## Facts

- California imposed a general premiums tax on insurers doing business in the state and, in addition, a retaliatory tax on foreign insurers when their home states taxed or regulated California insurers more heavily than California did in return.
- Western & Southern Life Insurance Company, incorporated in Ohio and operating in California, paid California’s retaliatory tax because Ohio’s treatment of California insurers was more burdensome than California’s treatment of Ohio insurers.
- Western & Southern filed administrative refund claims for the retaliatory taxes paid; the claims were denied.
- Western & Southern sued for a refund in California state court, alleging the retaliatory tax violated the Commerce Clause and the Equal Protection Clause.
- The trial court found the retaliatory tax unconstitutional, but the California Court of Appeal reversed and upheld the tax.

## Issues

1. Whether California’s retaliatory tax on foreign insurers was invalid under the Commerce Clause, given Congress’s enactment of the McCarran–Ferguson Act.
2. Whether the retaliatory tax violated the Equal Protection Clause by imposing a heavier burden on foreign insurers than on domestic insurers.

## Decision

- The Supreme Court affirmed the judgment upholding the retaliatory tax.
- The tax was not subject to dormant Commerce Clause invalidation because Congress, through the McCarran–Ferguson Act, authorized state taxation and regulation of the business of insurance.
- The tax did not violate equal protection because the differential treatment of foreign insurers was rationally related to a legitimate state purpose.

## Legal Principles

- When Congress affirmatively authorizes state regulation or taxation affecting interstate commerce, state action within the scope of that authorization is not vulnerable to a dormant Commerce Clause challenge.
- The McCarran–Ferguson Act removes dormant Commerce Clause constraints on state taxation and regulation of the business of insurance.
- A state may impose more burdensome taxes on foreign corporations than on domestic corporations only if the discrimination bears a rational relation to a legitimate state purpose.
- Under rational-basis review, a legislature may act on a reasonable belief that a measure will further its objective; actual effectiveness is not required for constitutional validity.

## Conclusion

California’s retaliatory insurance tax was upheld because Congress authorized state insurance taxation through the McCarran–Ferguson Act, eliminating dormant Commerce Clause limits, and because the tax’s discrimination against foreign insurers rationally furthered California’s legitimate goal of deterring other states from disadvantaging California insurers.


Western & S. Life Ins. Co. v. State Bd. of Equalization of Cal., 451 U.S. 648 (1981)