Dental Service of Massachusetts, Inc. v. Commissioner of Revenue (February 2, 2017)

COMMONWEALTH OF MASSACHUSETTS
APPELLATE TAX BOARD

DENTAL SERVICE OF 		       v. 	COMMISSIONER OF REVENUE
MASSACHUSETTS, INC.

Docket Nos.: C314356, C314436			Promulgated: 
	        C316095                    February 2, 2017


These are appeals filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39, from the refusal of the Commissioner of Revenue ("appellee" or "Commissioner"), to abate premium excise assessed against Dental Service of Massachusetts, Inc. ("DSM" or "appellant"), for the tax years ended December 31, 2006, December 31, 2007, and December 31, 2008 (the "tax years at issue").
Chairman Hammond heard these appeals and was joined by Commissioners Scharaffa, Rose, Chmielinski, and Good in the Decisions for the appellant.  
These findings of fact and report are made pursuant to requests by both parties under G.L. c. 58A, § 13 and 831 CMR 1.32.
Daniel P. Ryan, Esq. and David J. Nagle, Esq. for the appellant.

Christopher M. Glionna, Esq. and Michael P. Clifford, Esq. for the appellee.



FINDINGS OF FACT AND REPORT

On the basis of the Statement of Agreed Facts, exhibits, and testimony offered into evidence at the hearing of these appeals, the Appellate Tax Board ("Board") made the following findings of fact.
    The tax at issue in these appeals is the premium excise assessed under G.L. c. 176I, § 11 ("§ 11"), which applies to organizations, like the appellant, that offer "preferred provider arrangement[s]." Section 11 imposes upon such organizations an excise at the rate of 2.28% of the "gross premiums received during the preceding calendar year for covered persons residing in the commonwealth[.]"  
For each of the tax years at issue, DSM timely filed a Form 63-23P, Premium Excise Return for Insurance Companies ("Excise Return").  It subsequently filed Applications for Abatement with the Commissioner, seeking partial refunds of the premium excise self-assessed for each of the tax years at issue, which the Commissioner denied. DSM thereafter timely filed petitions with the Board.  The relevant dates for each of these jurisdictional prerequisites are set forth in the following table:

Tax Year	Abatement Application Filed	Abatement Application Denied	Petition Filed	
2006	03/15/10	06/20/11	08/04/11	
2007	03/15/11	07/25/11	09/08/11	
2008	01/03/12	05/10/12	05/31/12	
Based on the foregoing, the Board found and ruled that it had jurisdiction to hear and decide these appeals.  
I. The Appellant's Business Structure and Operations
At all times relevant to these appeals, the appellant was a non-profit dental service corporation with a principal business address in Boston, Massachusetts.  The appellant was a member of the Delta Dental Plans Association, which is a nationwide network of companies that provide dental care insurance coverage.  By the terms of its agreement with the Delta Dental Plans Association, the appellant exclusively contracted with employers headquartered in Massachusetts to provide coverage for their employees.  Although the employers with whom the appellant contracted were headquartered in Massachusetts, their employees and employees' dependents were not necessarily Massachusetts residents.
Prior to and during the tax years at issue, the appellant offered two types of preferred provider arrangements, Preferred/DPO+ ("Preferred") and DeltaCare ("DeltaCare"), both of which provided dental insurance coverage through Massachusetts employers to employees and their families.  In connection with its preferred provider arrangements, the appellant entered into contracts with dentists, who were then listed as preferred providers.  The appellant also negotiated fees for dental services with these dentists, and, through both Preferred and DeltaCare, it covered some or all of the cost of dental services provided to subscribers and their covered dependents.  The appellant paid the fees for dental services directly to the participating dentists.  Under the terms of their agreements with the appellant, participating dentists did not bill patients for more than the reimbursed amounts, with the exception of copayments, deductibles, and non-covered services.  Subscribers who were covered through the appellant's preferred provider arrangements could receive treatment from dentists located in Massachusetts or outside of Massachusetts.
The Issues in Dispute 
The Meaning of the Statutory Language
 The primary issue in these appeals is one of statutory interpretation. The premium excise imposed in § 11 is based on "gross premiums received during the preceding calendar year for covered persons residing in the commonwealth," and it is the preceding italicized language on which the parties disagreed.  G.L. c. 176I, § 11 (emphasis added).  The appellant argued that this phrase should be interpreted, in accordance with its plain language, to mean individual plan subscribers who live in Massachusetts.  The Commissioner, on the other hand, argued that the phrase "covered persons residing in the commonwealth" should be construed to mean the employers with whom the appellant contracted to provide coverage, all of whom were based in Massachusetts.  
On the basis of all the evidence, and as discussed further in the Opinion below, the Board found that for purposes of § 11, the phrase "covered persons residing in the commonwealth" means the individual, natural person receiving care under a preferred provider insurance plan, i.e., the employees and their dependents who live in Massachusetts, rather than the employers with whom the appellant contracted to provide coverage.   
 The Appellant's Evidence Regarding the Massachusetts  Residents who are "Covered Persons" under § 11  

A subsidiary issue in these appeals was whether the data and methodology used by the appellant to determine the premium excise due for each of the tax years at issue was reliable. The Commissioner took the position that even if the premium excise applied to only individual, natural persons residing in the Commonwealth, the appellant's requests for abatement should still be denied because it failed to offer an adequate or reliable factual basis for determining the number of Massachusetts residents covered under its preferred provider arrangements.  
Substantial evidence was entered into the record on this issue, including documents and the testimony of Michael Kelly, who is, and was during the tax years at issue, the Director of Regulatory Reporting and Taxation for the appellant.  In that capacity, Mr. Kelly oversaw the appellant's insurance, tax, and financial reporting functions. He testified at length about the appellant's computer systems, its record-keeping practices, and the methodology that was used to identify covered Massachusetts residents for purposes of the appellant's abatement claims. The Board found his testimony to be credible.
Mr. Kelly explained that the appellant, like most large organizations, maintains its records in a computerized database.  The data maintained by the appellant included information such as name, address, and date of birth for each plan subscriber, as well as information, including business address, of the dentists utilized in connection with each claim.  Mr. Kelly testified that in 2008, the appellant transitioned to a new computer operating system, a very time-consuming and labor intensive process that required, in his words, "[a]ll hands on deck" to accomplish.  
In preparing its abatement applications for tax years 2006 and 2007, the appellant calculated the number of Massachusetts residents covered under its preferred provider arrangements using a ratio, the numerator of which was claims paid to in-state dentists and the denominator of which was all claims paid.  Using that approach, the appellant originally determined that for 2006, 52.9% of those covered through its preferred provider arrangements were Massachusetts residents, while for 2007 that figure was 52.2%.  
Mr. Kelly also testified regarding another transition that began in 2008.  He stated that prior to that time, the percentage of in-state residents insured by the appellant had remained relatively stable at approximately 50% of total members.  However, beginning around 2008, a new trend emerged among the larger employers with whom the appellant contracted, and that trend was towards self-insurance.  These larger employers tended to operate on a regional or even nationwide basis, and thus had a more geographically diverse workforce, while smaller employers tended to have a more local workforce. Mr. Kelly testified that one result of this trend was that, beginning in 2008, the percentage of Massachusetts residents covered by the appellant's preferred provider arrangements increased.  Accordingly, in preparing its abatement application for tax year 2008, the appellant reported that 77.4% of persons covered by its preferred provider arrangements were Massachusetts residents.  
In the course of the pre-trial process of these appeals, certain questions were raised regarding the data and methodology used by the appellant to arrive at the requested abatement amounts.  At the hearing, Mr. Kelly explained that with migration to the new computer operating system behind it, the appellant finally had the resources available to better determine the number of Massachusetts residents covered under its preferred provider arrangements.  
The appellant commenced what was ultimately a months-long review process, through which it extracted, filtered, and examined archived member data in order to determine each member's state of residence.  Mr. Kelly testified that during 2006 and 2007, each employee and any covered family members shared a common identification number.  Accordingly, the appellant filtered the data for those years by name and date of birth so as to avoid duplication.  By 2008, each member had an individual identification number.  Mr. Kelly explained that if the state of residence for a member could not be determined, the appellant took the conservative approach and counted that person as a Massachusetts resident.
After undertaking this review, the appellant concluded that it had erroneously overstated the percentage of covered Massachusetts residents in filing its original abatement claims.  The appellant determined, through the examination of its data, that the correct percentage of Massachusetts residents for tax years 2006, 2007, and 2008 were, respectively: 49.3%, 51.5%, and 54.7%.  The appellant thereafter filed a Motion to Amend ("Motion to Amend") its petitions to reflect this information and the correspondingly increased abatement amounts sought.  The Board took the appellant's Motion to Amend under advisement, and allowed that motion when it decided these appeals.  
The Board's Ultimate Findings 
 On the basis of the record in its totality, the Board found and ruled that the appellant met its burden of establishing the correct percentage of Massachusetts residents covered by its preferred provider arrangements for the tax years at issue.  The evidence offered by the appellant included the testimony of Mr. Kelly, which the Board found to be credible and persuasive, along with voluminous documentary submissions.  The record established that the appellant dedicated significant time and effort into ascertaining the number of Massachusetts residents insured through its preferred provider arrangements, and that effort yielded sufficiently reliable data.  
In contrast, the Commissioner offered no verifiable evidence to dispute this point.  The evidence offered by the Commissioner consisted of the speculative testimony of its auditor, Todd Sharek, who explained his reasons for initially recommending the denial of the appellant's abatement applications.  
Mr. Sharek, who works in the Department of Revenue's Banking and Insurance Unit, testified that to his knowledge, no other insurance provider had ever taken the position asserted by the appellant in the present appeals. In other words, other insurance providers based the premium excise on 100% of their gross premiums, without regard to the state of residence of the covered member.  Mr. Sharek explained that the number of out-of-state members claimed by the appellant "did not seem credible" to him, and he based his opinion, in part, on such employers as the Department of Revenue itself.  Based on his own experience and observations, Mr. Sharek estimated that probably fewer than 100 out of the Department of Revenue's 2,000-plus employees reside outside of Massachusetts.  He also testified that for employers such as the "Boston Globe . . . and [his] local restaurant . . . common sense" would suggest a similarly nominal percentage of out-of-state employees.  
The Board found this testimony to be unpersuasive for numerous reasons, including that it appeared to be based more on conjecture or anecdote than data.  None of the employers to which Mr. Sharek cited, even as hypotheticals, was in the insurance industry.  Mr. Sharek did not seem to have an understanding of, or take into consideration, the fact that some employers self-insure, and premiums for their employees would not be in the base for calculating the premium excise at issue. Moreover, though it is true that all of the employers with whom the appellant contracted were headquartered in Massachusetts, in concluding that the appellant's figures "seemed high," Mr. Sharek did not appear to consider the fact that many employers had regional or even national operations, and thus had more widespread workforces than, for example, his "local restaurant."  
The Board likewise rejected the Commissioner's arguments that the varying methodologies used by the appellant to determine its percentage of in-state members provided an indication that its figures were not reliable.  The credible evidence of record indicated that in the time period between the filing of its abatement applications and the filing of its Motion to Amend, the appellant committed significant resources to reviewing the data in order to arrive at the most accurate information.  
As the evidence offered by the Commissioner did nothing to undercut the substantial evidence offered by the appellant, the Board found that the appellant met its burden of establishing, by a preponderance of the evidence, the number of its resident covered persons for purposes of calculating the premium excise for each of the tax years at issue.  
	As the Board decided each of the issues presented by these appeals in favor of the appellant, the Board issued decisions for the appellant, and granted abatements in the following amounts: $1,330,364 in tax, along with statutory additions, for tax year 2006; $1,711,953 in tax, along with statutory additions, for tax year 2007, and $1,668,785 in tax, along with statutory additions, for tax year 2008.  

					   OPINION 
   The primary issue presented by these appeals was the meaning of the phrase "covered persons residing in the commonwealth" found within § 11.  The term "covered persons" is defined by G.L. c. 176I, § 1 ("§ 1"), and the Board will address that portion of the contested language first. 
 	Section 1 defines "covered persons" as: "any policy holder or other person on whose behalf the organization is obligated to pay for or provide health care services."  Similarly, the Commissioner's regulation, 830 CMR 176I.1.1, defines "covered person" as "any policyholder, subscriber, member, or other person on whose behalf an insurer is obligated to pay for and/or provide health care services." For several reasons, the Board found and ruled that the logical import of this language is that "covered persons" refers to the natural persons receiving care under a preferred provider arrangement.   
First, natural persons, not employer-organizations, are capable of receiving the "health care services" referenced in the definition of "covered persons."  Second, this interpretation of the term "covered persons" is consonant with the use of that same term elsewhere within Chapter 176I.  For example, G.L. c. 176I, § 3(b)("§ 3(b)")  provides, in relevant part:
If a covered person receives emergency care and cannot reasonably reach a preferred provider, payment for care related to the emergency shall be made at the same level and in the same manner as if the covered person had been treated by a preferred provider; provided, however, that every brochure, contract, policy manual and all printed materials shall clearly state that covered persons shall have the option of calling the local pre-hospital emergency medical service system by dialing the emergency telephone access number 911, or its local equivalent, whenever a covered person is confronted with a need for emergency care, and no covered person shall in any way be discouraged from using the local pre-hospital emergency medical service system, the 911 telephone number, or the local equivalent, or be denied coverage for medical and transportation expenses incurred as a result of such use of emergency care.

(emphasis added).  The "covered person" referred to in § 3(b) is a natural person, not the employing entity with whom an insurer contracted.  
Third, it is notable that both the statute, and to a greater degree, the regulation, use broad language and multiple terms to describe who qualifies as a "covered person."  Both the statute and the regulation use the phrase "other person," most likely intended to describe spouses and additional dependents receiving coverage under an employed relative's policy, as is often the case.  Employees have dependents, while employers do not. If the term "covered persons" was intended to refer solely to a single entity - the employer who enters into a contract for coverage with an insurer - this plurality of terms and broad language would be unnecessary.  
Statutes should be construed as "a consistent and harmonious whole, capable of producing a rational result consonant with common sense and sound judgment."  EMC Corp. v. Commissioner of Revenue, 433 Mass. 568, 574 (2001) (internal citations omitted).  "Courts must ascertain the intent of a statute from all its parts and from the subject matter to which it relates, and must interpret the statute so as to render the legislation effective, consonant with sound reason and common sense." Harvard Crimson, Inc. v. President & Fellows of Harvard College, 445 Mass. 745, 749 (2006).  After applying these principles to the statutory language and facts at hand, the Board found and ruled that the term "covered persons" contained within § 11 refers to the individual, natural persons receiving health care coverage under a preferred provider arrangement, and not the employer with whom the appellant contracted.  
Also in dispute was the meaning of the phrase "residing in the commonwealth" found within § 11.  Because the statute itself did not define the term "residing in the commonwealth," the Board must consider "the natural import of words according to the ordinary and approved usage of the language when applied to the subject matter of the act," as reflective of the Legislature's intent. Boston & Me. R.R. v. Billerica, 262 Mass. 439, 444 (1928).  See also  G.L. c. 4, § 6, cl. 3.  
Courts and this Board frequently refer to a word's dictionary definition in deciphering its "ordinary" meaning.    See The Gillette Company v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 2007-1064, 1073, aff'd, 454 Mass. 72 (2009).  The word "reside" is defined as "[t]o live in a place permanently or for an extended period." The American Heritage College Dictionary, 1161 (3rd Ed. 1997).   Thus, according to the plain and unambiguous words of the statute, afforded their ordinary meaning, the excise at issue applies to premiums relating to covered persons who live in Massachusetts, and the Board so found and ruled.
The Commissioner's arguments to the contrary regarding the statutory language in dispute were without merit.  It was immaterial, for example, that the appellant has historically filed its Excise Returns by applying the excise to all premiums, regardless of the place of residence of the individual receiving care under the policy, or that the appellant self-assessed the amounts at issue on its original Excise Returns for the tax years at issue.  There was credible evidence in the record that the appellant took this position as an administrative convenience, and it has no bearing on the issue before the Board in this matter, which is the proper interpretation of the statute. 
The arguments and authority cited by the Commissioner in support of his position were unpersuasive. In an effort to bolster his position, the Commissioner cited to 830 CMR 176I.1.1, which is his regulation on § 11.  That regulation discusses the determination of the gross premium, and it states, in relevant part: 
[A]ll amounts received from, for, or on behalf of covered persons under an insured health benefit plan that includes a preferred provider arrangement that represent premiums for covered persons to use covered health care services rendered by preferred providers; excluding, however, premiums received for medicare supplemental coverage.  

830 CMR 176.I(3)(b).  
Absent from this language is the express limitation contained within the statute, which restricts the imposition of the excise to only premiums for "covered persons residing in the commonwealth."  G.L. c. 176I, § 11.  While deference is usually given to regulations promulgated by a state agency, "principles of deference . . . are not principles of abdication." Nuclear Metals, Inc. v. Low-Level Radioactive Waste Mgt. Bd., 421 Mass. 196, 211 (1995).   An agency "has no authority to promulgate rules and regulations which are in conflict with the statutes or exceed the authority conferred by the statutes" under which the agency operates. Telles v. Commissioner of Insurance, 410 Mass. 560, 564 (1991)(other citations omitted.)  To the extent that the regulation would include premiums beyond those authorized by the statute, it is invalid, as regulations cannot be "inconsistent with law." See G.L. c. 62C, § 3.
In addition, the Commissioner cited Liberty Mutual Ins. Co. v. State Tax Comm'n, 365 Mass. 411, 413-15 (1975), for the proposition that the courts have broadly construed what constitutes gross premiums for purposes of taxing domestic insurance companies.  At issue in that case was whether certain installment fees charged by an insurance company were to be included as part of the gross premium for purposes of G.L. c. 63, § 22.  Id.  The Court determined that the fees at issue were more in the nature of "payments for insurance," and thus were properly includable in the calculation of the gross premium.  Id.  at  415.  However, the statute at issue in that case did not contain the limiting language set forth within § 11, which specifically applies the excise to only those premiums from covered persons "residing in the commonwealth."  G.L. c. 176I, § 11. Even if the term "gross premium" is to be broadly construed, that term is still subject to the express limitation contained with § 11, and the Commissioner's argument was therefore unpersuasive.  
Additionally, the Commissioner suggested that the appellant was not entitled to the claimed abatements as the premiums that it sought to exclude were not eligible for the any of the deductions provided for within the statutory framework.  This argument, too, was unavailing.  The issue before the Board was not whether the appellant was entitled to deduct the premiums for out-of-state residents, but whether it was required to include those premiums in the base for calculating the excise in the first place.  Based on the plain language of the statute, the Board found and ruled that it was not, and accordingly it rejected the Commissioner's arguments and decided this issue in favor of the appellant. 
	Lastly, the Board found and ruled that the appellant provided sufficient, credible evidence to establish the number of Massachusetts residents covered by its preferred provider arrangements for purposes of calculating the premium excise.  The Board's evidentiary standard, with few exceptions not applicable here, is proof by a preponderance of the evidence.  See Assessors of New Braintree v. Pioneer Valley Academy, 355 Mass. 610, 612 (1969); Space Building Corporation v. Commissioner of Revenue, 413 Mass. 445, 450 (1992).   The preponderance standard does not require certitude, but instead means that the party with the burden of proof must show that the facts necessary to prevail in its claim were more likely true than not.  See Gates v. Boston and Maine Railroad, 255 Mass. 297, 301 (1926); Black v. Boston Consol. Gas Co., 325 Mass. 505, 508 (1950); Sullivan v. Hammacher, 339 Mass. 190, 194 (1959).  In deciding whether a party has met this burden, the Board must be mindful that the "'[e]vidence of a party having the burden of proof may not be disbelieved without an explicit and objectively adequate reason.'" New Boston Garden Corp. v. Assessors of Boston, 383 Mass. 456, 470-71 (1981) (quoting L.L. JAFFEE, judicial control of administrative action 607-608 (1965)).  
	In the present appeals, the appellant presented ample, credible evidence to support its claims for abatement, which in turn required it to demonstrate the number of Massachusetts residents covered by its preferred provider arrangements.  The evidence indicated that, prior to filing its Motion to Amend and the new abatement amounts included therein, the appellant undertook a careful review of its most complete and accurate data. The data itself was maintained in the ordinary course of the appellant's business, and as such, had an indicia of reliability.  The Commissioner, in contrast, did not meaningfully undercut or disprove the evidence offered by the appellant.  Accordingly, the Board found and ruled that the appellant met its burden of proof, by a preponderance of the evidence, as to the number of Massachusetts residents covered by its preferred provider arrangements for each of the tax years at issue. 

	Having resolved both the legal and factual issues presented by these appeals in favor of the appellant, the Board issued decisions for the appellant, and granted abatements in the following amounts: $1,330,364 in tax, along with statutory additions, for tax year 2006; $1,711,953 in tax, along with statutory additions, for tax year 2007, and $1,668,785 in tax, along with statutory additions, for tax year 2008.  


	                            THE APPELLATE TAX BOARD


                             By: __________________________________
      Thomas W. Hammond, Jr., Chairman


A true copy,

Attest:  ___________________________
	    Clerk of the Board




	

 The appellant also offered care plans that were not preferred provider arrangements, such as Delta Dental Premier, and thus premiums derived from those plans were not at issue in these appeals.  
 Mr. Kelly explained that self-insured employers contract with the appellant for certain administrative functions, such as billing, but they remain financially responsible for payment of claims by their employees.  Accordingly, employees of self-insured employers are not includable in the premiums subject to the excise in § 11.  
 The Board notes the distinction between the statutory language of § 11 at issue in the present appeals and the statutes at issue in Bank of America, N.A. v. Commissioner of Revenue, 474 Mass. 702 (2016).  The court in Bank of America affirmed the Board's determination that the term "inhabitant" includes corporate trustees for purposes of G.L. c. 62, § 10, in light of the explicit statutory directive in G.L. c. 62, § 14 that individual and corporate trustees must be treated alike for purposes of the tax at issue.  In the absence of such a statutory directive in the present appeals, the Board ruled that "covered persons residing in the commonwealth" refers to natural persons.

ATB 2017-45