HB2248 HD1

SECTION 1. The legislature finds that section 237-29.7, Hawaii Revised Statutes, exempts "insurance companies" from paying general excise tax on gross premiums. However, the term "insurance companies" is not defined in this section or in chapter 431, Hawaii Revised Statutes, which governs the regulation of insurance. Instead, chapter 431 applies to "insurers" and provides that "insurer" means "every person engaged in the business of making contracts of insurance and includes reciprocal or interinsurance exchanges."

Reciprocal insurers, unlike stock or mutual insurers which are incorporated entities, are unincorporated associations of individuals, partnerships, or corporations which are called "subscribers." These subscribers act and exchange insurance contracts through an attorney-in-fact common to all such subscribers.

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.

However, the general excise tax law has been interpreted to apply the tax to the gross income or gross proceeds earned by a reciprocal insurer's attorney-in-fact for services rendered on behalf of a reciprocal insurer. The basis for this interpretation is that section 237-29.7, Hawaii Revised Statutes, does not expressly define the reciprocal insurer's attorney-in-fact as being part of a reciprocal insurer.

This interpretation has resulted in the unfair treatment of reciprocal insurers and their attorneys-in-fact, who unlike their incorporated stock or mutual insurer counterparts, are not exempt from the general excise tax. This ultimately affects the premium rates paid by subscribers who are insureds of the reciprocal insurer.

The purpose of this Act is to recognize a reciprocal insurer and its attorney-in-fact as a single entity that qualifies for the general excise tax exemption under section 237-29.7, Hawaii Revised Statutes. 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; and

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

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;~~] 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 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 purposes 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.

HOUSE OF REPRESENTATIVES	H.B. NO.	2248
TWENTY-FOURTH LEGISLATURE, 2008		H.D. 1
STATE OF HAWAII