustaining the Department’s decision and order because Temple is immune from the surplus lines tax as it is a

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Commonwealth instrumentality under the Temple Act.[8]
More specifically, Valentine alleges that a number of provisions in the Temple Act demonstrate that Temple is an instrumentality of the Commonwealth.[9] In addition, Valentine sets forth instances in which the Department has previously recognized that Temple is immune from other taxes as a Commonwealth instrumentality.[10] Further, Valentine points to

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Exhibits G, H, and I of the Stipulation of Facts, outlined above, in which the Department considered Temple to be immune from the surplus lines tax as a Commonwealth instrumentality from 1966 up until 2004. Based on the foregoing, Valentine asserts that Temple is immune from the surplus lines tax and, as a result, the Board’s order in the case subjudice
should be reversed.

In determining whether an entity is an agency or instrumentality of the Commonwealth for both tort and tax immunity purposes, this Court examines the entity’s enabling legislation. Bucks County Community College v. Bucks County Board of Assessment Appeals, 147 Pa.Cmwlth. 505, 608 A.2d 622 (1992). As noted by Valentine, Section 2 of the Temple Act provides that Temple is “[a]n instrumentality of the Commonwealth to serve as a State-related institution in the Commonwealth system of higher education.” 24 P.S. § 2510-2.

However, under Section 3 of the Temple Act, the General Assembly specifically provided that Temple “[s]hall continue as a corporation for the same purposes as, and with all rights and privileges heretofore granted to, Temple University, unless hereinafter modified or changed.” 24 P.S. § 2510-3. Thus, Section 3 of the Temple Act explicitly preserved Temple’s status as a non-profit corporation chartered for educational purposes.

In Mooney, [11] the Pennsylvania Supreme Court examined the provisions of the Temple Act relied upon by Valentine in determining whether Temple University was subject to the provisions of the former statute commonly referred to as the Right to Know Law[12] as a “state agency”. In concluding that Temple University was not a “state agency”, the Supreme Court noted the following regarding the provisions of the Temple Act:

We conclude, as did the Commonwealth Court, that this latter declaration [in Section 3 of the Temple Act] reveals an express legislative intent to preserve Temple’s status as a non-profit corporation chartered for educational purposes. The receipt by Temple of increased state financial aid no more transforms Temple into a state “agency” than the receipt of federal funds can make Temple an agency of the federal government. A review of the [Temple Act] further supports our conclusion.
Appellants rely on various provisions of the [Temple Act] to bolster their contentions. They emphasize that the act altered the board of trustees by providing for appointment of four trustees respectively by the Governor, the President pro tempore of the Senate, and the Speaker of the House. Nevertheless, these twelve Commonwealth trustees remain only a one-third minority of the board’s total number of thirty-six trustees.”[[13] ]

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The majority of non-public trustees clearly retains the powers to manage and control the University. The act in its legislative findings describing Temple’s status prior to passage of the act specifically declares that `Temple University owns and maintains land, buildings, and other facilities which are used, together with land and buildings owned by the Commonwealth of Pennsylvania, for higher education, which land, buildings, and other facilities are under the entire control and management of the board of trustees. . . . The Legislature then expressly directs that `[t]he entire management, control and conduct of the instructional, administrative, and financial affairs of the university is hereby vested in the board of trustees.’ Additionally, the act provides that `[t]he board may exercise all powers and franchises of the university and make bylaws for their own government, as well as for the university.
The act also directs that `[i]n accordance with legislative appropriations made as provided by law, the Commonwealth may, by agreement with the board of trustees, acquire lands, erect and equip buildings, and provide facilities for the use of the university. Had the Legislature intended to transform Temple into a `state agency’, it would be hardly necessary to require that the Legislature reach an agreement with the board of trustees before it can expand or alter Temple’s facilities. This requirement further supports the conclusion that Temple is not a state “agency” for present purposes.
Appellants also rely on fiscal controls, provided by the [Temple Act] to facilitate Commonwealth inspection of the University’s expenditures of Commonwealth funds, to support their contention that Temple is now a state “agency”.
The [Temple Act] has clearly authorized increased financial assistance to Temple from the Commonwealth. The Commonwealth is obligated to provide sufficient funds to enable Temple to maintain the legislatively determined tuition and fee schedules. Temple is permitted to participate in Commonwealth programs for capital development and to support these programs the board of trustees is empowered to issue tax free bonds. It is, of course, a fundamental practice of government that its grants of public funds to an appropriate institution are generally accompanied by some regulatory mechanism in order to insure that the public funds are being properly expended.

Mooney, 448 Pa. at 430-432, 292 A.2d at 399-400
(footnotes omitted and emphasis in original).

Based on the foregoing, the court concluded “[t]hat the Legislature by increasing its financial assistance to Temple did not alter Temple’s status as a nonprofit corporation chartered for educational purposes and clearly did not transform Temple into a state `agency’ for purposes of the [former Right to Know Law].” Id. at 434, 292 A.2d at 400-401.[14] Likewise, as noted

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above, the parties in this case have stipulated that “Temple University Hospital, Inc. and Temple University Children’s Medical Center resulted from a reorganization of Temple University in 19% that involved a corporate division and merger pursuant to the Nonprofit Corporation Law of 1988. . . .” Stipulation of Facts at 6. Thus, all of the Temple entities claiming immunity from the surplus lines tax in this case are nonprofit corporations, and not agencies or instrumentalities of the Commonwealth, as alleged by Valentine.

Nevertheless, Valentine points to instances in which Temple is immune from the imposition of a tax as an instrumentality of the Commonwealth. More specifically, Valentine cites to its immunity from the sales and use tax and the realty transfer tax pursuant to Sections 202 and 204(2) of the Tax Code, 72 P.S. §§ 7202, 7204(12), and Sections 91.192(a) and 91.195(a)(3) of the Pennsylvania Code, 61 Pa. Code §§ 91.192(a), 91.195(a)(3).

However, as the Pennsylvania Supreme Court has noted, “[a]n entity’s status as an agency or instrumentality [of the Commonwealth] varies, depending on the issue for which the determination is being made.” Pennsylvania State University, 557 Pa. at 96, 731 A.2d at 1274. I Doughty, this Court considered whether Temple was immune from suit because it was an independent agency of the Commonwealth entitled to sovereign immunity.[15] In that case, a court of common pleas concluded that Temple was not immune from liability as an independent Commonwealth agency, relying upon the Pennsylvania Supreme Court’s opinion i Mooney. On appeal to this Court, Temple argued tha Mooney did not control the disposition of that case.

In rejecting Temple’s assertion regarding the application o Mooney to its claim of sovereign immunity, this Court stated the following:

Temple asserts that Mooney is inapplicable for three reasons: (1) because Mooney limited its analysis to the definition

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of state agency in the Right to Know Act; (2) because Mooney was decided 6 years before the sovereign immunity statute was enacted; and (3) because Mooney does not consider the effect of the Temple Act’s designation of Temple as an “instrumentality” of the commonwealth.
As to the first contention, Temple argues that Mooney was decided based on the definition of “state agency” in the Right to Know Act, under which a “state agency” must perform “an essential governmental function”. Temple asserts that the definition of “commonwealth agency” applicable to sovereign immunity contains no such restriction.
The Supreme Court in Mooney did not limit itself to deciding whether Temple performed “an essential governmental function”. Rather, the Supreme Court exhaustively examined the Temple Act, section-by-section, searching for any intent to transform Temple into a state agency and found none.
As to the second contention, Temple states that because Mooney was decided before the 1978 sovereign immunity statute was enacted, the holding in Mooney that Temple is not a state agency is inapplicable. Temple cites no authority for this position.
The sovereign immunity statute provides the defense of immunity to entities which have the status of commonwealth agency independent of the sovereign immunity statute. The only possible source for Temple’s status as a commonwealth agency would be the Temple Act. In Mooney, the supreme court held that the General Assembly did not intend the Temple Act to alter Temple’s prior status as a non-profit corporation. The subsequent passage of the 1978 sovereign immunity statute did not alter this holding in Mooney.
As to the third contention, Temple asserts that the designation of Temple as an “instrumentality of the commonwealth” in the Temple Act transformed Temple into a state agency. Temple states that “instrumentality” is commonly defined as meaning “agency”. Temple contends that if “instrumentality” does not mean “agency”, inclusion of the term in the Temple Act would serve no purpose.
“Instrumentality” is defined as “1: the quality or state of being instrumental: a condition as serving as an intermediary . . . 2a: something by which an end is achieved: MEANS . . . b: something that serves as an intermediary or agency through which one or more functions of a controlling force are carried out.” Webster’s Third International Dictionary 1172 (1986). The definition of “instrumentality” merely denotes that Temple is a means to achieving a purpose. The use of an entity by the commonwealth to achieve a purpose does not in itself transform the entity into a commonwealth agency.
* * *
Contrary to Temple’s argument, the term “instrumentality” has not been construed as conveying commonwealth agency status. Accordingly, we conclude that the mere description of Temple as an “instrumentality” of the commonwealth does not entitle Temple to use the defense of sovereign immunity.
We conclude that Mooney controls this case, and holds with ample clarity that passage of the Temple Act did not transform Temple into a commonwealth agency. We hold that Temple is not entitled to the defense of sovereign immunity. . . .

Doughty, 596 A.2d at 1189-1190, 1191.

We conclude that Mooney and Doughty control the disposition of this

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case, and support the conclusion that Temple is not immune from the imposition of the surplus lines tax as an instrumentality of the Commonwealth. It is true that the Department has deigned it appropriate to confer immunity upon Temple from the sales and use tax and the realty transfer tax pursuant to the enumerated provisions of the Tax Code and the Pennsylvania Code. However, in the matter sub judice, the only statutory source upon which Valentine relies for its claim of Temple’s immunity as a Commonwealth instrumentality are the provisions of the Temple Act. Under Mooney an Doughty, it is clear that the General Assembly did not intend such a result because, under the Temple Act, Temple has specifically retained its status as a nonprofit corporation chartered for educational purposes.[16] , [17] It would certainly be incongruous for this Court to determine i Doughty that Temple is not immune from liability as an instrumentality of the Commonwealth, and then to determine in this case that it is immune from

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a tax on the surplus lines of liability insurance as an instrumentality of the Commonwealth. As a result, Valentine’s claim that the Board erred in refusing its petition for review and in sustaining the Department’s decision and order based on Temple’s immunity from the imposition of the surplus lines tax is patently without merit.

Finally, Valentine claims that, even if it is assumed that Temple is not immune from the surplus lines tax, any change in Temple’s immunity from the tax should only be prospectively applied. More specifically, Valentine contends that because of Temple’s good faith reliance on its tax immune status, equity dictates that any change in Temple’s immunity be effective only after a final determination by this Court.

However, the Department notes that, after it had determined that it had not been properly applying the surplus lines tax up to the 2004 tax year, it has only prospectively changed Temple’s immunity status and required remission of the tax from the 2004 tax year forward. The Department notes that it has done so, even though it was empowered to resettle the preceding three tax years pursuant to Section 407 of the Tax Code.[18]

Nevertheless, as noted above, Section 1621(c) of the Insurance Law provides, in pertinent part, “[t]he surplus lines licensee shall collect from the insured or the producing broker the amount of the tax at the time of delinery of the initial policy. . . .” 40 P.S. § 991.1621(c). Thus, it was Valentine’s obligation under Section 1621(c) of the Insurance Law to collect the surplus lines tax from Temple and to remit it to the Department. However, Valentine had no notice that it was required to collect the tax from Temple and remit it to the Department prior to the settlement for the 2004 tax year that was mailed by the Department to Valentine on September 23, 2005.

In Transcontinental Gas Pipe Line Corporation v. Commonwealth, 153 Pa. Cmwlth. 60, 620 A.2d 614 aff’d, 157 Pa. Cmwlth. 674, 630 A.2d 960 (1993), the tax-payer was an out-of-state business that sold gas to Pennsylvania customers. The taxpayer’s rates for gas were subject to long-term contracts with its customers that were approved in advance by the Federal Energy Regulatory Commission (FERC), and not subject to change at the taxpayer’s discretion. As a result, the tax-payer was required to anticipate and factor into its price all of the taxes that it would incur prior to submitting its rate request to the FERC because the FERC did not allow a taxpayer to recoup unexpected state taxes from its customers.

The taxpayer did not file utilities gross receipts tax reports with the Department until notified by the Department to do so in 1975. The taxpayer had failed to file the reports on the mistaken belief that its sales were not subject to the tax under the “sale for resale” exemption contained in a former version of Section 1101(a) of the Tax Code, 72 P.S. § 8101(a). From 1975 to 1984, the taxpayer filed the reports with the Department claiming the exemption, and received favorable reports for that period. However, the Department audited the taxpayer’s report for 1984, and settled the report determining that the taxpayer

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owed $102,541.00 in gross receipts tax, and a penalty of $1,275.00, for gas that was not resold for the 1984 tax year. The taxpayer appealed the Department’s resettlement to the Board, which denied the appeal.

On appeal to this Court, the taxpayer alleged, inter alia, that even if it was subject to the tax, any change in its liability should only be applied prospectively. In disposing of this claim, this Court stated the following, in pertinent part:

[B]ecause [the taxpayer] did not anticipate that it would become subject to the gross receipts tax before 1984, it did not incorporate this cost in its pre-1984 rate requests to FERC. Because [the taxpayer] received favorable reports since it began filing gross receipts tax reports in 1975, it is understandable that [the tax-payer] would continue to believe that its sales were exempt.
In Abbotts Dairies, Inc. v. Philadelphia, 436 Pa. 131, 258 A.2d 634 (1969), the Pennsylvania Supreme Court held that, because of the hardship involved, Philadelphia’s mercantile license tax could not be assessed retroactively against companies that had relied on their exemption status for 13 years. Citing equitable principles, the Court agreed that the companies could not be taxed because they had reasonably relied upon exempt status and this would create a serious hardship on them, which would far outweigh any good which might be derived from the assessment. Only after the companies were put on notice could the city assert tax liability. Because we do not wish to impede or discourage the conduct of commerce, the gross receipts tax liability will be applied only from 1984 onward, the date [the taxpayer] had notice of the possibility that it was not exempt from the utilities gross receipts tax. The Department is thereby foreclosed from attempting to collect utilities gross receipts tax from [the taxpayer] before 1984.
Accordingly, the orders of the Board of Finance and Revenue are affirmed as modified to apply only to prospective enforcement.

Transcontinental Gas Pipe Line Corporation, 620 A.2d at 621-622 (footnotes omitted and emphasis in original).

Likewise, in the instant case, Valentine had no notice that it was required to collect the surplus lines tax from Temple and to remit it to the Department prior to the settlement for the 2004 tax year that was mailed by the Department to Valentine on September 23, 2005. As a result, the Department is foreclosed from attempting to collect the surplus lines tax from Valentine prior to the 2004 tax year, and the Board’s order will be modified to reflect only prospective enforcement Transcontinental Gas Pipe Line Corporation.

V. Conclusion
Based on the foregoing, it is clear that the Board did not err in refusing Valentine’s petition for review, and in sustaining the Department’s determination of its surplus lines tax obligation imposed on gross premiums for the 2004 tax year. However, it is also clear that the Department is foreclosed from attempting to collect the surplus lines tax from Valentine prior to the 2004 tax year, and that the Board’s order should be modified to reflect only prospective enforcement. Accordingly, the order of the Board is affirmed as modified.

ORDER
AND NOW, this 8th day of June, 2009, the order of the Board of Finance and Revenue, dated September 15, 2006 at No. 0520040, is affirmed as modified to apply

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only to prospective enforcement for the tax year ending December 31, 2004 and subsequent tax years. Judgment shall become final unless exceptions are filed within 30 days of this order pursuant to Pa.R.A.P. 1571(i).

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