Report Title:

Taxation; Insurance Companies; Exemption; General Excise Taxes

 

Description:

Recognizes that a reciprocal insurer and its attorney-in-fact shall be considered as a single entity for tax purposes and not be subject to general excise taxes in order to avoid the effect of double taxation.  (SB2315 SD2)

 


THE SENATE

S.B. NO.

2315

TWENTY-FOURTH LEGISLATURE, 2008

S.D. 2

STATE OF HAWAII

 

 

 

 

 

A BILL FOR AN ACT

 

 

RELATING TO INSURANCE.

 

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 


     SECTION 1.  The legislature finds that reciprocal insurers are insurers or insurance companies as set forth in section 431:1-202, Hawaii Revised Statutes.  Unlike stock or mutual insurers that are incorporated entities, a reciprocal insurer is an unincorporated association of individuals, partnerships, or corporations, which are called "subscribers," who act and exchange insurance contracts through an attorney-in-fact common to all subscribers.

     Accordingly, section 431:3-108, Hawaii Revised Statutes, defines a reciprocal insurer as "an unincorporated aggregation of subscribers operating individually and collectively through an attorney-in-fact common to all such persons to provide reciprocal insurance among themselves."  As a result, a reciprocal insurer cannot conduct the business of insurance in Hawaii without its attorney-in-fact.  Since the reciprocal insurer cannot accomplish anything without its designated attorney-in-fact, a reciprocal insurer and its attorney-in-fact are virtually indistinguishable.

     All authorized insurers are subject to the insurance premium tax, which is imposed upon them in lieu of the general excise and net income tax on the gross premiums received by the insurers, pursuant to article 7 of chapter 431, Hawaii Revised Statutes.  For many years, insurance companies have been exempt from paying general excise tax on gross premiums.  This exemption was enacted by the legislature in Act 141, Session Laws of Hawaii 1935, and subsequently codified as section 237‑23(a)(4), Hawaii Revised Statutes.

     Act 286, Session Laws of Hawaii 1991, modified the general excise tax exemption for insurance companies in section 237‑29.7, Hawaii Revised Statutes, to specify that while the gross income or gross proceeds of insurance companies authorized to do business under chapter 431, Hawaii Revised Statutes, are exempt from the general excise tax, this exemption does not apply to gross income or gross proceeds from real property rentals.

     While chapter 431, Hawaii Revised Statutes, specifically defines "insurer" in section 431:1-202, Hawaii Revised Statutes, there is no definition of "insurance company" or "insurance companies" anywhere in chapter 431, Hawaii Revised Statutes.  While "insurers" and "insurance companies" may refer to the same thing, "insurers" and not "insurance companies" are authorized to do business under chapter 431, Hawaii Revised Statutes.  The legislature finds that the ambiguous use of the term "insurance companies" in section 237-29.7, Hawaii Revised Statutes, should be corrected to accurately reflect application to "an insurer" or "insurers" as defined in chapter 431, Hawaii Revised Statutes.

     Existing law has been interpreted so that the gross income or gross proceeds earned by a reciprocal insurer's attorney-in-fact for services rendered on behalf of a reciprocal insurer are subject to the general excise tax because the attorney-in-fact is not expressly defined as being part of a reciprocal insurer under section 237-29.7, Hawaii Revised Statutes.  That definition has resulted in double taxation and the unfair treatment of reciprocal insurers and their attorneys-in-fact, who unlike their stock or mutual insurer counterparts, are not exempt from the general excise tax, which in turn may ultimately affect the premium rates paid by subscribers who are insured by the reciprocal insurer.

     The purpose of this Act is to recognize that a reciprocal insurer and its attorney-in-fact shall be considered as a single entity and shall not be subject to double taxation under Hawaii law.  Specifically, this Act:

     (1)  Ensures that when a reciprocal insurer is conducting the business of insurance in Hawaii through its attorney-in-fact, the reciprocal insurer and its attorney-in-fact shall be considered a single entity that qualifies for the general excise tax exemption under section 237-29.7, Hawaii Revised Statutes;

     (2)  Clarifies that the general excise tax exemption applies to insurers, and not insurance companies, authorized to do business under chapter 431, Hawaii Revised Statutes; and

     (3)  Makes other amendments for purposes of clarity and consistency.

     SECTION 2.  Section 237-29.7, Hawaii Revised Statutes, is amended to read as follows:

     "[[]§237-29.7[]]  Exemption of [insurance companies.] insurers.  This chapter shall not apply to the gross income or gross proceeds of [insurance companies] insurers authorized to do business under chapter 431; except this exemption shall not apply to any gross income or gross proceeds received after December 31, 1991, as rents from investments in real property in this State; provided that gross income or gross proceeds from investments in real property received by [insurance companies] insurers after December 31, 1991, under written contracts entered into before January 1, 1992, that do not provide for the passing on of taxes or tax increases shall not be taxed until the contracts are renegotiated, renewed, or extended."

     SECTION 3.  Section 431:1-202, Hawaii Revised Statutes, is amended to read as follows:

     "§431:1-202  Insurer defined.  Insurer means every person engaged in the business of making contracts of insurance and includes reciprocal insurers or interinsurance exchanges."

     SECTION 4.  Section 431:3-108, Hawaii Revised Statutes, is amended to read as follows:

     "§431:3-108  Reciprocal or reciprocal insurer.  A reciprocal or reciprocal insurer means an unincorporated aggregation of subscribers operating individually and collectively through an attorney-in-fact common to all such persons to provide reciprocal insurance among themselves."

     SECTION 5.  Section 431:7-204, Hawaii Revised Statutes, is amended to read as follows:

     "§431:7-204  In lieu provision.  (a)  As to insurers, the taxes and fees imposed by section 431:7-201 to section 431:7-204, and the fees imposed by this code, when paid shall be in settlement of and in lieu of all demands for taxes, licenses, or fees of every character imposed by the laws of this State, the ordinances or other laws, rules, or regulations of any county of [this] the State, except:

     (1)  As expressly otherwise provided;

     (2)  Taxes on real property;

     (3)  Taxes on the purchase, use, or ownership of tangible personal property; [and]

     (4)  Taxes on gross income, gross proceeds, gross rental, or gross rental proceeds under chapter 237 or 237D[.]; and

     (5)  Each corporate or other attorney-in-fact of a reciprocal insurer shall be subject to all taxes imposed upon corporations or others doing business in the State, other than taxes on income or gross receipts derived from its principal business as attorney-in-fact.

Nothing in this section shall be deemed to exempt insurers from liability for withholding taxes payable by their employees and paying the same to the proper collection officers, or from keeping [such] records, and making such returns and reports, as may be required in the case of other persons enjoying tax exemption.

     (b)  As used in this section, "attorney-in-fact" means the attorney-in-fact authorized to act for an unincorporated aggregation of subscribers of a reciprocal insurer as a whole and not for the benefit of an individual subscriber or group of subscribers less than the entire membership of the reciprocal insurer pursuant to section 431:3-108.  For the purpose of this section, a reciprocal insurer and its attorney-in-fact shall be considered a single entity."

     SECTION 6.  Statutory material to be repealed is bracketed and stricken.  New statutory material is underscored.

     SECTION 7.  This Act shall take effect on July 1, 2008.