Johnson & Johnson wins captive premium tax refund

The New Jersey Supreme Court on Monday upheld an appeals court ruling that Johnson & Johnson is due a $56 million premium tax refund related to its captive insurance company.

The ruling in Johnson & Johnson v. Director, Division of Taxation hinged on changes New Jersey made to its insurance law after the passage of the federal Nonadmitted and Reinsurance Reform Act of 2011.

New Brunswick, New Jersey-based Johnson & Johnson covers risks located nationwide through its Vermont-domiciled captive Middlesex Assurance, court papers say.

Prior to the passage of the NRRA, states could assess premium taxes paid to nonadmitted insurers only for premiums that covered risks within the state. The NRRA, however, allowed a home state to tax all of an insured entity’s nonadmitted premium, even if some of the risks were based in other states.

To make use of NRRA, in 2011 New Jersey amended its insurance law imposing its 5% premium tax on all nonadmitted premium.

Johnson & Johnson increased its tax payment to New Jersey as “a precautionary measure” but filed a claim for overpayment, saying that the amendment only covered surplus lines insurance purchases and did not include self-procured coverage obtained through a captive, court papers say.

The New Jersey tax authorities denied the refund, and in 2018 a tax court ruled in favor of the state, but an appeals court overturned the ruling last year.

New Jersey law “clearly limited J&J’s tax liability to the risks it insured in New Jersey [and] was not changed in any way, shape, or form in the 2011 amendment,” the 2019 appeals court ruling stated.

The state’s high court agreed that the plain language of the New Jersey law meant that Johnson & Johnson was due a refund and noted that the New Jersey legislature could amend the statute further.