Can a tort victim recover sales tax from a tortfeasor who causes the total loss of the tort victim's vehicle? The Louisiana Supreme Court addressed this issue in the case of State Farm v. Berthelot, 98-1011 (La. 4/13/99), WL 213023 (La.).
A State Farm insured and a Southern United Fire Insurance Company (SUFIC) insured were involved in a motor vehicle accident. The State Farm insured's automobile was declared a total loss. Comprehensive and collision coverages were limited to the lower of either the actual cash value or the cost of repair or replacement. In this case, State Farm paid for the total loss if the car, which included the face price of the vehicle and sales tax (less the deductible). SUFIC paid State Farm for the cash value of the vehicle but refused to pay the sales tax. In response, State Farm brought suit against SUFIC and moved for summary judgment based on La.Civ. Code art. 2315. The trial court granted State Farm's motion and the Fourth Circuit affirmed.
The Court of Appeals supported its decision based on general principles of tort law emanating from La.Civ.Code art. 2315, and more particularly, the fact that the primary objective of a general damage award is to restore the injured party to the state that the party was in before the injury. Additionally, the appellate court found that La.R.S. 22:655 (D) contained a statement of public policy, which supported the concept of making an insured whole following an injury or property damage.
Subrogation Issues
The Supreme Court viewed State Farm's claim against SUFIC as a subrogation action. While the relationship between State Farm and its insured had its origin in their contract of insurance, conventional subrogation did not govern State Farm's subrogation rights, but instead, according to the Supreme Court, codal provisions relevant to subrogation governed the relationship between State Farm and SUFIC. As such, the Supreme Court found that, notwithstanding the contractual relationship between State Farm and its insured, the subrogation action by State Farm was not a conventional subrogation, but instead a legal subrogation. (La.Civ.Code art. 1825)
The Supreme Court went on to explain that in subrogation, the insurer has no greater rights than that of its insured. As such, the Supreme Court's opinion examined the compensation right of the tort victim in order to assess State Farm's position.
State Farm argued that it was the legal and conventional subrogee of its insured. SUFIC argued that State Farm was subrogated to its insurer's rights only to the extent that it provided coverage to its insured. SUFIC argued that since State Farm's policy did not specifically obligate State Farm to reimburse sales tax, its payment of same was outside the policy limits and, therefore, SUFIC was not liable for that payment. The Louisiana Supreme Court specifically pointed to La.Civ.Code art 1830, which provides that when subrogation takes place by operation of law, the new obligee may recover from the obligor only to the extent of the performance rendered to the original obligee. The obligee may not recover more by invoking conventional subrogation.
The Supreme Court reasoned that because of this provision, there was no need to examine the specific language of the State Farm policy, which defined its payment obligations to its insured. State Farm, according to the Supreme Court, as the new obligee via legal subrogation, could not take advantage of its conventional subrogation agreement to increase its recovery from the tortfeasor and his insurer beyond the debt that the tortfeasor owed under Louisiana tort law. State Farm could only recover what was actually owed to its insured as a result of the tortfeasor's negligence.
When Tax Liability Arises
The Louisiana Supreme Court explained that a sales tax is a distinct and separate charge which the retailer is required to collect as a "pass through" entity for the benefit of the state and local government. Under Louisiana Law, sales tax is due upon the sale price of the vehicle. Additionally, the service and repair of vehicle, gives rise to the imposition of a tax. The court observed that had State Farm repaired or replaced its insurer's vehicle, there would have arisen an event or transaction for which a tax could have been imposed. Under these circumstances, tax liability arises as a matter of law.
In the instant case, however, the Supreme Court noted that since no sale, repair or replacement had occurred, no taxable event had taken place. Accordingly, the Supreme Court concluded that although any of these transactions can give rise to the imposition of a tax, none had occurred in the case at bar. The court concluded that the vehicle in question did not have a higher value when it was totaled simply because a sales tax was paid when it was originally purchased nine years earlier. With market valued damage awards, transactional costs are ignored.
Therefore, according to the Supreme Court, payment of market value of the vehicle in question, without the payment of sales tax, restored the tort victim to the position that he would have occupied if the injury had not been inflicted. The court dismissed State Farm's contention that its subrogation rights entitled it to reimbursement for the sales tax it paid to its insured. The court likewise found no merit to the argument that public policy demand that an injured person be paid a sales tax based upon the value of the totaled vehicle. The Supreme Court reversed.