HSC Reassesses what Constitutes a tax.
Hawai'i Insurance Council v. Lingle (HSC December 18, 2008)
Background. The Department of Commerce and Consumer Affairs is an executive agency of the State of Hawai'i. It has an insurance division that is run by the Insurance Commissioner. In 1999 the DCCA was no longer funded by the Legislature's General Fund. Instead it was funded by private persons and entities that were regulated by the DCCA or received DCCA services. Those funds for the insurance division went into a special fund--the Insurance Regulation Fund. Funds were based on assessments made by the Insurance Commissioner and paid for the carrying out of operations by the insurance division and some of the overhead of the DCCA. The money never went to the General Fund. In 2002, the Legislature merged the special fund with another fund. The Legislature determined that there was an outstanding $4 million and directed the transfer of that money to the General Fund. The Governor by line-item veto struck it down to $2 million. The same thing happened in 2003. In all, $3.5 million was transferred to the General Fund. The Hawai'i Insurers Council sued to enjoin those transfers on the grounds that it was an unconstitutional tax. The ICA held that they were indeed unconstitutional taxes. The State appealed.
So is the Exaction a tax? The Hawai'i Constitution prohibits the executive branch from imposing taxes. Haw. Const. Art. VIII § 3. "[T]he tax can be imposed only by the legislative power." McCandless v. Campbell, 20 Haw. 411, 420 (Terr. 1920). But not all exactions are taxes. The Legislature can delegate the power to charge fees. State v. Medeiros, 89 Hawai'i 361, 366, 973 P.2d 736, 741 (1999). The distinction, therefore, hinges on whether the exaction by the executive agency was a fee or a tax. The HSC noted that a taxes are "burdens or charges imposed by legislative authority on persons or property to raise money for public purposes, or, more briefly, an imposition for the supply of the public treasury." McCandless, 20 Haw. at 420. A fee, on the other hand, was not as easy to define.
The Tried and True Service/User fee. The HSC identified two kinds of fees: the service or user fee and the regulatory fee. A service/user fee is determined by a three-prong test: (1) it is applied to the direct benefit for a particular service; (2) it was directly allocated to defraying the costs of providing that service; and (3) it was reasonably proportionate to the benefit. Medeiros, 89 Hawai'i at 367, 973 P.2d at 742. The HSC agreed with the State that this was not a service/user fee, but its analysis did not end there.
. . . And Introducing the Regulatory fee. A regulatory fee is not a tax either. A regulatory fee, according to the HSC, is a charge authorized by the police of power of promoting the public safety, health, and welfare. The HSC had never before adopted a test to determine whether the charge is a regulatory fee and here it adopted the analysis from San Juan Cellular Telephone Co. v. Pub. Service Com'n of Puerto Rico, 967 F.2d 683 (1st Cir. 1992). Under San Juan Cellular, a charge is a regulatory fee (and not a tax) when (1) a regulatory agency assesses the charge; (2) the agency places the monies into a special fund; and (3) the money is not for general purposes, but rather to "defray the expenses generated in specialized investigations and studies, for the hiring of professional and expert services and the acquisition of the equipment needed for the operations provided by law for the payor." Id. at 686.
And so the HSC applied the San Juan Cellular test here. The assessments by the Insurance Commissioner met the first two prongs easily. As for the third prong, the HSC pointed out that the monies cannot be used for a general purpose, but that it could be used to pay for the "regulation or benefit of the parties upon whom the assessment is imposed." Bidart Bros. v. California Apple Com'n, 73 F.3d 925, 931 (9th Cir. 1996). The assessments that went to pay for the overhead costs of the DCCA, according to the HSC, fit the test just fine and it was not an unconstitutional tax.
A Taxing Flow-Chart. This case presents the perfect opportunity to make one of those flow-charts from law school. The first question is whether there is any governmental entity other than the legislature exacting money. If so, then arises the question of whether the charge is a tax or a fee. Before this case, the ICA was confronted with the same question and applied the only test it saw as available: the Medeiros test. Now, however, there is an intermediate step: we need to determine what kind of fee the charge could be. If a regulatory fee, then the San Juan Cellular test applies. If a service/user fee, then the Medeiros approach controls. But how do we determine whether the fee is a regulatory one or a service/user fee? The HSC never really addressed that question. It simply declares that this particular assessment collected by the insurance commissioner was a regulatory fee because the payor did not have a direct benefit.
But if that is the distinction between the regulatory fee and the service/user fee, then what is the distinction between the regulatory fee and the tax? Justice Breyer, who wrote San Juan Cellular when he was Chief Judge of the First Circuit noted that the test is not a three-prong test in the truest sense. The First Circuit wrote that the test is to determine whether the charge is "close to the 'fee' end of the spectrum" rather than the "tax" end. San Juan Cellular, 967 F.2d at 686. So perhaps instead of asking what kind of fee, it is better to ask whether the fee passes muster under Medeiros (even if the HSC never applied it here). If so, then it is a service/user fee. If not, then we may be on that regulatory-fee-to-tax spectrum, which calls for the San Juan Cellular analysis. In the law school flow-chart, both tests apply.
Separation of Powers: the Bigger Problem? The HSC applied the San Juan Cellular test and held that the charges were not unconstitutional taxes. The court then examined whether the Legislature's bills directing the transfer of funds out of the DCCA accounts into the General Fund was a violation of separation of powers. The Hawai'i Constitution "is one in which the sovereign power is divided and allocated among three co-equal branches." Biscoe v. Tanaka, 76 Hawai'i 380, 383, 878 P.2d 719, 722 (1994). A department cannot "exercise powers not so constitutionally granted, which from their essential nature, do not fall within its division on governmental functions, unless such powers are properly incidental to the performance by it of its own appropriate functions." Id. Here, according to the HSC, the legislation directing the transfer of the money to the General Fund was an "impermissible blurring of the distinction between the executive power to assess regulatory fees and the legislative power to tax for general purposes." Thus, the $3.5 million was an unconstitutional attempt by the Legislature to convert the fees to taxes by transferring it to the General Fund. The remedy ordered by the HSC was to invalidate the transfer bills and have the money returned to the DCCA's special fund.
Other Issues. The HSC agreed with the ICA that it had subject-matter jurisdiction to hear the issue and that the assessments by the Insurance Commissioner did not violate Equal Protection provisions.
Background. The Department of Commerce and Consumer Affairs is an executive agency of the State of Hawai'i. It has an insurance division that is run by the Insurance Commissioner. In 1999 the DCCA was no longer funded by the Legislature's General Fund. Instead it was funded by private persons and entities that were regulated by the DCCA or received DCCA services. Those funds for the insurance division went into a special fund--the Insurance Regulation Fund. Funds were based on assessments made by the Insurance Commissioner and paid for the carrying out of operations by the insurance division and some of the overhead of the DCCA. The money never went to the General Fund. In 2002, the Legislature merged the special fund with another fund. The Legislature determined that there was an outstanding $4 million and directed the transfer of that money to the General Fund. The Governor by line-item veto struck it down to $2 million. The same thing happened in 2003. In all, $3.5 million was transferred to the General Fund. The Hawai'i Insurers Council sued to enjoin those transfers on the grounds that it was an unconstitutional tax. The ICA held that they were indeed unconstitutional taxes. The State appealed.
So is the Exaction a tax? The Hawai'i Constitution prohibits the executive branch from imposing taxes. Haw. Const. Art. VIII § 3. "[T]he tax can be imposed only by the legislative power." McCandless v. Campbell, 20 Haw. 411, 420 (Terr. 1920). But not all exactions are taxes. The Legislature can delegate the power to charge fees. State v. Medeiros, 89 Hawai'i 361, 366, 973 P.2d 736, 741 (1999). The distinction, therefore, hinges on whether the exaction by the executive agency was a fee or a tax. The HSC noted that a taxes are "burdens or charges imposed by legislative authority on persons or property to raise money for public purposes, or, more briefly, an imposition for the supply of the public treasury." McCandless, 20 Haw. at 420. A fee, on the other hand, was not as easy to define.
The Tried and True Service/User fee. The HSC identified two kinds of fees: the service or user fee and the regulatory fee. A service/user fee is determined by a three-prong test: (1) it is applied to the direct benefit for a particular service; (2) it was directly allocated to defraying the costs of providing that service; and (3) it was reasonably proportionate to the benefit. Medeiros, 89 Hawai'i at 367, 973 P.2d at 742. The HSC agreed with the State that this was not a service/user fee, but its analysis did not end there.
. . . And Introducing the Regulatory fee. A regulatory fee is not a tax either. A regulatory fee, according to the HSC, is a charge authorized by the police of power of promoting the public safety, health, and welfare. The HSC had never before adopted a test to determine whether the charge is a regulatory fee and here it adopted the analysis from San Juan Cellular Telephone Co. v. Pub. Service Com'n of Puerto Rico, 967 F.2d 683 (1st Cir. 1992). Under San Juan Cellular, a charge is a regulatory fee (and not a tax) when (1) a regulatory agency assesses the charge; (2) the agency places the monies into a special fund; and (3) the money is not for general purposes, but rather to "defray the expenses generated in specialized investigations and studies, for the hiring of professional and expert services and the acquisition of the equipment needed for the operations provided by law for the payor." Id. at 686.
And so the HSC applied the San Juan Cellular test here. The assessments by the Insurance Commissioner met the first two prongs easily. As for the third prong, the HSC pointed out that the monies cannot be used for a general purpose, but that it could be used to pay for the "regulation or benefit of the parties upon whom the assessment is imposed." Bidart Bros. v. California Apple Com'n, 73 F.3d 925, 931 (9th Cir. 1996). The assessments that went to pay for the overhead costs of the DCCA, according to the HSC, fit the test just fine and it was not an unconstitutional tax.
A Taxing Flow-Chart. This case presents the perfect opportunity to make one of those flow-charts from law school. The first question is whether there is any governmental entity other than the legislature exacting money. If so, then arises the question of whether the charge is a tax or a fee. Before this case, the ICA was confronted with the same question and applied the only test it saw as available: the Medeiros test. Now, however, there is an intermediate step: we need to determine what kind of fee the charge could be. If a regulatory fee, then the San Juan Cellular test applies. If a service/user fee, then the Medeiros approach controls. But how do we determine whether the fee is a regulatory one or a service/user fee? The HSC never really addressed that question. It simply declares that this particular assessment collected by the insurance commissioner was a regulatory fee because the payor did not have a direct benefit.
But if that is the distinction between the regulatory fee and the service/user fee, then what is the distinction between the regulatory fee and the tax? Justice Breyer, who wrote San Juan Cellular when he was Chief Judge of the First Circuit noted that the test is not a three-prong test in the truest sense. The First Circuit wrote that the test is to determine whether the charge is "close to the 'fee' end of the spectrum" rather than the "tax" end. San Juan Cellular, 967 F.2d at 686. So perhaps instead of asking what kind of fee, it is better to ask whether the fee passes muster under Medeiros (even if the HSC never applied it here). If so, then it is a service/user fee. If not, then we may be on that regulatory-fee-to-tax spectrum, which calls for the San Juan Cellular analysis. In the law school flow-chart, both tests apply.
Separation of Powers: the Bigger Problem? The HSC applied the San Juan Cellular test and held that the charges were not unconstitutional taxes. The court then examined whether the Legislature's bills directing the transfer of funds out of the DCCA accounts into the General Fund was a violation of separation of powers. The Hawai'i Constitution "is one in which the sovereign power is divided and allocated among three co-equal branches." Biscoe v. Tanaka, 76 Hawai'i 380, 383, 878 P.2d 719, 722 (1994). A department cannot "exercise powers not so constitutionally granted, which from their essential nature, do not fall within its division on governmental functions, unless such powers are properly incidental to the performance by it of its own appropriate functions." Id. Here, according to the HSC, the legislation directing the transfer of the money to the General Fund was an "impermissible blurring of the distinction between the executive power to assess regulatory fees and the legislative power to tax for general purposes." Thus, the $3.5 million was an unconstitutional attempt by the Legislature to convert the fees to taxes by transferring it to the General Fund. The remedy ordered by the HSC was to invalidate the transfer bills and have the money returned to the DCCA's special fund.
Other Issues. The HSC agreed with the ICA that it had subject-matter jurisdiction to hear the issue and that the assessments by the Insurance Commissioner did not violate Equal Protection provisions.
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