Case Title: In re Tax Appeal of Director of Taxation, State of Hawaii v. Medical Underwriters of California.

Citation: 115 Haw. 180

Docket Number: 

State: hawaii

Court: Hawaii Supreme Court

Date: 2007-08-30T00:00:00Z

Document:
MAW LIBRAR,

 

FOR PUBLICATION IN WEST'S HAWAM REPORTS AND PACIFIC REPORTER **#

IN THE SUPREME COURT OF THE STATE OF HAWAI'T

 

000

 

 

IN THE MATTER OF THE TAX APPEAL OF

DIRECTOR OF TAXATION, STATE OF HAWAT'E,
‘Appellant /Cross-Appellee,

aai4

p 1s
SWAB ano

Wuvk 1 YHUON

MEDICAL UNDERWRITERS OF CALIFORNIA,
‘Taxpayer-Appellee/Cross-Appellant-

Vee Rd Of ONY LOG

No. 27023

APPEAL FROM THE TAX APPEAL COURT
(TAX APPEAL CASE NO. 00-0061)

AUGUST 30, 2007
MOON C.J.

 

LEVINSON, NAKAYAMA, ACOBA, AND DUFFY, JJ.
OPINION OF THE COURT BY NAKAYAMA, J.

Appellant /Cress-Appellee, director of taxation, State
of Hawai's (“director”), appeals from the following orders and
judgment of the tax appeal court:! (1) the April 1, 2004 “orde
Regarding Director of Taxation, State of Hawaii’s Motion for
Sunmary Judgment”; (2) the Septenber 13, 2004 “Order Granting
Appellee Medical Underwriters of California’s Motion for Partial
Summary Judgment Filed August 10, 2004"; (3) the Septenber 13,
2004 “Final Judgnent”; and (4) the January 18, 2008 order denying
the director's motion for reconsideration. On appeal, the
director asserts that the tax appeal court erred by (1) sua
sponte determining that Medical Underwriters of California

("Myc") was subject to the .15 percent general excise tax rate

‘The Honorable Gary ¥.

   

chang prs
 

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imposed by Hawai" Revised Statutes (“HRS”) § 237-13(7) when it
is undisputed that MUC was not Licensed as an insurance solicitor
or agent, and (2) denying his motion for reconsideration.

Appellee/Cross-Appellant, MUC, cros:

 

ppeals from the
following judgment and orders of the tax appeal court: (1) the
September 13, 2004 “Final Judgment”; (2) the December 20, 2004
“order Denying Appellee Medical Underwriters of California's
Motion for Attorney's Fees and Costs Filed Septenber 27, 2004"
and (3) the December 20, 2004 “Order Denying Appellee Medical
Underwriters of California's Motion for Leave to File Amended
Answer to Appellant Director of Taxation, State of Hawaii's
Notice of Appeal to the Tax Appeal Court Filed July 6, 2000 and
to Alter or Anend Final Judgment{.]" On appeal, MUC presents the
following points of error: (1) the tax appeal court erred by
failing to exempt MUC from the payment of general excise taxes
pursuant to HRS § 237-29.7 inasmuch as MUC is an insurance

(2) the
tax appeal court improperly denied MUC’s motion for leave to file

 

company authorized to do business under HRS chapter 43:

an amended answer to director’
6, 2000, and to alter or amend the final judgment filed September
23, 2004; and (3) the tax app

 

notice of appeal, filed on July

 

1 court improperly denied muc

 

notion for attorneys’ fees and costs.
For the reasons that follow, we resolve the director's
appeal as follows: (1) the tax appeal court erred by applying
the .15 percent tax rate imposed by HRS § 237-13(7) inasmuch as
it is reserved for licensed general agents, subagents, and
solicitors; and (2) the tax appeal court did not err by denying

the director's motion for reconsideration. With respect to MUC’s

 

cross-appeal, we hold that: (1) MUC is not an insurance company

2
 

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exempt from the payment of general excise taxes; (2) MUC'S
axgunent that the tax appeal court erred by denying its motion

for leave to file an anended answer to the director's notice of
appeal, and to alter or amend the final judgnent filed Septenber
23, 2004 Le moots and (3) the tax appeal court did not err by

denying MUC’s notion for attorneys’ fees and costs. We therefore
partially vacate the tax appeal court's judgment and remand with

 

instructions to enter judgnent in favor of the director in the
anount of $105,172.04.
1. BACKGROUND

It is undisputed that MUC manages the Hawai"i-based
insurance operations for Medical Insurance Exchange of California
(*MIEC") and Clarenont Liability Insurance Company ("CLIC"),
foreign insurers authorized to do business in Hawai". Inasmuch
as MUC's activities essentially constituted the transaction of

insurance busines!

 

the insurance division of the Department of
commerce and Consuner Affairs, State of Hawai‘i, has consistently
construed MUC as an insurer for licensing purposes under HRS
chapter 431. As such, MUC has taken the position that it is an
“insurance company” exempted from general excise taxes under HRS
§ 237-29.7. Based upon the perceived exemption, MUC did not file
general excise tax returns with respect to, and did not pay
general excise taxes on, funds received in exchange for its

services rendered to MIEC and CLIC.

 

In 1999, the director assessed general excise taxes
against MUC at a rate of four percent for unreported income
received from 1985 through 1999. MUC prepaid and appealed

$160,258.45 of the director's assessments for the time period
 

FOR PUBLICATION IN WEST'S HAWAII REPORTS AND PACIFIC REPORTER.

from January 1, 1992 to January 31, 1999 to the Board of Review,
First Taxation District ("Board”).? On June 7, 2000, the Board
found that MUC’s tax liability was $19,460.36.

on July 6, 2000, the director filed a notice of appeal
in the tax appeal court.”

1, The parties’ motions for summary judament

on August 24, 2001, the director filed a motion for
summary judgment. Therein, the director alleged the following
facts. MUC is the attorney-in-fact for MIEC and the managing
agent of CLIC. MUC provides managenent services to MIEC and
CLIC, including selling insurance, making investments, and
adjusting, settling, and paying claims. To execute those
services, MUC maintains an office located at 1360 South Beretania
Street, Suite 405, Honolulu, Hawai'i and employs three persons in
ite claims department. MUC receives a percentage of the premiums
it collects on behalf of MIEC and CLIC as compensation for its
services. Although MIEC and CLIC were licensed in this
jurisdiction as foreign insurers, MUC was not licensed as an
insurer under HRS § 431:3-201. MUC was also not licensed as an
insurance general agent, subagent, solicitor, or adjuster under
HRS § 431:9-201. During the time period in question, MUC did not
file any general excise tax returns and paid no general excise
tax. Based upon the foregoing factual allegations, the director

argued that (1) MUC’s income from management services provided to

 

MIEC and CLIC was subject to Hawai'i’s general excise tax at a

 

3 The Board dismiesed MiC's appeal as to the 1985 to 1981
Jecanents dve to MUC'# failure to prepay.

 

+ te Honorable Gary W.B. Chang presided.

4

 
   

‘OR PUBLICAT

 

IN WEST'S HAWAII REPORTS AND PACIFIC REPORTER

rate of four percent, (2) MUC was not an insurance conpany
authorized to do business under the Hawai'i Insurance Code and
was thus not exempt from paying general excise taxes under HRS §
237-29.7, and (3) MUC did not qualify for the reduced .15 percent
general excise tax rate available to licensed inevrance general
agents, subagents, solicitors, or adjusters.

On Septenter 10, 2001, MUC filed a memorandum in
opposition. Therein, MUC disputed the director's
characterization of MUC, MIEC, and CLIC as separate entities.
Rather, MUC claimed that (1) it is the attorney-in-fact for MIEC,
a reciprocal insurance exchange, (2) that CLIC is a wholly ovned
subsidiary of MIEC, and (3) in every tax year since 1981, the
insurance commissioner has treated MUC and MIEC as a single
enterprise or entity, MUC asserted that the MIEC entity payed
gross premium insurance texes to the director of finance,
pursuant to HRS § 431:7-202, and that MUC, as part of the IEC
entity, was not subject to an additional general excise tax. uc
argued further that it should be included within the definition
of “insurer” for purposes of the general excise tax exemption by
virtue of its status as a constituent of the MIEC entity.

On April 1, 2004, the tax appeal court filed an order
partially granting and partially denying the director's notion
for summary judgment. The court concluded as follows

that of an inuurance: solicitor or geteral agents”
provides that, spon every person engaged a” a licensed colietter,

General agent, or eubagent pureuant to [HRS] chepter 431, there i8
hereby levied’ snd shall be sesessed and collected tax equal to

 

   

 

 

‘the director filed # reply nenorandum on Septenber 12, 2001 and 2
sopplenental nenorandum in support on October 2, 2001. MUC filed’ a
supplenental nenorandum in opposition on Octeber 3, 2002

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25 per cent of the conaissions due to such activity.”

5." (ioc) is taxable at the reduces general excise tax
rate of .15N on its conissions oF compensetion for services
Eendered se the attorney-in-fact.

(“The Court 14 not Ignoring the licensing requirement in
uns § 237-12(7), but believes that the statutory requirenenes of
attorneys-in-fact contained in HRS chapter 431, in effect, satisty
the statutory licensure requirenents of HRS § 237-13(7)-

S.A determination of the exact dollar anount of tax
Llabinity 42 not sajudicated by this order.

(Some brackets added and some in original.)
on August 10, 2004, MUC filed a motion for partial
summary judgment. MUC argued that since the court decided that

MUC is subject to a .15 percent tax rate,

 

the only remaining
issue is the exact dollar ancunt, which MUC calculated to be
$3,943.95. On August 19, 2004, the director filed a response to
muc's motion for partial summary judgment. Therein, the director
did not oppose MUC's calculation of its tax liability in the
amount of $3,943.95. Rather, the director clarified that he
continued to object to the court’s refusal to uphold the
assessment at a tax rate of four percent.

On Septenber 13, 2004, the court filed an order
granting MUC's motion for partial summary judgment. The court
also filed 2 “Final Judgnent,” stating as follows:

1, Appellant Director of Taxation, ste
appeat filed Joly 6, 2000 from the Board of Review for the First
Tonation District, State of Hawaii's Decision dated June 7, 2000
is hereby denied;

2.) ““Rppeliee Medical Underwriters of California is taxable
lat the teduced general excise tax rate of 0-15t (Fizteen
hundredths of one percent) on ite commissions or conpe!

Services rendered as the attorney-in-fact for Medical
Exchange of California;

‘3: Rppeliee Medical Underwriters of California's
Liabiiity for general excise tex for the period Janvary 1, 1992
through Jenuary 31, 1999 is $3,943.95 (Three, Thousand Nine Hundred.
Ferty Three Dollars and Ninety’ Five Cents)-[*] Any remaining

   

   

 

 

* the $3,943.95 amount ie derived from applying @ .15 percent tax

rate to Mic’ s gross incone received as compensation for services rendered to
(cone insed,

 

 

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elaine ore dientesed with prejudice

 

The director's motion for reconsideration
Following the tax appeal court's oral ruling on MuC’s
August 10, 2004 motion for partial sunmary judgment, the director
filed a proposed order that included the following pertinent
finding of fact: “MUC’s gross income subject to the general
excise tax for compensation for services rendered as an attorney~
in-fact to (MIEC] and (CLIC] for the period January 1992 through
January 1999, inclusive, totaled $2,629,301.00." uc filed
objections on September 8, 2004, asserting, inte: , that the
dixector’s finding of fact

Se inoppropriate because said proposed “fact” As erroneous an
neoppertes by any evisence. That appellee treated appellant’
Genera excise tax aseesenents, as “adniesions against interest’
Under Aule 803 of the Hawaii Roles of Evidence for the purpose of
Mc's notion for partial summary Judgment, does not convert the
assessments Into stipulated facts:

[the director's) proposed finding . . . should alse be
rejected because it is factually incorrect. (The] [f}inding «+ «
Eltonesusly states that appellee received “compensation for
Secvices rendered as an attorney-in-fact for... (CLIC)." In
fact, [CLI¢] 1s Not s reciprocal insurance carrier and therefore
did not compensate MIC for services rendered as its atterney-in=
fect.”

   

 

   

(Some ellipses added and some in original.)

On September 17, 2004, the director filed a motion for
reconsideration of the order granting MUC’s motion for partial
sunmary judgnent, arguing that MUC’s objections presented new
evidence of genuine issues of material fact when MUC made the
following two factual admissions:

1, (toc] aid not receive any compensation or commissions
from (CLIC) for services rendered 45/ay attorney-in-facts and

Iie} “does not agree that its gross income subject to
the gencral cneive tax for conpensation for services rendered as

 

(,..continued)
nec and CLIC, calculated by the director to be §2,629,301.00. The tax appeal
Court opperently did not avard the director interest of penalties

   

 

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fn sttorneymin-fact to (MIEC] and (CLIC) for the period January
4992 through Janvary 1998, inclusive, totaled $2, €25, 301.00.

 

The director contended that the compensation received by MUC from
CLIC was subject to a tax rate of four percent, rather than .15
percent, inasmuch as CLIC was not a reciprocal insurer and MUC
was not its attorney-in-fact. The director also averred that MUC
created a genuine issue of material fact as to MUC’s tax
Liability inasmuch as it expressly denied receiving gross income
in the amount of $2, 629,301.00 during the tax period in question.
‘The director pointed out that .15 percent of $2, 629,301.00 equals
$3,943.95 and that MUC’s denial of the gross income amount
necessarily means that its calculated tax liability required

MUC filed a memorandum in opposition on Septenber 27,
2004. MUC countered that the .15 percent tax rate applied to its
compensation received from CLIC inasmuch as it acted as an
“insurance company” for all of CLIC’s business in Hawai'i despite
its lack of attorney-in-fact status. MUC argued further that
calculation of its tax liability was based on the director’s own
assessments, that the director “had every opportunity to verify
CLIC's insurance status and the accuracy of its own assessments,”
and that “[i]t is simply too late for [the director] to raise . .
+ ‘new evidence’ as a basis to vacate the Order and Final
Judgment herein.”

On January 18, 2005, the court filed an order denying
the director’s motion for reconsideration.

3. MG's motion to amend

On Septenber 23, 2004, MUC filed a motion for leave to

file an amended answer to the director's “Notice Of Appeal To Tax
   

“OR PUBLICATION IN WEST'S HAWAI REPORTS AND PACIFIC REPORTER

 

Appeal Court” and to alter or amend the September 13, 2004 “Final
Judgnent[.]” Therein, MUC requested consolidation of the
adjudication of the 198-1991 assessments with the present
adjudication of the 1992-1999 assessments. The director filed a
memorandum in opposition on October 8, 2004, objecting to MUC's
motion, inter alia, on the grounds that MUC may not cure its
failure to perfect a timely eppeal with respect to the 1985 to
1991 assessments through a motion to amend its pleadings in the
present case regarding the 1992 to 1999 assessments. On December
20, 2004, the court filed an order denying MUC’s motion for leave
to file an amended answer to the director's “Notice Of Appeal To
Tax Appeal Court{.]"
4, MUG's motion for attorneys’ fees and costs

On September 27, 2004, MUC filed a motion requesting an
award of attorneys’ fees and costs. Therein, MUC asserted that
it prevailed on its appeals before the Board and the tax appeal
court and that the director’s assessments from 1985-1999 were
frivolous, wilful violations of law, and in bad faith. on
December 20, 2004, the tax appeal court filed an order denying
Muc’s motion for attorneys’ fees and costs.

5. Notices of appeal

On December 10, 2004, the director filed a notice of
appeal from (1) the April 1, 2004 “Order Regarding Director of
Taxation, State of Hawaii’s Motion for Summary Judgment,” (2) the
September 13, 2004 “Order Granting Appellee Medical Underwriters
of California’s Motion for Partial Summary Judgment Filed August
10, 2004," (3) the September 13, 2004 “Final Judgment,” and (4)
the January 18, 2005 order denying the director's motion for
reconsideration. NUC filed a notice of cross-appeal from the

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final judgment on December 27, 2004. On Janvary 19, 2005, MUC
filed a separate notice of appeal from the following post-
judgment orders: (1) the December 20, 2004 order denying MUC's
Septenber 23, 2004 motion for leave to file an amended answer and
to alter or amend the final judgments and (2) the December 20,
2004 order denying MUC's September 27, 2004 motion for attorneys’
fees and costs.
I, STANDARD OF REVIEW
When reviewing decisions of the tax appeal court, we
have generally stated as follows:
It Ss well settled that{,] in reviewing the dectaion
and findings of the Tax Appeal’ Court, a presumption arises
favoring ite actions which should not be overturned without

good and sufficient reason. The appellant hes the burden of
cision of the Tax Appeal Court was

 

Apoes sky cou vy, cies
Honolulu, €5 tawat' 36, 33, 936 p-24 612, €18 (1997) (quoting

79 Haw. 449, 455, 634 P.2d
3302, 1306 (1992))

Conversely, “(Conclusions of Lew art
right/urong standard,” "Gold v. Uarrlson,
P.2d 353, 359 (1996) "(citing Furukema v. Honolulu Zooleaical
Acclaty, "eS awai't 7, 12, 336 P-24 €43, G48 (1997))- Under the
e nove’ or right /wrorig standard, this court “evamine[s] the facts
fand anewer{a] the question without being required te give any
Weight to the trial court's anewer to it." ide (ceiving Aletin

Ocean View Inv. Cou, Inc., 84 Hawai" 447, 453,"995 P20 992, 598
(99

owed under the
jawai's 94, 100, 962

     

1 e Tax Avr re

Club v, County of Maui, 90 Hewai't 334, 339, 978 P.2d 772, 777
(1999) (brackets in original).

 

gous Va

 

More particularly, the director's appeal and MUC's
cross-appeal in the case at bar present questions involving the
meaning of, and interplay between, provisions of HRS chapters 237
and 431, Such ere questions of law reviewable de novo. Ide
("It]he meaning of a statute is 2 question of law that this court

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reviews de novo.”)
XII. DISCUSSION
A. ‘The Director's Appeal
1. MUC is subject to the ceneral exci at a rate
four percent.

‘The director's first point of error asserts that
management services provided by MUC to MIEC and CLIC should have
been taxed at four percent, 2s cpposed to -15 percent. In order
to resolve the issue presented by the director, it is first
necessary to address the issue presented by MUC's cross-appeal as
to whether MUC is an insurance company exempt from general excise
taxes under HRS § 237-29.7.

a. MUC is not an insurance company under HRS § 237-
29.7 and HRS chapter 431, and it ie therefore not
exempt from general excise tax:

 

As mentioned, HRS § 237-29.7 exenpts from the payment

 

of general excise tax assessments “insurance companies authorized
to do business under HRS chapter 431.” MUC, in its opening brief
on cross-appeal, urges that it is an insurance company under HRS
§ 237-29.7 and an “insurer” under HRS § 431:1-202 by virtue of
its status as the inseparable operating arm of the MIEC
reciprocal insurance exchange.*

Contrary to MUC’s argunents, however, the provisions of
HRS chapter 431, article 4, in pari materia, evince a legislative
intent to recognize a bipartite relationship. See HRS § 1-15(1)

+ Mocts pening brief does not present any argunent with respect to

ite velaticnship with CLIC. Accordingly, any such argument has Deen waived,
iai't Rules of Appellate Procedure Rule 26(b) (7) (2008) (Points not
nay be deened waived."), and the forthconing analysis iil
freee only unether on attorney-in-fact of a reciprocal insurer ie
insurance cenpany or “insurer.

 

      

   

a
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(1993) ("The meaning of ambiguous words may be sought by
examining the context, with which the ambiguous words, phrases,
and sentences may be compared, in order to ascertain their true
“405 define a

 

meaning.”). For example, HRS §§ 431:3-107 and 431:
reciprocal insurer and its attorney-in-fact in terms of their
relationship with each other, rather than bestowing existential
equivalence. See HRS § 431:3-107 (1993) ("A reciprocal insurer
means an unincorporated aggregation of subscribers operating
individually end collectively through an attorney-in-fact conmon
to all such person to provide reciprocal insurance anong

); HRS § 431:4-405 (1993) ("Attorney as used in this

 

themselves

 

part, refers to the attorney-in-fact of a reciprocal insurer.").
Also, as argued by the director, HRS § 431:4-406 requires the
attorney-in-fact to obtain a pover of attorney. Indeed, HRS §

431:4-406 (1993) provides as follows:

$431:4-406 Power of attorney. (a) The rights and powers of
the attorney of a reciprocel insurer shall be as provided in the
power of attorney given it by the subscribers.

{b)" “She power of sttorney must set forth:

(2) The powers, duties, and conpensation of the attorney:

(2) ThatPthe sttorney ie eapowered to accept service of
frotess on behalf of the insurer end to authorize the
Ecanissicner to receive service of process in action
Sgsinst the insurer upon contracts exchanged?

(3) Except as to renasseseable policies, a provision for
contingent several lisbility of cach subscriber in a
Specified ancont, which ancunt shall be not less than
che her more than ten times the presium or premium
Sepoait stated in the policy.

(c) The poner of attorney may:

(i) Provide for the right of substitution of the attorney
and revocation of the power of attorney and rights
thereunder;

(2) Tnpose svch restrictions upon the exercise of the
poner as are agreed upon by the subscribers;

(3) Provide for the exercise of any right reserved to the
Subscribers directly of through their advisory
committee and

(4) Contain other lawful provisions deened advicable

(a) The terms of any power of attorney, or agreenent

collateral thereto, shall be reasonable, equitable, and no such
power, agreenent or any anenduent thereof, shall be used or

   

 

 

 

 

 

 

 

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HAWAII REPORTS AND PACIFIC REPORTER
effective in this State until approved by the comissicner.
If, as NUC asserts, an attorney-in-fact 18 the operating arm of
the reciprocal ineurance exchange, as opposed to a legally
distinct agent of the exchange, a power of attorney would seem
unnecessary. Moreover, a reciprocal insurance exchange is
required to have a subscribers’ advisory committee. Soe HRS 55
431:4-409(a) (7) and 431:4-415 (1893). BRS § 431:4-415 provides

 

the following:

$¢31:4-415 Subscribers’ advisory comsittee, (a) the
advisory ccnmittee of s donestic reciprocal insurer exercising the
Subscribers” rights shall be selected under such rules ss the
subscribers adopt.

 

 

(b) Not ieee than three-fourths of the committee shall be
od) of subscriber ney, oF an
‘fnploved by, representing, or having a financial interest ia the
attomey,
Te) The committee shall:

(D) Supervise the finance
(2) Supervise the incurer's operstions to evch extent as
te assure their conformity with the subscribers”

agreement and power of attorney?
(3) Procure the avait of the account:
and of the attorney at the expense of the
5 and.
(4) Have such sdditiona powers and functions as may be
conferred by the subscribers’ agreement.

  

  

   

 

(Sophasis added.) These requirements are clearly designed to
protect the rights and interests of the subscribers where they do
not align with those of the attorney-in-fact. Finally, HRS
chapter 431, article 4, is replete with provisions that refer
separately to the “attorney” and the “insurer.” See HRS § 431:4-
406 ("The attorney is empowered to accept service of process on

 

 

behalf of the insurer and to authorize the conmissioner to
receive service of process in actions against the insurer...
.")4 HRS § 431:4-411(b) (1993) (“The bond shall be in the sum of

$25,000 conditioned that the attorney will faithfully account,
before a notary public, in a sworn affidavit, for all moneys and

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other property of the insurer coning into the attorney's hands,
and that the attorney will not withdraw or appropriate for the
attorney's own use from the funds of the insurer any moneys or
property to which the attorney is not entitled under the power of

attorney.”); HRS § 431:4-415(c) (3) ("The [subscribers’

 

advisory]
committee shall . . . (plrocure the audit of the accounts and
records of the insurer and of the attorney at the expense of the
insurer... .”); BRS § 431:4-422 (1993) ("The attorney or other
parties may advance to the reciprocal insurer funds as it may

require from time to time in its operations.”).

 

Additionally, under analogous circumstances, the
Indiana Court of Appeals in Ind, Dep't of Revenue v, Am.
nderwriters, Inc., 429 N.E.2d 306 (Ind. Ct. App. 1981), reb'a
denied, 431 N.E.2d 528 (Ind. Ct. App. 1982), held that American
Underwriters, Inc. (*A-U"), the attorney-in-fact of American
Interinsurance Exchange ("Exchange"), was a “distinct entity for
tex purposes... .” Id, at 312. In so holding, the court
recognized that the arrangement consisted of a singular
entezprise, id. at 311, but explained that “in the legal form of
‘the operation, and in the final analysis, a cleavage exist (ed)
and the single enterprise [was] conpartmented.” Id, The court
elaborated upon the separateness of A-U and the Exchange, as
follows:
First, the interests of A-U and the Exchange are divergent, and
the interesta of the Exchange are not coextensive with those Of Ax
U." Acceraing to the contract cocurents the subscribers ere
eititied to any profite and assete of the Exch
dissolution, ‘and AcU hes no interest in those
the subscribers have no interest in the Ml assets
of the Exchange are eubsect to the LiabLlity of the insurance
egeration, Bur none of the sesets of A-0 are svailable to these
claimants, AsO has five wholly-owned subsidiaries in weich the

Exchange subscribers heve no inter ‘Second,
treated for most purposes as an entity By AU, public

      

 
     

Likewise,

 

 

   

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snsedtutions,
heme of (the Exchange]. AcU he
for the purpose of increasing the guaranty fund, and A-O hes
received the Fuchange's notes az security, Separate acccunts are
kept, and the respective assets of A-U and the Exchange are
segregated. Bonk sccounte are kept in the name of the Sxchange
and checks written in the rane of the Exchange. Policies of
insurance are written in the mane of the Exchange, losses adjusted
in the nane of the Exchange, and, in general, business is
trantacted in the rane of the Exchenge, Federal tax returns are
fled in the nane of the Exchange. ‘The annval statement to the
Indlana Tneorance Departnent 1s published in the nae of the
Exchange, and cther publications. reflect the Investaent Port folio
to be in the rane of the Exchange snd nanaged by the indiana
National Bank. These dscunente are not commingled mith the
personal assets or Business of A-U.

and the public at lorge, It sues and de ued in the
leaned the Exchange suns of money

 

  

  

 

 

 

 

Id, at 311-12, The court also noted that, having elected to
operate as an interinsurance exchange, A-U may benefit from the
advantages that flow from the particular business form, but must
also accept the attendant disadvantages:

It was conceded in oral argument by A-U that the principal
eevantage to writing incurance in thie sanner is the insulation of
Liability to A-U in-an area of high-risk, substandard insurance,

Tt appears that the rganizers of Ac deliberately have selected
this statutorily permitted vehicle of reciprocal insurance end
have Conpartnented the enterprise to achieve that end. Different
forms of business enterprises have different legal ss vell es tax
Consequences, ‘sone advantageous, and sone disadvantageous, “On the
fone hand, we’ view AU as desiring to trest the Exchange as 3
Separate entity to maintain insulation from 1iability, and on the
other hand, as desiring to escepe dual taxation By calling itself
‘and the Exchange ene single enterprise

 

 

     

 

Id, at 312. The court thus concluded that the receipt of
Premiums from policyholders by the Exchange wae one taxable
event, and "when A-U, as attorney-in-fact acting for the
Exchange, paid itself personally . . . the premium for its
management fee, a second taxable event occurred.” Id.

Similarly, in the case at bar, MUC’s own arrangements
with MIEC indicate that it is a separately taxable legal entity.
Under MUC's written agreements with MIEC, MIEC owns all

investments and corporate accounts of the exchange. MIEC i:

 

responsible for the payment of state and federal taxes inposed on

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the exchange. MUC is to receive premiums paid by subscribers and
deposit those premiums into separate accounts held by MIEC. It
is conceded that MUC does not share in the liabilities of
insurance contracts. See also In the Matter of Int’).
nderwriters, Inc., 157 F. Supp. 367, 371 (W.D. Mo. 1957)
("[Rlisk is an essential factor of the insurance business, and in
the absence of risk imposed upon an entity, regardless of the
other insurancelike functions it performs, it is not an

insurer.”).?

 

MUC was separately incorporated. MUC files its oun
corporate income tax returns. MIBC is statutorily mandated to
“sue and be sued” in its own name. HRS § 431:4-404 (1993).
Under these circumstances, we believe that Am, Underwriters, tne,
provides separate and additional grounds supporting the
conclusion that MUC maintains a separate identity from, and is
not subsumed within, the reciprocal insurer it serves.

Arguing for a contrary result, MUC offers a plethora of
subargunents, which we address in turn.

4. Prior codifications
MUC first refers this court to codifications of the

general excise tax and regulatory insurance schemes predating the

7 the court ultinstely concluded that the attorney-in-fact at issue

wee an “insurance corporation” for purposes of the Bankruptcy Act, inasmuch 3
Missours law statutorily inposed the requisite degree of risk on the attorney=
incfact. 157.F, Supp. at 371, 373." For example, Missouri law requized the
reserve and’ guaranty fund for the protection of insureds.”
The attorney-in-fact was not permitted to sesese the subscribers
seditional ‘charges in the event that “claims for losses exceed(ed] the fonds
available for payment of losses.” Id, Moreover, Misscurt law isposed the
duty to replenish funds that fail below the statutorily inposed inion on
Doth the subscribers and the attorney-in-fact- Id However, the court's
ultinate conclusion that the attorney-in-fact was an insurance corporation 1s
distingalshable from the present cose insofar oe this jurisdiction's insurance
code inposes no Such Fisk’ ch attorneys-in-fact ef reciprocal insurers.
Indeed, as nentioned, MIC concedes that 1t does not share in the liabilities
Of the insurance contracta,

 

        

 

 

 

 

 

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+ FOR PUBLICATION IN WEST'S HAWAI REPORTS AND PACIFIC REPORTER ***
1955 recodification of the insurance code. MUC claims that,
under the statutory framework in effect at that time, an
attorney-in-fact in a reciprocal insurance exchange was
considered an insurance company exenpt from the payment of
general excise taxes. MUC's interpretation of the prior version
of the insurance code is plausible. Indeed, the code made no
reference to reciprocal or inter-insurance exchanges as an
insurance entity distinct from its attorney-in-fact. Rather, as
MUC points out, the code expressly required an attorney-in-fact
to “pay such taxes and fees for the transaction of business of
insurance as prescribed by law for the transaction of the sane

 

kinds of insurance by other insurance companii Revised Laws

of Hawai'i (“RLH") § 6825 (1935) (emphasis added). RLH § 6792
(1935) provided further that

soretyship, oF

2 oF of entering

Into contracts substantially anounting to insurance, shal) be

desned on insurance concany and shall not transact business unl

the business is suthorized or permitted by the laws of the

Tercitory, and ali laws regulating the same and applicable thereto
‘been complied with vss +

 

 

 

 

(Emphases added.) Thus, it appears that the attorney-in-fact was
statutorily deened the entity transacting the business of
insurance and against whom the tax on gross insurance premiums
received vas assessed. Seg RLH § 6850 (1935) (imposing a tax on
gross premiums received from all risks located in and all
business transacted in the Territory of Hawai'i). It therefore
made sense to construe the attorney-in-fact (the entity charged
with payment of the tax on insurance premiums) as the entity to
hich the benefit of the exemption from the payment of general

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FOR PUBLICATION IN WEST'S HAWAII REPORTS AND PACIFIC REPORTER **¢

excise taxes inured.*

However, even if we were to accept the proposition that
the 1935 codification of the insurance code contemplated the
attorney-in-fact in a reciprocal exchange as an insurance
company, we disagree with MUC’s subsequent assertion that the
recodification of the insurance code in 1955* did nothing to
alter the plausibility of that interpretation. Particularly
persuasive is the legislature's repeal of RLH §§ 6825 and 6791
(1935). See 1955 Haw. Sess. L. Act 277 at 564.! As discussed
supra, the provisions of the insurance code currently at issue
appear to recognize a bisection between a reciprocal insurance
exchange and its attorney-in-fact. Hence, MUC’s reference to
repealed statutes is unavailing.

ii, The trade meaning rule

Equally without merit is MUC's attempt to invoke the
trade meaning rule of statutory interpretation, expressed in In
re Taxes, Hisvaiian Pineapple Co., Ltd., 45 Haw. 167, 363 P.2d 990
(1961) ("Hawaiian Pineapple Co.”).

In Hawaiian Pineapple Co., the taxpayer was the
operator of a pineapple cannery located in Honolulu. 45 Haw, at
169, 363 P.2d at 992, In 1945, taxpayer commenced with the

manufacturing of frozen pinespple products which necessarily

 

+ tn 1935, the legistature levied a general excise taxes against
“persons on account of their business snd cther activities in this Territory .
ere S38 haw. Ly Act 141at 77, The legislature exempted from the
fement of sucht) ier alia, *[JInturanee conpanies which psy the

   

    

 

      

Territory of Hawaii a tax upon their grose preniome under the provisions of
the Revised Laws of Hevaii 1935, chapter 224+ - "Ida at 63.

* Soe 1955 Haw. Sess. L. Ret 277 at 377-565,

 

Rul § 6791 (1935) was recodified as RLM § 6462 (2945). 1955 Haw.
Sess. L, Act 277 repealed AL § 84€2 (1945). RLH § 6625 (1935) wae recodified
fas Rim § G50 (2945); 1955 Haw, ean, L, Act 277 repealed RLM $ 8500 (3945)~

18
 

FOR PUBLICATION IN WEST'S HAWAII REPORTS AND PACIFIC REPORTER *

 

involved the packing of frozen pineapple products in hermetically

sealed cans. Id, at 169-70, 363 P.2d at 992-93. The tax

 

commissioner tock the position that taxpayer's manufacturing
process involved “canning,” within the meaning of a statute that
imposed a higher general excise tax rate on “canning” and
assessed the taxpayer accordingly. Id, at 171, 363 P.2d at 993.
on appeal before the Tax Appesl Court, the taxpayer presented the
testimony of several expert witnesses testifying that freeze
packing food does not involve sterilization by the use of heat,
and therefore would not be referred to as “canning” by the food
industry. Id. at 176, 363 P.2d at 996. The Tax Appeal Court
agreed with the taxpayer and set aside the tax connissioner’s
assessment. Ida at 173, 363 P.2d at 994.

on appeal, this court framed the issue as: “Does the
process of freezing pineapple products in hermetically sealed
cans constitute ‘canning’ within the meaning of the statute?”
Id. at 173, 363 P.2d at 995.

We subsequently concluded that the tax statute made
express reference to a particular trade or industry ~~
canning -- and that the applicable maxim of statutory

interpretation wi

   

the trade meaning rule, expressed as follow

fence to a particular trade,

‘re used unich everybody

int with that trade, Business, or transaction, knows and
particular meaning in it, then the words are

tobe construed az having that particular meaning, though it may

Sister from the conmon of ordinary meaning of the words.

 

   

Id. at 178, 363 P.2d at 997 (citation omitted). We explained
that the party ascerting the trade meaning must prove its
acceptance in the trade or industry, id. at 179, 363 P.2d at 997,
and, if proved, the result is a presumption in favor of the trade

19
 

FOR PUBLICATION IN WEST'S HAWAI REPORTS AND PACIFIC REPORTER

 

meaning subject always to “the cardinal principle that, the
legislative intent, hovever evinced, must be given effect.” Id.
at 161-62, 363 P.2d at 998.

Applying the rule, we concluded that the
“uncontradicted proof” presented by the taxpayer was that “the
trade meaning of ‘canning’ and ‘canned! excludes frozen foods,

however packed... .” Id, at 179, 363 P.2d at 997. Finding no

 

evidence of a contrary legislative intent, we upheld the trade
meaning presumption and affirmed the ruling of the Tax Appeal
Court. Id. at 194, 363 P.2d at 1005.

Here, however, MUC has failed to provide sufficient

 

evidence of a trade meaning. At trial, MUC offered a declaration
by Hiram Tanaka (“Tanaka”), who was employed as the
“Administrative Assistant, Deputy Insurance Commissioner” and
“Chief Deputy Insurance Commissioner of the Insurance Division of
the Department of Commerce and Consumer Affairs of the State of
Hawaii” from 1974 to 1999. Tanaka’s declaration stated, in

 

relevant part, as follows:

6. That the Insurance Division includes reciprocal
Aneurer attorneys-in-fact, such as MUC, in the definition of
“insurer” for the purpose of the exemption of insurance companies
under ERS 237-29," and considers MIEC and MOC to be a single
Insurer for the purposes of the insurance premium tax.

7." That the original legislative intent benind the
fenectnent of the Hawaii Insurance Code was to treat alike ai2
Insurers, whether stock, mutual orf

 

   

original iegie
the statutory interpretation of the Hawaii Insurance Code by the
Insurance Division is Pssed, in part, upon the following factst
vo “unlike a Stock insurer and mutual ineucer
reciprocal insurer does not have any eaployees
nd is requized by statute to be cperated by an
Sttorney-in-fact.

+ the attorney-in-fact {8 the reciprocal insurer
from an sdninistrative and operations function
standpoint

+ the reciprocal insurer has already paid the 4.78

insurance prenivm tax

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+ the attorney in fact actually performs the
Insurance work

+ aha the public policy of encouraging the
fcrnation of insurers, including reciprocal
insurers and reciprocal captive Ansurance
companies in Hawaii.

 

 

11, That the Insurance Division construes the reciprocal
ineurer ind insurance premium tax lows to treat reciprocal
insurers as a single unit and the reciprocal insurer attorney-Ln-
fact as exenpt from gross excise tax under ERS. 237-29.

 

    

MUC also attached a copy of former insurance commissioner
Reynaldo D. Graulty's testimony, presented before the Senate
Committee on Connerce and Consumer Protection on February 12,
1999, in support of Senate Bill No. 364. Senate Bill No. 364
proposed to clarify that attorneys-in-fact of reciprocal insurers
are exenpt from the payment of general excise taxes by HRS § 237-
29.7.% The former commissioner testified as follows:

The OCCA defers to the Department of Taxation on thie bill
Ne wish to inform the Coanittee however of the snsurance
Implications of this bill

Hawadd lew specifies that insurance cenpanies formed in the

hie note that the director argues that the fact that Senate ill
No. 364 was not enacted Le evidence of the legislature's intent to sunject
attorneys-in-fact to the general excise tax. However, although it is possible
Chat Senate Bill No. 364's failure to pass indicates a legislative intent to
reject the proposal contained therein, such legislative inaction 1g nota
Cogent expression of legislative intent. fee

a wenue, €(8 S.W.24 91, 85 n-5 (Mo. 1983) [acknowledging that the
feilure of s bill to pass ‘nay aid interpretation where a statute ie sxbiguous,
Dut stating that such reliance “provides a cenuous besis” insofar as, "without
a record to explain the purpose for which the bill Se introduced of & record
Of debate cn the bill when considered, examination of the enactments would not
Eeveal why the legislature rejected s propeced bill."]) Slue Springs tow) y,
‘SoradLing, 551 5.W.24 £96, 601 (wo. 1977) ("TE [ehe statute] were enbiguovs,
This legitlative history Could be construed as one of the aids to statutory’
construction which a court ray use. However reliance on bills not passed
provides # tenucus basis for determining legislative intent.“); Escrow Serv,
Go. v, Cressler, 365 P.24 760, 766-6? (laeh: 1963) {Finley, Ced- dissenting)
(fo hold that every bill of auch a nature introduced into the legislature bet
hot passed by it is a manifestation of legislative intent and a directive to
the courte not to effect a change similar to that attempted by the
‘unsuccessful bill spproxinates ... (1) extrene naivete respecting the nature
of the legislative process, and (2) an abdication of judicial function and
Feeponsibility that should not be condoned by resort to legal fictions")

a1

 

    

 

 

 

 

 

 
‘0+ FOR PUBLICATION IN WEST'S HAWAII REPORTS AND PACIFIC REPORTER ***

state shall be either an incorporated stock insurer, an

incorporated mutual insurer, of a reciprocal insurer. Unlike the

stock and mutual insurer, reciprocal insurer does aot have any
employees and is required by statute to be cpersted by an
attorney-in-fact, the reciprocal insurers reinburse thelr
atterney-in-facts [sic] for the cost of cperating the insurance
Company. The attorney-in-fact in essence Le the reciprocal
insurer from an administrative function standpoint. You cannot

 

 

hove a reciprocal insurer without an attorney-in-fact, You cannot

Rave one without the other”

Since the reciprocal inaurer pays premium taxes, ve
understood the original legislative intent to be that’ the
cperations of the attorney-in-fact, the entity that actually
performs the insurance work, ig incloded in the definition of
[neuer for the purposes of § 237-29.7, HRS, Exemption of
Insurance Cospants

 

 

 

 

Sone of the insurers which write medical malpractice
Aneurance in this state are reciprocal insurers comieiles in
calttorns

hich clearly exenpte the attorney-in-fact of 8 reciprocal. from

 

Californie has © specific provision in thetr tex low

taxes Girectly attributable to property used exclusively in oF on

Ancone derived from the attorney-inefact’s principal business.
Hawaii law sakes no specific reference and is therefore unclear.
5B 364 in Wedical Insurance Exchange's attempt to seek @
clarification of Hawal! law.

 

The Insurance Division 1e sensitive to the potential loss of

Jobs that might result if this bill 1g not enacted. One of the
Adnieted reciprocal insurers here hi

fo directly cervice their Hawaii policyholders, “If the
Feinbursenent the attorney-in-fact receives for ite Ha
Gperating cost becenes subject to the excise tax, we have been

 

 

an office with two employees

44 office

Sdvieed that the sttorney-in-fact will close ite Hawaii office ond

Service the policyhelders from thelr hone office in California.

ot only might existing Jobs in Ha
attorney’ svin-fact [sic] already doing bu
this oeate, out future job creation might also be adversely
affected.

 

41 be An Jeopardy for

  

Feciprocals in

‘The captive insurance law was amended last year to allow the

formation of captive insurance companies as reciprocals. One
Gonpany has already redenesticated ies captive to Howall an 8
result of this law change. We expect more reciprocal ceptive
Tneurance conpant

our regular insurance leq, the captive law also requires that a
Feciprocal have an attorney-in-faet. Tf our excise tax Lav ie

 

 

 

will be forned here in the future, Similar to

Unterpeeted in such a nonner ag to tax the attorney-inefact on ite

principal business for a Havaii-doniciled reciprocal, this will
Rave the negative effect of discouraging the creation or
employment ef ccal entities and personnel as the attorney-in-
fact (.]. Under a worst case scenario, it will discourage the
formation of reciprocal captive insurance cenpanies in Hawaii.

We thank the Comittee for the opportunity to conment on

this matter.

 

22
1+ FOR PUBLICATION IN WEST'S HAWAI REPORTS AND PACIFIC REPORTER ***

Hearing on S.B. 364, Sen. Conm. on Commerce & Consumer Prot.,
20th Leg., Reg. Sess. (Feb. 12, 1999) (statement of Ins. Conm’r
Reynaldo D. Graulty) (on file with committee clerk).

While Tanaka’s declaration and the former
conmissicner’s testimony may set forth the insurance division's
position as to whether an attorney-in-fact is an insurer, they do
not purport to establish an industry-wide understanding.
Accordingly, MUC has failed to provide sufficient evidence of a
trade meaning and the presumption in favor of that meaning is not
triggered.?

iid. Equitable estoppel

MUC also claims that it relied on the insurance
division’s view that it was an insurance company since 1981. MUC
contends that the department of taxation had knowledge of MUC's
Hawai'i operations because MUC had been filing Hawai'i income tax
returns with the department since 1981, yet did not assess MUC
until 1999. MUC argues that it is “patently unfair” to “impose a
[general excise tax) upon MUC after MUC has relied to its
detriment upon a determination by another state agency... .”

‘The director, on the other hand, asserts that equitable
estoppel cannot be applied to interfere with the government's
exercise of its sovereign power (ie, the power to tax). The
director additionally contends that MUC failed to provide any
evidence of “manifest injustice.” The director further points

“Moc does not argue the related doctrine that the interpretation of
wwote by an agency charged with ite administration ie entitled to
deference, Seg, @.ds, In the Interest of John Doe, horn on August 3, 1977, 73
Baw. 63, 94, 628 F.2d 272, 275 (1382) (n(T}he Construction of (a statute by
tthe agency charged with ite administration is entitled to substantial
Geference ... + If the agency's construction 8 a reasonsble one, the court
‘Should give deference to it.") (Some brackets added and some in originals)
(Ellipees in original.) (Citation caitted.).

23

 

 
   

‘OR PUBLICATION IN WEST'S HAWAI REPORTS AND PACIFIC REPORTER

out that MUC has not relied to its detriment on any
representation of the director. Moreover, the director avers
that the department of taxation has no duty to advise MUC of its
tax obligations and that, pursuant to HRS § 237-40, the director
4s authorized to assess MUC at any time insofar as MUC failed to
file any annual general excise tax returns.

‘This court has stated that generally, “the doctrine of
equitable estoppel is fully applicable against the government if
it is necessary to invoke it to prevent manifest injustice.”
State v. Zimring, 58 Haw. 106, 126, 566 P.2d 725, 738 (1977)
(citing Yamad easter Clad: q ‘count
of Hawas's, $4 Haw, 621, 629, 513 P.2d 1001, 1006 (1973),
abrocated on other orounds by Morcan vy. Planning Dep’t, County of
Kauai, 104 Hawai'i 173, 183, 86 P.3d 982, 992 (2004)). However,
“significant limitations have been placed on the doctrine in this
context.” Filipe v. chang, 62 Haw. 626, 634, 618 P.2d 295, 300
(2980). As argued by the director, one of these recognized
Limitations is that the doctrine of equitable estoppel “nay not
be used in such a way as to hinder the state in the exercise of
its sovereign power.” Ida; see also Godbold v. Manibog, 36 Haw.
206, 214 (1942) (“The doctrine of estoppel is not applied to the
extent of impairing sovereign powers of a state such as it
exercises, for example, in the enactment and enforcement of
police measures.”) (Citation omitted.).

It is beyond dispute that the power of taxation is a
sovereign power of the state. See Ionatz v. Conmonvealth, 849
A.2d 308, 313 (Pa. Conmw. Ct. 2004) (“The sovereign power of
taxation. . . is in the state... .”) (Some ellipses added
and some in original.); Lemke ex rel, Teta v. Brooks, 614 N.W.2d

24
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242, 246 (Minn. Ct. App. 2000) (classifying the power to tax as a
sovereign poser); Nerning Safety Lights of Ga., Inc. v. state,
Dep't of Revenue, 678 So.2d 1377, 1381 (Fla. Dist. Ct. App. 1996)
(same); Mash. Public Pover Susply Svs. v. Gen, Elec. Co., 778
P.2d 1047, 1050 (Wash. 1989) (sene); Banner County vy, State Bd,
of Equalization ¢ Resossment, 411 N.W.2d 35, 45 (Web. 1987) ("The

power to tax is a sovereign power. . . .”

 

As such, the
doctrine of equitable estoppel may not be applied against the
governnent’s power to tax. See Fitzgerald v. City of Bangor, 726
A.2d 1253, 1255-56 (Me. 1999) ("The rationale for the rule
precluding the assertion of estoppel against the government in
tax cases is to assure that no officer of government has the
ability to interfere inadvertently with the government! s
fundamental sovereign power to tax its citizens.”); BCS, Inc. v
Ariz, Dep't of Revenue, 863 P.2d 920, 922 (Ariz. 7.C. 1993)
("(T]here can be no estoppel involved against a sovereign state.
‘The failure of the tax commission to attempt to collect taxes now
sought to be collected from plaintiff for a period of years
constitutes no defense to their collection.”) (Citing Ariz. Tax

Conm’n v. Dairy & Consumers Coop, Ass'n, 215 P.2d 235, 240 (Ariz.
1950).). Therefore, MUC’s estoppel argument is unavailing.
iv. a ments are withor

NUC also asserts that the legislature's preservation of
the term “insurance companies” when it enacted HRS § 237-29.7 in
1991 indicates @ legislative intent to continue to exempt from
the payment of general excise taxes all entities previously
considered “insurance companies,” including attorneys-in-fact.

However, we can find no evidence of legislative intent supporting

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muc’s leap in logic." Rather, HRS § 237-29.7 continues to
expressly reference HRS chapter 431, and, as discussed supra, HRS
chapter 431 contenplates the attorney-in-fact as an entity
distinct from its reciprocal insurer.

NUC contends that the failure of any director of
taxation to assess general excise taxes against attorneys-in-fact
of reciprocal insurers “confirms the intent of the law to exenpt
[attorneys~in-fact] from [tax] liability." However, even
assuming that MUC's factual assertion is correct, the mere fact
that past directors have not assessed attorneys-in-fact does not

require the conclusion that they were not authorized to do so.

 

Rather, that assertion is germane to MUC’s estoppel argument,

addressed supra.
Finally, MUC asserts that it is authorized to do
business under HRS chapter 431. However, MUC’s authority to

transact business under HRS chapter 431 does not inform the

% Prior to 1992, insurance conpanies were exenpted from the general
excise tax schene by HRS § 237-23(a) (4). Sag HRS § 237-23 (a) (4) (2985 Supp.
550). “pecisicaily, aks § 237-23¢a) (4) (Sopp. 1990) proviced that chepter
237 “inal not apply to. - . [i]neurence companies which pay the State a tax
pon their gross. premiins Gnder chapter 431 ss +7 dn 1091, however, the
legislature repealed HRS § 237-23(8) (4). Seg 1951'Haw. Sess. L. Act 2668 3,
at 682. The legieiature simultanecusly enacted the following provision:

 

 

237- xcaption of insurance companies. This chapter shall
not apply to the gross incone or grose proceeds of insurance
Cenpaniee authorized to do business under chapter 421; except this
‘exemption shail not apply to any gross incone or gross proceeds
received after Decenber 31, 1991, ae rents from davestments in
real property in this state; provided that gross income or gross
proceeds fron investments in real property received by sneurence
Companies after Decenber 31, 1991, under written contracts entered
Into before the effective date of’ this Act that do not provide for
the passing on of taxes or tax increases shall not be texed until
he Contracts are renegotiated, renewed, or extended.

 

 

 

 

 

 

 

1991 Haw, L. Act 286 § 1, at 690. The purpose of the 1991 amendment wa
to ensure that incone derived from sources sther than premiuns on insurance
Centracte vere taxable “at the general excise rate of four percent ss =
Stand. Comm. Hep. No. 1002, n 1991 House Journal, st 1396.

 

    

 

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** FOR PUBLICATION IN WEST'S HAWAII REPORTS AND PACIFIC REPORTER.
question as to MUC’s tax liability. Although MUC presented
evidence that the insurance division has taken the position that
At may authorize an attorney-in-fact to transact business under
the certificate of authority granted to it in the name of the
reciprocal insurer, it does not necessarily follow that the
attorney-in-fact and the reciprocal, insurer constitute the same
taxable entity.

For the foregoing reasons, we agree with the tex eppeal
court's implicit conclusion that MUC is not exempt from the

payment of general excise taxes under HRS § 237-29.7.

 

MUC does not qualify for the .15 percent tax rate
reserved for licensed general agents, subagents,
and solicitors.

 

Having established that MUC is not exempt from general
excise taxes, we turn to the director's argument that the tax
appeal court erred by sua sponte applying the tax rate of .15
percent reserved for licensed general agents, subagents, and
solicitors under HRS § 237-13(7). The director contends that MuC
was not licensed, an express requirenent of HRS § 237-13(7), and
that it therefore could not benefit from the reduced tax rate
provided for therein. The director points out that MUC provides
management sexvices to MIEC and CLIC, and that any compensation
received in exchange for those services is taxable under URS §
297-13(6) at a rate of four percent. The director argues further
that statutes exempting taxpayers from the payment of taxes must
be strictly construed.

MUC counters that if this court should find that it is
not exenpt under HRS § 237-29.7, it is alternatively subject to
the .15 percent general excise tex rate imposed by HRS § 237-

2
   

HAWAII REPORTS AND PACIFIC REPORTER

13(7) inasmuch as its business activity most closely resenbles

that of a general agent or solicitor, as found by the tax appeal

court. MUC avers that the certificate of authority under which

it operates is the License qualifying it under HRS § 237-13(7).
HRS § 237-13(7) (1993) provides the following:

£237, Imposition of tax. There is hereby levied snd shall

18 against persons
sn the state

  

neasured by the application of rates against values of product
gross proceeds of sales, or gross incone, whichever Se specified,
ae follow

 

 

   

” nce solicitors and agents. Upon every
fon engaged asa licensed solicitor, general agent,
ter 431, there is hereby
fed and collected « tax equal
to .15 per cont of the commissions due to such
activicy.

 

Preliminarily, we note that HRS § 237-13(7) is plainly
worded as a statute of imposition, as opposed to a statute of
exemption. Thus, although the director is correct that statutes

exempting persons from taxes are to be strictly construed against

the taxpayer, see Hawaiian Pineapple Co., 45 Haw. at 169, 363
P.2d at 1002 (“This court has. . . often applied strict

construction against a taxpayer and in favor of the government

when the ambiguity pertained to an exemption in a taxing

statute.”); In the Matter of the Tax Appeals of 711 Motors, Inc.,
56 Haw. 644, 646, 547 P.2d 1343, 1345 (1976)? In the Matter of
the Tax Ropeal Union -Arcadia Re! idenet

63 Haw. 199, 206, 624 P.2d 1346, 1351 (1961), a contrary rule
applies. To wit, statutes imposing taxes are to be strictly
construed against the government. See Hawaiian Pineapple Co., 45
Haw. at 189, 363 P.2d at 1002 ("This court has on many other

occasions resolved an ambiguity in a statute imposing a tax in

28
   

FOR PUBLICATION IN WES:
favor of the taxpayer."); Ince Hawaiian Tel, Co., 61 Haw. $72,

578, 608 P.2d 383, 388 (1980) ("It is a cardinal rule of
construction that a statute imposing taxes is to be construed

  

HAWAII REPORTS AND PACIFIC REPORTER.

strictly against the government and in favor of the taxpayers .

 

Nevertheless, these competing rules of strict
construction “should only be resorted to ‘as an aid to
construction when an ambiguity or doubt is apparent on the face
of the statute, and then only after other possible extrinsic aids
of construction available to resolve the ambiguity have been
exhausted.‘” Id, at 579, 608 P.2d at 388 (citing Bishop Trust
Co. v, Burns, 46 Haw. 375, 399-400, 381 P.2d 687, 701 (1963).
Here, giving effect to all of the words expressed by the
legislature, see Canara v. Agsalud, 67 Haw. 212, 215-16, 685 P.2d
794, 797 (1984) ("It is a cardinal rule of statutory construction
that courts are bound, if rational and practicable, to give
effect to all parts of a statute, and that no clause, sentence,
or word shall be construed as superfluous, void, or insignificant
Af a construction can be legitimately found which will give force
to and preserve all the words of the statute.”), we think it
reasonably clear that the phrase “engaged as a licensed
solicitor, general agent, or subagent pursuant to chapter 431,”
is a direct reference to HRS chapter 431, article 9.

HRS § 431:9-201(a) (1993) unambiguously states that
“{nlo person in this State shall act as, be appointed as, or hold
oneself out to be a general agent, subagent, solicitor, or
adjuster unless so licensed by this State.” HRS § 431:9-102
(1993) defines the term “general agent” as:

any person sppointed under section 431:3-203(b) (1) and authorized

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by the insurer to perform all of the following acts in this State:

 

(2) Soiiest applications for insurancey

(2) Collect preatume on insurance spplied for or
sEfectustes

(3) point subagents and solicitors:

{4} ReEange ineurance on subjects located, resident, or to

bbe perfcrned wholly outside this State with an
authorized ingurer for which the agent is not
Licensed;

(5) In accordance with the provisions of article 8,
arrange inesrance on subject located, resident, or to
be performed wholly outside this state with an
neuthorized insurer; and

(6) Any other lowful acts porsvant to this article.

 

HRS § 43:

  

}-103 (1993) defines the term “subagent” as:

any person appointed by a general agent, or by 2 donestic insurer
Upen cenpliance with section #31:9°102 (b) to perform the following
facts in this state:
(2) Solicit applicetions for tneurances
(2) Cellect prenions on ineuronee so spplied for or
effectuateds and
(3) Any" other lawful acts pursuant to this article,

 

HRS § 432:

 

-104 (1993) defines the term “solicitor” as:

any individual sppointed by a general agent or by @ subagent oF by
a donestic ineurer upon compliance with section 431:3-102(b], te
Perform the following acts in this Stal
(2) Solieie applications for insurances
(2) Collect preniuns in connection therewith: and
(3) Gny other lawful acts pursuant to this article,

 

  

 

Here, MUC does not dispute the director's assertion
that it does not hold @ general agent, subagent, or solicitor
license under HRS chapter 431, article 9. Without such a
license, MUC could not have been legally appointed as either a
general agent, subagent, or solicitor of MIEC, its certificate of
authority notwithstanding. Consequently, MUC does not qualify as
a “general agent, “subagent,” or “solicitor,” as defined by HRS
chapter 431, and it therefore does not fall within the paraneters
of the category described by HAS § 237-13(7).

©. MUC is taxable under HRS § 237-13(6) at four
percent.

Rather, as averred by the director, the applicable

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toxing statute is HRS § 237-13(6) (1993), which provides, in

pertinent part, as follow

 

“upon every person engaging or
continuing within the State in any service business or calling
not otherwise specifically taxed under this chapter, there is
Likewise hereby levied and shall be assessed and collected a tax
equal to four per cent of the gross income of any such business.”
There can be no question that MUC is compensated for the services
it provides to MIEC and CLIC, and MUC does not assert any other
statutory subsection under which it may be taxed. We therefore
hold that MUC 4s subject to a general excise tax at a rate of
four percent, purauant to HRS § 237-13(6).

2. The director's motion for reconsideration

The director's second and final point of error on
appeal acserts that the tex eppeal court erred by denying his
motion for reconsideration insofar as MUC made factual assertions
after the court's oral ruling on MUC’s motion for partial summary
judgment that raised genuine issues of material fact.

As previously mentioned, it appears that after the tax
appeal court’s oral ruling, the director prepared a proposed
order that included the following pertinent finding of fact:
*wuc's gross income subject to the general excise tax for
conpensation for services rendered as an attorney-in-fact to
(IEC) and [CLIC] for the period January 1992 through January
1999, inclusive, totaled $2,629,301.00." MUC filed objections to
that proposed finding of fact, asserting that it

4s inappropriate be

generat excise tax jens ageinst anterest™

Wic's notion for partial summary juagnent, does net convert the

sesesenents into stipulated facts.
[The director’) proposed finding . . . shovld sis be

 

foneous and

  

 

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‘OR PUBLICATION IN WEST'S HAWAll REPORTS AND PACIFIC REPORTER **¢

rejected because it 1s factually incorrect, (The) (f]inding . . -
ervonecuely states that appellee received “compensation for
Services rendered as an attorney-inefact for... (CLIC)." tn
fact, [eLicl 1s No? a reciprocal insurance carrier snd therefor
rendered as ite attorney=in-

 

 

 

    

(Some ellipses added and some in original.). The director
thereafter filed a motion for reconsideration accusing MUC of

nisrepr

 

nting facts to the tax appeal court and arguing that
more evidentiary proceedings were required to address the genuine
issues of material fact created by (1) the revelation that MUC is
not the attorney-in-fact for CLIC, and (2) MUC’S refusal to
stipulate to the $2,629,301.00 amount that served as the basis
for calculating its tax lability.

For the following reasons, we agree with the tax appeal
court's decision to deny the director’s motion for
reconsideration. First, the director's characterization of MUC's

admission that it is not an attorney-in-fact for CLIC

 

evidence is curious given that the director’s own pretrial
motions characterized MUC as the attorney-in-fact for MIEC and
the managing agent of CLIC, thus demonstrating its cognizance of
the fact that MUC’s relationship with MIEC differed from its
relationship with CLIC. Moreover, even if the director was
truly not aware that MUC was not an attorney-in-fact of CLIC,
such basic information could easily have been obtained prior to
such a late stage in the proceedings. Second, the director has

waived any argument premised upon MUC’s assertion that it did not

 

see discussion supra at n.6.

Indeed, the director's August 24, 2001 motion for euamary judgment
sribed MOC as fellows: "[MOC] is the attorney-in fact (sic] of an
Sneurance conpany, [MIEC]. Taxpayer ie also the managing agent of another
Sneurance company, [CLIC]...

   

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++ FOR PUBLICATION IN WEST'S HAWAII REPORTS AND PACIFICREPORTER ***
stipulate to the $2, 629,301.00 anount. The record indicates that
Muc's motion for partial sunmary judgnent expressly treated the
$2,629,301.00 anount as an adnission by a party opponent under
Hawai'i Rules of Evidence Rule 803(a) (1). Thus, MUC made clear
that it did not stipulate to the accuracy of the director's
calculation; rather it merely agreed that it would abide by that
number and used the nunber to calculate its tax liability at a
rate of .15 percent. The director was sufficiently apprised of
Muc's refusal to stipulate at that time. Nevertheless, the
director thereafter filed a response that stated, “the Director
does not object or oppose the fact that [MUC’s] general excise
tax liability is $3,943.95 for income received in the amount of
$2,629, 302.00 as compensation for services rendered as an
attorney-in-fact.” By failing to object or oppose MUC’s position
at that time, the director may not, in a motion for
reconsideration, challenge MUC’s reiteration of that position
after the tax appeal court's oral ruling on the matter.
Therefore, the director's present point of error is

without merit.
B. Muc's Cross-Appeal

In its opening brief on cross-appeal, MUC presents the
following points of error: (1) the tax appeal court erred by
failing to exempt MUC from the payment of general excise taxes
pursuant to HRS § 237-29.7 inasmuch as MUC is an insurance
company authorized to do business under HRS chapter 431; (2) the
tax appeal court improperly denied MUC’s motion for leave to file
an amended answer to director's notice of appeal, filed on July

6, 2000, and to alter or amend the final judgment filed September

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1** FOR PUBLICATION IN WEST'S HAWAII REPORTS AND PACIFIC REPORTER
23, 2004; and (3) the tax appeal court improperly denied muc’s
motion for attorneys’ fees and costs.
Inasmuch as we have already concluded that MUC's first
point of error is without merit, only MUC’s final two points of

error remain.

 

MuC's second point of error on cross-appeal asserts
that the Tax Appeal Court erred by denying MUC’s motion for leave
to file an anended ansver and to alter or amend the judgnent.

MUC specifically contends that the director introduced evidence
relating to MUC’s tax liability for the years 1985 to 1991, and
that under Hawai'i Rules of Civil Procedure Rule 15(b), the court
was required to amend “the pleadings as may be necessary to cause
them to conform to the evidence, upon motion of any party at any
time.” MUC further contends that under HRCP Rule 42, the issue
of its tax liability in years 1985-1991 should have been
consolidated with the present matter, involving its tax liability
for the years 1991-1999, inasmuch as connon issues of law and
fact arose from both time periods. The director counters that
nUc’s motion to amend was an attempt to circumnavigate the fact
that it failed to timely appeal the Board’s adverse ruling with
respect to the 1985-1991 time period.

However, in light of the foregoing conclusions that the
director properly taxed uc at a rate of four percent, the issue
presented is moot.

2, MUcts mots ‘ and cost
NUC's third point of error on cross-appeal asserts that

At ig entitied to attorneys’ £

 

s and costs incurred in defending

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against the director’s bad faith abuse of power. Specifically,
MUC asserts that

the actions of the [d}irector in unilaterally rewriting nore than
sixty years of law without precedent and then not on

his self-«ritten law upon MOC but also. spplyi

law retroactively for hearly fifteen
to'pay the taxes, penalties, and

at the very least, be described

 

  
 

 

 

factiona taken in bad faith,

 

However, MUC’s argunent is without merit inasmuch ai
(1) MUC was properly taxed at a rate of four percent, and (2) the
director is correct that MUC’s failure to file returns authorize:
it to assess MUC at any tine. See HRS § 237-40(b) (1993) (“In
the case of . . . a failure to file the annual return, the tax
may be assessed or levied at any time... .”). Accordingly,
NUC has failed to assert a legitimate basis for its bad faith
claim.
IV, concLusrow

In sum, the payment of compensation by a reciprocal
insurer to its attorney-in-fact is a taxable event under this
jurisdiction’s insurance code and general excise tax scheme.
Additionally, insofar as MIC is not licensed as a general agent,
subagent, or solicitor, it is not subject to the .15 percent tax
rate imposed by HRS § 237-13(7). Rather, it is subject to the
four percent tax rate imposed by HRS § 237-13(6).

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‘Therefore, we partially vacate the tax appeal court's
judgment and remand with instructions to enter judgment in favor

of the dizector in the amount of $105,172.04."

on the briefs:

Hugh R. Jones and Damien A.

Elefante, Deputy Attorneys

General, for appellant/cross-

appellee Mim Yok armeo—

Russell L, Ching and Randall 1.

Morikawa of Ching, Yuen & Neues

Morikawa and Roy ¥. Yempuku of Net Dae
the law offices of Roy Y. Yempuku

for taxpayer-appellee/cross~ ae
appellant e

Gorm € Diy ty

The 6105, 172.06 ancunt 1s derived from applying a generat excise
tex rate of four percent to the $2,629,301.00 received by MUC as compensation
for services rendered to MIEC and CLIC. Although the director assessed MOC in
the ancunt of 160,250-45 for the tax years presently at iesue, that ancunt
Included interest and penalties. The tax appeal coure’s judgment did not award
interest and penalties, gg discussion supra at n.5, and the director did not
appeal that omiceion. ‘sence, interest and penalties should not be avarded on
remand.

 

 

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