Title: Hawaii Insurers Council v. Lingle. ICA Opinion, filed 04/14/2008 [pdf], 117 Haw. 454. Concurring Opinion by J. Watanabe [pdf]. ICA Order of Amendment, filed 04/15/2008 [pdf]. Application for Writ of Certiorari, filed 07/30/2008. S.Ct. Order Accepting Application for Writ of Certiorari, filed 09/08/2008 [pdf]. S.Ct. Order Denying Motion for Partial Reconsideration or, in the Alternative, for Clarification, filed 02/06/2009 [pdf].

State: hawaii

Issuer: Hawaii Supreme Court

Document:

LAW LIBRARY

 

‘s4* FOR PUBLICATION IN MEST’S EAKAT'T REPORTS AND PACIFIC REPORTER +1

 

IN THE SUPREME COURT OF THE STATE OF HAWAT'T

n= 000 ===

 

HAWAII INSURERS COUNCIL, Plaintiff-Appellee,

 

STATE OF HAWAI'I; GEORGINA K.

LINDA LINGLE, GOVERNOR,
KAWAMURA, DIRECTOR OF FINANCE, DEPARTMENT OF BUDGET AND
REIFURTH, DIRECTOR, DEPARTMENT

SCHMIDT,

FINANCE; LAWRENCE 6.
DEPARTMENT

OF COMMERCE AND CONSUMER AFFAIRS? J.P.
INSURANCE COMMISSIONER, INSURANCE DIVISION,
OF COMMERCE AND CONSUMER AFFAIRS, Defendants-Appellants.

 

   

no. 27840
CERTIORARI TO THE INTERMEDIATE couRT oF APPEALS] &
(ctv. Wo, 02-1-2298) s

8 x,

DECEMBER 18, 2008 as -

ECEMBER 18, 20) u =

MOON, C.J., LEVINSON, NAKAYAMA, AcoBA, ano curRygIgs. FG
»
OPINION oF THE SON, =
é

We accepted the application for a writ of certiorari
8 Linda Lingle,

 

filed by the defendants-appellants-petition
Governor, State of Hawai'i, Georgina K, Kawamura, Director of
Finance, Department of Budget and Finance (DBF), Lawrence M.
Reifurth, Director, Department of Conerce and Consumer Affairs
(DCCA), and J.P. Schmidt, Insurance Commissioner, Insurance

Division, DCCA (collectively, the State) in order to review the

published opinion of the Intermediate Court of Appeals (ICA) in

urers Council v. Lingle, 117 Hawai'l 454, 164 P.3d 769

The ICA affirmed the final judgment of the first circuit
in favor of the

(2008).
Abn presiding,

court, the Honorable Karen 3.5.
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plaintiff-appellee-respondent Hawaii Insurers Council (MIC) and
against the State. Id, at 463, 184 P.3d at 778. In its
application, the State asks whether the ICA erred in concluding
that the regulatory assessments imposed by the insurance
commissioner pursuant to Hawai'i Revised Statutes (HRS)

§ 431:2-218 (Supp. 1999) were unconstitutional taxes and whether
the circuit court had subject-matter jurisdiction over this
matter.

For the reasons that follow, we hold that the insurance
conmissioner’s assessments were not unconstitutional when they
Were initially imposed, gee infra sections III.A and B, but that
the legisiature’s transfer of $3,500,000.00 of those funds into
the general fund was unconstitutional under the separation of
powers doctrine, see infra section T1T.A. We further hold that
the circuit court had subject-matter jurisdiction over this case.
See infra section III.c. We therefore affirm the ICA's May 5,
2008 judgment in part, reverse it in part, and remand this matter
to the circuit court for further proceedings consistent with this

opinion.

1. BACKGROUND
A. Eactual Backsround
‘The DCCA is an executive agency of the State of
Hawai'i. HRS § 26-4(5) (Supp. 1999). Its departments include an
insurance division, HRS § 431:2-101 (1993), which is supervised
and controlled by the insurance commissioner, HRS § 431:2-102
(1993 & Supp. 2000). In 1999, the DCCA became financially self-

sufficient. Its operations were no longer funded by the

2
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legislature’s general fund, but instead by the persons and
entities who were regulated by the DCCA or who received services
from the DCCA. To that end, the legislature established the
Insurance Regulation Fund (IRF). HRS § 431:2-215(a).) “all
assessments, fees, fines, penalties, and reimbursements collected
by or on behalf of the insurance division under (HRS) title 24,”
subject to certain exceptions, were to “be deposited into the
RF]." Ida

The insurance commissioner was directed to make
assessments against insurers, with criteria for assessments to be
established by rules he or she promulgated. HRS
§ 431:2-215(d) (1).? The assessments had to bear a reasonable
relationship to the costs of regulating the line or type of
insurance, including any administrative costs of the insurance
division. HRS § 431:2-215(d) (3). The monies in the IRF were to
be used by the insurance commissioner to carry out his or her
duties and obligations under the insurance code. HRS
§ 431:2-215(a). For example, the insurance division prosecuted
fraud committed against insurers. Of paramount importance for
present purposes, the funds in the IRF were not allowed to revert

to the general fund. HRS § 431:2-215(c).

 

8 tm 2000 and 2006, HRS § 431:2-215 was amended in respects immaterial to
the present matter, 2000 Haw. Sess. L. Act 162, $§ 5, 17 at 361-62, 3667 2000
Haw. Seas. tL. Act 253, $§ 150, 152 at 9167 2006 Haw. Sess. L. Act 1, $1. 50
fat i27, 447. Certain anenanents to the statute in 2002 snd 2006 are discussed
Below Where relevant, 2002 Haw. Sess. L. Act 39, $6 5, 22, at 115-16, 1197
2008 Haws Sp. Sess. L. Act 1, $51, 6, at 786, 788.

 

    

+ tn 2008, the requirement thet the insurance commissioner promulgate
rules to calculate assessments as repealed. 2005 Haw. sp. Sess. L. Act Ly
S52, & at 786, 783.

 
 

 

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The insurance commissioner collected assessments from
insurers proportionate to each insurer’s “Line or type of
insurance.” Hawai'i Administrative Rules § 16-175.3 (2002).
This figure was based on the insurer's market share percentage
and pro rata share of the other insurance division costs. Id.
The insurance conmissioner calculated the total assessments for a
given fiscal year by starting with the insurance division's

operat

  

g cash requirements for the fiscal year. The
commissioner would then project revenues, other than IRF
assessments, for the year and deduct the revenues from the cash
requirements. The resulting difference was the amount that the
insurance commissioner would assess insurers for the IRF. In
other words, the IRF assessments were calculated as follows:
projected budget - projected non-IRF assessment revenues = IRF
assessments, The insurance division's projected budget included
the division’s overhead expenses. In fiscal year 2000-2001, the
insurance commissioner began to calculate the division's cash
requirements to include an expense that represented a percentage
of the DccA’s overhead, including charges for the director's
office, the adninistrative services office, the hearings office
and/or information services. HRS § 431:2-215(b), The DCCA
provided the insurance division with, inter alia, personnel
management services, review and processing of the insurance
division's expenditures, the preparation of its annual operating
budget, a forum for contested case hearings, computer system
support, and various administrative services. The insurance

division provided the DCCA with $4,335, 792.00 between July 2,
 

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2001 and December 17, 2004, In fiscal year 2003-2004, the
commissioner began to allocate five percent of the revenues

collected by the division to overhead expenses of the DBF. HRS

$8 431:2-215(b) and 36-27 (Supp. 2003). In return, the DBF

  

provided the insurance division with, inter alia, oversight of
budget preparation and execution, determination of budgetary
requirements and expenditures, management of employee benefit
Programs, management of public debt, and treasury programs. The
insurance division provided the DSF with $376,360.00 between
October 1, 2003 and December 31, 2004.

In addition to overhead expenses, the insurance
division's annual budget included amounts intended to create a
reserve of surplus funds in order to ensure the availability of
monies to fund the insurance division. The reserve was also
intended to provide the flexibility necessary to handle unplanned
insurance rehabilitations and insolvencies that typically
required the insurance division immediately to expend funds for
the protection of policyholders. For a period of time, the
reserve was set at double the budgeted cost of regulating the
insurance industry or two times the total expenditures. For
fiscal year 2002-2003, the reserve margin was decreased to one
and one-half years of expenditures. tn 2003, after the present
action was filed, the target for the reserve margin was decreased
to fifty or seventy-five percent of the insurance division
budget. Throughout this fluctuation in the reserve margin, the

margin was not subjected to the rulemaking process.
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Prior to the present lawsuit, insurers, including HIC’s
nenbers, were never informed of the insurance division's reserve
objective and had no knowledge that their assessments were
increased to effectuate this reserve objective. Since the IRF
was established in 1999, HIC's members have paid the various fees
and assessments imposed by the insurance commissioner. HIC’s
members’ assessments have constituted roughly twenty to twenty-
five percent of the total assessments levied by the insurance
commissioner. In addition to receiving funds from assessments,
the IRF was funded by monies transferred from defunct funds that
were repealed when the IRF was established.

In 2002, the legislature merged the IRF into the
compliance resolution fund (CRF). 2002 Haw. Sess. L. Act 39,
56 1, 5, 22 at 111-12, 115-16, 119 (codified at HRS 95 26-9
(Supp. 2002) and 431:2-215 (Supp. 2002)). As a result, monies
thet would previously have been deposited into the IRF were
instead deposited into an insurance sub-account of the CRF, See
HRS § 431
in 2002 Senate Journal, at 1285. Also in 2002, the legislature

  

-215 (d) (2); s9¢ also Sen. Stand. Comm. Rep. No. 2547,

determined that the IRF contained at least $4,000,000.00 in
excess of the requirements of the fund. 2002 Haw. Sess. L.

Act 178, § 40 at 793. In an effort to balance the state’s
budget, the legislature directed the transfer of these excess
monies to the general fund through #.8. 2627. Conf. Comm. Rep.
No. 160, in 2002 House Journal, at 1830, and in 2002 Senate
Journal, at 10247 2002 Haw. Sess. L. Act 178, § 40 at 793. The

governor line-item vetoed portions of H.B. 2827, the result of
   

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which was that $2,000,000.00, rather than $4,000,000.00, was
authorized to be transferred from the IRF to the general fund.
Gov. Msg. No. 258, Statement of Objections to H.B. No. 2627, in
2002 House Journal, at 1115; 2002 Haw. Sess. L. Act 178, § 40
at 793, 796 1.2. This was the first time that the legislature
had transferred any funda out of the insurance special fund and
into the general fund. ‘The division did not foresee the
transfer. On or about December 1, 2002, the insurance
commissioner transferred $2, 000,000.00 from the IRF or the CRF to
the general fund. In 2003, the legislature determined that the
CRE contained $15,000,000.00 in excess of its requirements and
authorized an additional transfer of monies from the CRF to the
general fund. 2003 Haw. Sess. Laws Act 178, $$ 28, 66 at 407,
412, The director of finance transferred $1,$00,000.00 from the
insurance sub-account of the CRF to the general fund in 2003. In
all, $3,500,000.00 of the insurance special fund has been
transferred to the general fund.
B. Circuit Court Proceedings

HIC filed a complaint in the circuit court on September
27, 2002, seeking to enjoin the then-impending transfer of
$2,000,000.00 to the general fund on the ground that the transfer
converted the assessments into an illegal and unconstitutional
tax. HIC additionally sought declaratory relief as well as an
accounting, HIC filed a first amended complaint on January 12,

2005, asserting the following claims: unconstitutional tax,
‘e+ FOR PUBLICATION IN WEST'S HAWAI'T REPORTS AND PACIFIC REPORTER ¢**
statutory scheme,? illegal transfer, due process, separation of
powers, equal protection, violation of HRS § 431:7-204 (1993),
violation of trust doctrine, and accounting.

With respect to its unconstitutional tax claim, HIC
alleged, inter alia, that the assessments imposed by HRS
§ 431:2-215 were unconstitutional taxes in their entirety in
Light of this court’s decision in State v. Medeiros, 89 Hawai'i
361, 973 P.2d 736 (1999), because HIC's members were not direct
beneficiaries of a particular service, the assessments were not
allocated directly to defraying a cost of providing the service,
and the assessments were not reasonably proportionate to the
benefit received. HIC additionally alleged that the transfer of
funds from the IRF and the insurance regulation sub-account of
the CRF to the general fund was an unconstitutional tax. with
respect to its due process claim, HIC averred that the
assessments of the insurance commissioner from 1999 to the
present imposed = tax on HIC’s menbers, which was violative of
the due process clauses of the Hawai"i and United states
Constitutions. In its separation of powers claim, HIC maintained
that the assessments constituted a tax violative of the
separation of powers doctrine because the legislature lacked the
authority to delegate its taxing power and because, by empowering
the insurance commissioner to levy the assessments, the

legislature had effectively delegated its taxing power to the

 

 

>In Wicta statutory schene claim, it alleges that HRS §§ 431:2-215(c) and
431:2-Z16[6) (Supp. 2003) ‘expressly prokibit the transfer of monies to the
General fund that were initially deposited by the insurance commissioner into
the GRE.

 
 

‘++ FOR PUBLICATION IN MEST’S HAWAI'T REPORTS AND PACIFIC REPORTER +

commissioner. With respect to its equal protection claim, HIC
asserted that the assessments amounted to an improper tax
violative of the equal protection clauses of the Hawai'i and
United States Constitutions, because the varying amounts of the
assessments set by the insurance commissioner bore no rational
relationship to any legitimate state purpose, With respect to
ite claim under HRS § 431:7-204, HIC observed that the statute
provided that:
As to insurers, the taxes and fees imposed by

(wns) 43117-201 to. [iS] 3117-204, and the fees

imposed by [the insurance] code, when paid shall be in

settionent of and in lieu of ali demands for taxes,

Ifcenses, of fees of every character inposed by the

laws of this State, the ordinances or other laws,
rules, of Fegulations of any county of this State

 

 

 

HIC alleged that the assessments constituted a tax in violation
of the foregoing provision. With respect to its accounting
claim, HIC averred that the assessments by the insurance
commissioner had not been properly accounted for, which was
necessary to determine whether the assessments qualified as fees
under Medeiros and whether they comported with HRS § 431:2-215.
The State answered the first amended complaint by
asserting (1) that HIC’s members had failed to exhaust their
administrative remedies, (2) that, if the transferred assessments
were deemed to be taxes, then the court did not have jurisdiction
under HRS § 632-1 (1893) because the present matter would be

tantamount to a controversy respecting taxes, (3) that the state

 

was not subject to suit under the doctrine of sovereign immunity,
and (4) that HIC lacked standing to sue because none of its

members had an interest in any monies in the IRF or the CRF,
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except to the extent that HIC’s members could have sought a
refund pursuant to HRS § 431:7-203 (Supp. 2002)

The State filed a first amended motion for summary
judgment on January 31, 2008, and HIC filed a cross motion for
summary judgment on the following day. The circuit court ruled
that HIC was entitled to summary judgment on its claims of
unconstitutional tax, due process, separation of powers, equal
protection, violation of HRS § 431:7-204, and accounting. The
circuit court granted HIC’s request for an accounting and for
injunctive relief. The circuit court further rejected the
State’s defenses that this case involved a “tax matter” under HRS
§ 632-1 and that HIC members had failed to exhaust their
administrative remedies. still, the circuit court ruled that the
State was entitled to summary judgment as to HIC’s claims of
statutory scheme, illegal transfer, and violation of trust
doctrine. The State filed a motion for reconsideration. The
circuit court denied the motion, but granted a stay pending
appeal of the injunction, judgment, and accounting with certain
conditions. Final judgment was entered on February 27, 2006, and
the State filed a timely notice of appeal on March 28, 2006.

C. Appellate Proceedings

In its direct appeal to the ICA, the State argued that
the circuit court erred in concluding that the assessments were
unconstitutional taxes under Medeiros, because that decision was
inapposite to the present matter insofar as it involved a user
fee, as opposed to a regulatory fee. The State maintained that,

because the assessments were regulatory fees, Medeiros did not

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apply and that the ICA should instead apply the test set forth in

 

Juan Cellu, hone Co, ic Servi sion
Euerto Rico, 967 F.2d 683 (1st Cir. 1992), HIC countered that
the assessments were in fact taxes under Medeiros, which was not

inapposite, and that, because the assessments were taxes, they
offended the separation of powers doctrine, the due process
clauses, and the “in lieu" provision of HRS § 421:7-204. HIc
further asserted that the assessments violated the equal
protection clauses of the Hawai'i and United states
Constitutions.

The ICA held that the assessments were taxes under
Medeiros because the regulation of the insurance industry
directly benefitted the public-at-large and not the insurers who
ments. Hawaii Insurers Council, 117 Hawaii

at 459-60, 184 P.3d at 774-75. The ICA reasoned that the

paid the ass

 

assessments were taxes because they were not allocated directly
to defraying the costs of providing services to the insurers and
were not reasonably proportionate to the benefits received by the
insurers. Id. at 460, 184 P.3d at 775. The ICA observed that

 

Medeiros precluded it from applying the test set forth in San
Juan Cellular, as the State had urged, because Medeivos made no

distinction between regulatory and user fees. Id, at 461, 164
P.3d at 776. The ICA further held that, because the assessments
levied by the insurance commissioner were invalid taxes, the
legislature had, in effect, unconstitutionally delegated its
taxing power. Id, The ICA also concluded that, because the

assessments were taxes, they violated the “in lieu” provision of

a
‘+4 FOR PUBLICATION IN MEST’S HAWAI'T REPORTS AND PACIFIC REPORTER +*+
HRS § 431:7-204. Id, at 462, 184 F.3d at 777. The ICA declined
to address HIC's due process contention, but it did take up HIC’s

equal protection argument, holding that the regulatory fees

 

authorized by HRS § 431

 

-215 were rationally related to the
statutory objective of defraying the insurance division’ s
administrative costs and costs incurred by supporting offices and
divisions and that the circuit court erred in concluding that the
assessments violated the equal protection clauses of the Hawai'i
and United States Constitutions. Id.

The State further argued that the circuit court lacked
subject-matter jurisdiction over the present matter because HIC’s
members had failed to exhaust their administrative remedies under
HRS § 431:

  

-203 (a) of, in the alternative, because HIC had
sought declaratory relief with respect to taxes pursuant to HRS
§ 632-1. The ICA disagreed, concluding that HRS $ 431:7-203(a)
did not establish any available administrative mechanism for
challenging the constitutionality of assessments levied upon
insurers and that HRS § 632-1 did not apply because HIC was not
attempting to keep the State from assessing or collecting taxes
Id. at 462, 164 P.3d at 777. Finally, the State asserted that
sovereign immunity barred HIC's claim for a reimbursement of
assessments, The ICA rejected this contention, reasoning that
the issue of refunds was not presented on appeal because it was
not addressed in the circuit court’s order granting summary
judgment. Id. at 463, 184 2.34 at 778. Accordingly, the ICA

affirmed the circuit court’s final judgment. Id.

12
 

 

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Associate Judge Corinne K.A. Watanabe filed a separate
concurring opinion, expressing her concern regarding the impact
that the circuit court’s decision might have on specially funded
prograns and the integrity of the state’s fiscal infrastructure
if the test in Medeiros were not adjusted. Id, at 464, 184 P.3d
at 779 (Watanabe, J., concurring). She emphasized that other
courts examining the issue of regulatory fees have adopted a
broader test in determining whether such fees constituted taxes.
Ide

‘The ICA entered its judgment on appeal on May 5, 2008,

and the State filed a timely application for a writ of certiorari
on July 30, 2008. We accepted the application on September 8,
2008 and heard oral argument on November 6, 2008.

TI. STANDARDS OF REVIEW
AL Certiorari

‘The acceptance or rejection of an application for a
writ of certiorari is discretionary. HRS § 602-59(a) (Supp
2007). In deciding whether to accept the application, this court
considers whether the ICA's decision reflects “(1) (g)rave errors
of law or of fact[} or (2) (olbvious inconsistencies . . . with
(decisions) of this} court, federal decisions, or (the ICA's)
own decision[s]” and whether “the magnitude of those errors or
inconsistencies dictat[es] the need for further appeal.” Id.

§ 602-59(b).

2B
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8. Summary Judoment

This court reviews the circuit court’s grant of summary
judgment de novo. Brice v. AIG Haw. Ins. Cou, 107 Hawai's 106,
120, 111 P.3d 1, 5 (2005), Summary judgment is appropriate “if
the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that

the moving party is entitled to a judgment as a matter of law.”

 

Hawai'i Rules of Civil Procedure Rule 56(c).

TIT, DISCUSSION

Unconstitutional wi Were Initial ut

The _Legislature’s Transfer of $3,500,000,00 of Those
Funds Into The General fund Was Unconstitutional Under
‘Tne_Separation Of Powers Doctrine,

HIC argues that the insurance commissioner’ s

 

assessments offend the separation of powers doctrine because they
resulted from an impermissible delegation of the power to tax
from the legislature to the insurance division. The Hawai'i
Constitution does not grant the executive branch the power to
tax. Specifically, the Hawai'i Constitution directs that

(e)he taxing power shall be reserved to the state,
Excepe so much therest az may De delegates by the
Jagislature to the political subdivisions, and except
that all functions, powers and duties relating to the
taxation of real property shall be exercised
exclusively by the counties, with the exception of the
Sounty of Kelawac. The legislature shall have ‘the
Power to apportion state revenues among the several
polities) subdivisions,

 

 

 

‘The ICA explained that "[t]he term ‘political subdivision’ as st appears
in [article ViIt, section 3 of the Hawai't Constitution) refers to counties

Hiwaii Insurers Council, 117 Hawas's at 459, 184 P30 at 574 ieiting Stand

 

 

 

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Haw. Const. art. VITT, § 3. This court elucidated the contours
of the foregoing principle in McCandless v. Campbell, 20 Haw.
411, 420 (1911), as follows:

The power of taxation is essentially »
legislative poner. It cannot be delegated except to
municipalities which themselves exercise subordinate

Tegisistive powers. The pewer to tax must not be
confused with the adninistrative duties which are

 

 

 

Secessarily involved in the asvecsment. and collection
Sf taxes. In the nature of things, che Legislature
{esele cannot attend te all the details involved in
the enforcenent of she. 2a

be

‘Those mast of necessity
‘entrusted to adninisteative officers. But the tax
sabe imposed only by she legislative power- No
Srbitrary Siscretion to fix the rate ofa tax, or to
Sctetning the method by wnich it is ta be levies, oF
to adjust sts apportionment among the tax-payers,
here the principles upon which the apporticanent 1s
to ba made are not fixes, can be lefe to the executive
Branch of the government

    

Nonetheless, “[n]ot every exaction by state authorities is a
tax.” Hexom v. Oregon Dep't of Transp., 177 F.3d 1134, 1135 (9th
Cir, 1999), The legislature may delegate the state’s police
power to state authorities to allow them to assess fees.
Medeiros, 89 Hawai'i at 366, 973 P.2d at 741. Generally, a fee
is exchanged for a service rendered or a benefit conferred, and
the amount of the fee normally bears a relationship to the value
vice or benefit. Bolt v. City of Lansing, 587 N.W.2d
264, 269 (Mich. 1998).

1. Medeiros is distinguishable.

In the present matter, the State argues that the

of the

 

assessments via HRS § 431:2-215 are properly characterized as

fees that the insurance commissioner has the authority to

 

 

“(...continued)
Cons, Rep, No, $3, Committee on Local Government, 1
Constitst ional Convention of Hawai'i of 1968, at 229 (137311

as
 

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collect, while HIC maintains that the assessments are
unconstitutional taxes violative of the separation of powers
doctrine pursuant to this court’s holding in Medeiros, 89 Hawai
361, 973 P.2d 736.

On the one hand, this court has defined the term “tax”

 

as follow:

 

Taxes are the enforces proportional
contributions from persons aod property, levied by the
State by virtue of its sovereignty for the support of
Government, and for all public m

 

charge: By legislative authority on persons or
property to raise money for public purposes, oF
Briefly, an imposition for the supply of the public
treasury,

‘The word taxes is very comprehensive, and
properly includes, as indicated in the foregosng
Sefinition, 211 Burdens, charges ang inpositions by
Virtue of the taxing power with the object of raising
money for public purposes

McCandless, 20 Haw. at 420 (citations and quotation marks

omitted). This definition is consistent with the plain meaning

 

 

 

 

 

of the term “tax”: “A monetary charge imposed by the government

on persons, entities, transactions, or property to yield public

revenue.” Black's Law Dictionary 1496 (th ed. 2004); see also
Sanduan Cellular, 967 F.2d at 685 (“The classic ‘tax’ is imposed

 

by a legislature upon many, or all, citizens. rt raises money,
contributed to a general fund, and spent for the benefit of the
entire community.) .

On the other hand, in Medeiros, this court identified

 

 

two common types of fees:

“fees imposed by a governmental entity tend to fall
into one of two principal categories: user fees,
based on the richts of the entity a2 a propristor of
the instrumentalities eed, or regulatory fe
Uneluding licensing and inspectian fees), founded on
the police power to regulate particular businesses oF
activities.”

 

 

 

16
 

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99 Hawai'i at 366, 973 P.2d at 741 (quoting Emerson Coll, v. City
of Boston, 462 N.B.2d 1098, 1105 (1984). Thus, as noted, a user
fee is “‘based on the rights of the entity as a proprietor of the
Anstrumentalities used.” Id. at 366, $73 P.2d at 741 (quoting
Bmerson Coll, 462 N.E.2d at 1105); see also Black's Law
Dictionary 1579 (defining a “user fee” as “[a) charge assessed
for the use of a particular item or facility”). Examples of user
fees include bridge tolls, Gargano v. Lee County Bd. of County
Comm'rs, 921 So. 24 661, 669 (Fla. Dist. Ct. App. 2006), charges
for sewer hookups, Contractors & Build ‘

County v. City of Dunedin, 329 So. 2d 314, 317-18 (Fla. 1976),
and charges for managing wastewater, Missouri Growth Ass'n v
Metro, St. Louis Sewer Dist., 941 $.W.2d 615, 622-25 (Mo. Ct.
App. 1997). By contrast,

[elke classic “regulatory fee" is imposed by an agency

pon those subject to its vegulation. Ie may serve
Fegulatory purposes directly by, for exsmple,
Geliverately discouraging particular conduct’ by naking
St nore expensive. Or, it say serve such purposes
indirectly by, for example, raising money placed in a
Special fund to help defray the agency" =
Fegulation-related expenses.

San Juan Cellular, 967 F.2d at 685 (citations omitted).

Regulatory fees are authorized by the state’s police power to

 

 

 

 

 

   

 

regulate particular businesses or activities. Medeiros, 89
Hawai" at 366, 973 P.2d at 741 (quoting Emerson Coll., 462
N.E.2d at 1105). The police power of the state “is broad and

 

extends to the public safety, health, and welfare.” State ve
Ewing, @1 Hawai‘ 156, 164, 914 P.2d 549, 557 (App. 1996).
Examples of regulatory fees include a state guaranty fund

assessment levied on certain insurance companies in order to

uv
‘44 FOR PUBLICATION IN WEST’S HAWAI'I REPORTS AND PACIFIC REFORTER +++
provide 2 fund for the protection of policyholders of insolvent
insurers and to support their orderly rehabilitation or
Liguidation, Principal Life Ins, co. v, United States, 70 Fed
1. 144, 170 (2006), @ $3.00 transaction fee for each pawn shop
transaction report filed with the police department, Jachimek vs
State, 74 P.34 944, 949 (Ariz. Ct. App. 2003), and fees assessed
by a city against telecommunication service providers, including
permit, registration, application, license, and franchise fees,

c. Bell Tel. co. v. , 188 F. Supp. 2d 1169,
1277 (¢.D. Cal. 2002).

In the case at hand, the ICA relied on this court’s
holding in Medeizos in determining that the insurance division's
assessments were unconstitutional taxes and not fees. Hawaii
Insurers Council, 117 Hawai'i at 459-60, 184 P.3d at 774-75. In
Medeiros, a defendant who pled guilty to a charge of unauthorized
entry into @ motor vehicle filed @ motion to enjoin enforcement
of chapter 6, article 52 of the Revised Ordinances of the City
and County of Honolulu (ROCCH) (Supp. 1998), which provided for
the collection of a fee from persons convicted of misdemeanors
and felonies “‘for services performed by the city in connection
with the arrest, processing, investigation, and prosecution of
the convicted person.’” 89 Hawai'i at 362 n.1, 973 P.2d at 737
1.1 (quoting ROCCH § 6-52.2). The circuit court granted the
motion on the ground that the ordinance was an unconstitutional
tax that the city had no authority te assess. Id, at 363-64, 973

P.2d at 738-39. On appeal, the city argued that the assessment

18
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was a fee authorized by HRS § 46-1.5(8) (1993).° In affirming
the decision of the circuit court, this court noted that,
although ROCCH § 6-$2.2 characterized its charge as a “fee,” “the
nature of the tax or ‘charge’ that a law imposes is not
determined by the label given to it but by its operating
incidence.” Id, at 366, 973 P.2d at 741 (quoting Stewarts"
Pharmacies v, Fase, 43 Haw. 131, 144 (1959)) (brackets omitted).
‘This court adopted @ three-pronged test for determining whether
such charges were fees as opposed to taxes, The test analyzed
whether the charge (1) applied to the direct beneficiary of 2
particular service, (2) was allocated directly to defraying the
costs of providing the service, and (3) was reasonably
proportionate to the benefit received. Id. at 367, 973 P.2d
at 742. In the course of formulating the Medeiros test, we
quoted the following passage from Enexson College:

“[Elees share common traits that distinguish then from

taxes!” they are charged in exchange for a particular

Governmental service which benefits the party paying

fhe fee ins manner ‘not shared by cther menbers of

society," Matongl Cable Television Acero v United

States, 5-0-8. 336, 3. 9G) thay are

pala by choice, in that the party paying the fee has

Ehe option of tot vtslizing the governmental service

and thereby avoiding the charge, and the charges are

Goluscted not to raise revenser but to compensate the

Governmental entity providing the services for itt

expenses.”
Medeivos, 89 Hawai'i at 366, 973 P.2d at 741 (quoting Emerson

 

Coll., 462 N.£.2d at 1105 (citation omitted). We deviated from

 

+ uns § 46-1.5(8) provides that, “{s}ubject to general law, each county
shall have the following powers and shall be subject to the following

Auities and limitations. . (8) ach county shall have the power to fix
the fees and charges for all official services not otherwise paid for.”

13

 

 
{++ FOR PUBLICATION IN MESI’S HAWAT'T REPORTS AND PACIFIC REPORTER +++

Berson College by declining to adopt its “voluntariness” element
because,

Islubsequent to its opinion in Enexson Colleas, the
Massachusetts Suprene Judicial Court has weakened its
adherence to the second identifying factor described
fg -"voluntary seesipt of the
service” =~ oiding that "the elenent of choice se
not a cenpelling consideration which can be used to
invalidate an ctherwige legitimate charge.”

 

 

     

 

Id. In applying the test to the facts before us, we determined
that ROCCH § 6-52.2 did not satisfy the first and second prongs
of the test. id. at 370, 973 P.2d at 745. First, the ordinance
did not benefit the payor of the charge, the defendant, but
instead benefitted society as a whole. Id, at 368, 973 P.24
at 743. Second, the ordinance was not “allocated directly to
defraying the costs of providing the service” because it
seemingly allowed any “remaining revenues” from the fee to be
used for general purposes. Id. at 367, 973 P.2d at 742.
Accordingly, we held that ROCCH § 6-52.2 was invalid because it
authorized the imposition of a tax and because the state had not
empowered the city to impose such a tax. Id. at 370, 973 P.2d
at 745.

The State maintains that Medeiros is distinguishable
from the present matter because it dealt with an alleged

“service” or “user” fee, while the present case involves an

5 _ the tems “user fee” and “service fee” are essentially interchangeable
See util, Audie co, ¥. Citvof Los Angeles, S'Cal. Rpers 32'520, 526 (App

2003) “riser feos are arounts charges to a person using a service where the
amount of, the charge 1s generally related to the value of the services
provided."); Continental Aislinss, Inc. c. United States, 77 fed. Cl. 482, 484
5.2 (2007) (“Befendant refers to the agricultural querancine inspection
Services fee as the "AQ! user fee," while plaintiff calle it the "AEWIS user
fee’ For ease of discussion, the Court will refer to these fees as AQT
ser fees!)

 

 

 

20
‘tee FOR PUBLICATION IN WHST'S HAWAI'Z REPORTS AND PACTFIC REPORTER +++

 

alleged “regulatory” fee. The State (1) argues that the
Medeiros test is proper only for distinguishing between user fees
and taxes and (2) notes that the Medeiros test was largely
derived from the Emerson College test which, like Medeiros,
involved an alleged service fee. HIC asserts numerous arguments
as to why the Medeiros test should be applied in the present
matter. First, HIC claims that Medeiros, in its exposition of
the difference between taxes and fees, did not create separate
tests for distinguishing user fees and regulatory fees, on the
one hand, from taxes, on the other. On its face,
Medeizce employs a three-pronged test in order to determine
whether 2 charge is a fee or a tax without explicitly stating
that the test differentiates between “user fees” and taxes.
Id. at 367, 973 P.2d at 742, HIC thus highlights the extent of
our citation to Emerson College in Medeiros, in which Emerson
College was seemingly discussing “fees” as a whole:

“pees smposed by s governmental entity tend to fall

unta one of two principal categories: user fees, based

fon the rights of the entity as 2 proprietor of the

Ghetrunentelities usea, oF regulatory fees (including

USeensing and inspection fees|, founded on the polis

power to regulate particular businesses or activitil

Such’ rees Share Connon traits that aistinguish then

cieslar service she

Barty paving the fee ioe manner “not shared by other
Tational Gable Television Ass'n

     

Bf

hesbers of a society,” cz
jnited States, #15 U.S. 336, 341... 9T@7
"+ and the shares are collected net io rasa

Eetenues ut To compensate the governmental anuity

Medeiros, 89 Hawai'i at 366, $73 P.2d at 741 (quoting Emerson
Coll., 462 N.E.2d at 1105) (emphases added). Accordingly, KIC
contends that we should apply the Medeiros test to the present

matter regardless of the type of fee that is allegedly at issue.

21
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Different rationales underlie the assessment of user
and regulatory fees. A user fee is generally charged to the
recipient of a service provided by the government, such as the
use of a toll bridge, see Gargano, 921 So. 2d at 668, or entry
into a regulated profession, see Seafarers Int’) Union of N. An.
ws United States Coast Guard, 81 F.3d 179, 189-90 (D.C. cir.
1996) (holding that Coast Guard licensing program fees were user
fees and noting that fees for licenses and registrations are
classic examples of user fees), On the other hand, @ regulatory
fee is authorized by the state’s police power to prescribe
régulations for the promotion of “public safety, health, and
welfare,” Ewing, 81 Hawa
Medeiros, following our review of Emerson College's test, we
adopted

 

‘Lat 164, 914 P.2d at $57, In

a modified Merson College test for determining
“nether a charge isa fee or a tax, in which we
analyze whether the charge (1) applies to the direct
Beneficiary of « particular service, (2) 19 allocated
directly to detraying the costs of brovidine the
gekzice, and (3) 1s reasonably proportionate to the
Benefit’ received.

89 Hawai'i at 367, 973 P.2¢ at 742 (emphases added). Like the
test developed in Euexrson College, a decision that, like
Medeiros, dealt with an alleged service fee, ges Euerson Coll,
462 N.E.2d at 1106 ("Under the statute, the city is authorized to

 

impose a fee for augmented fire services.") (internal quotation
marks omitted), cur modified test focused on elements of
“service,” namely whether the payor was a beneficiary of 2
service and whether the funds defrayed the costs of the provider

of the payor’s service. Consequently, the Medeiros test was and

22
 

‘4 FOR PUBLICATION IN WEST'S HAWAI'I REPORTS AND PACIFIC REPORTER +
is intended to distinguish between taxes and service fees, not

regulatory fees.
HIC contends that National Cable, 415 U.S. 336, a

decision cited in Emerson College and consequently in Medeiros,
89 Hawai'i at 366, $73 P.2d at 741, is relevant to the present

matter because it distinguishes between taxes and regulatory

fees. In National Cable, the National Cable Television

Association, a trade association that represented conmunity
antenna television (CATV) systems, challenged assessments by the
Federal Communications Conmission (FCC), which was authorized to
regulate the CATV systems. 415 U.S. at 337-38. The regulatory

fees were imposed pursuant to

[t]he Independent offices Appropriation Act, 1952,
Tit. 5, 65 Stat. 290, si U.S.C. s (83a, which provided
In‘televane pare: sft ia the sense of the Congress
that any work, service ‘benefit, iigense,
©. oF similar thing of value or utility performed,
iuinished, provided, granted... By any Feseral
agency «to or for any person (including.
Gorporations vs | Ghali be aelf-sustaiatng to
the full extent’ possible, ‘and the head of esch Federal
Agency is authorized by regulation... . to prescribe
therefor... such fee, charge, or price, if any, a2
he shall determine... to be fair and aquitable
Esking inte consideration direct and indivect cost to
‘Wie Government, value to the recipient, public policy

 

Id. at 337 (ellipses in original) (emphasis added). The United
States Suprene Court reviewed this statute and concluded that

Ia} “fee” connotes s “benefit” and the Act by ite us
of the standard ‘value to the recipient” carfles that
Conngtation.. The addition of “public policy or
interest sexved, and other pertinent facts,” if re.
Literally, carries an agency far from its customary
orbit and puts it in search of revenue in the manner
Gf an Appropriations Committee of the House

Id. at 342. Thus, when analyzing whether the fees were lawful,

     

 

 

 

the Supreme Court focused on the “value to the recipient” clause

23
‘4+ FOR PUBLICATION IN WEST'S HANAI'T REFORTS AND PACIFIC REPORTER +**
of the statute. It concluded that CATV systems should only pay
regulatory fees equivalent to the value of services received,
stating that,

[w)nite those wo operate CATV’s may receive spectal
Benefits, we cannot be sure that the [elonmission used
the correct standard in setting the fee, Te is not
encugh £0 figure the total cost (direct and sndizect)
fo the [comission for operating a CATV unit of
Supervision and then to contrive a forma that
Feinburses the (clomission for that amount

Certainly sone Of the costs inured to the benefit of
‘he public, unless the entire regulatory scheme is 8
failure, which we refuse to aasune.

 

Id. at 343. As a result, the Suprene Court held that the fees
that the FCC assessed the CATVs were unconstitutional taxes.
HIC's contention that the National Cable shoe fits here
is unpersuasive. The Suprene Court has subsequently explained
that National cable “st (cold only for the proposition that
Congress must indicate clearly its intention to delegate to the
Executive the discretionary authority to recover administrative
costs not inuring directly to the benefit of regulated parties by
imposing additional financial burdens, whether characterized as
‘tees’ or ‘taxes,’ on those parties.” Skinner v, Mid-America
Bipeline, 490 U.S. 212, 263-64 (1989) (emphasis added); see aleo

Union Pac. R.R. Co. v. Pub. Util, Comm'n, 899 F.2d 854, 860 (9th
Cir, 1990) ("National Cable . . . [was] concerned with the

interpretation of a statute. At issue was the meaning of ‘fee,
charge, or price’ ina provision . . . directing federal agencies
to collect a ‘fee, charge, or price’ for any ‘work, service,

benefit, . . . or similar thing of value . . . granted, prepared,
or issued by any Federal agency.’"). There is no language in the

Hawai'i Insurance Code or the administrative regulations

24
‘104 FOR PUBLICATION IN WEST'S KAWAI'T REPORTS AND PACIFIC REPORTER +++
promulgated under the code similar to the “value to the
recipient” clause at issue in National Cable. Instead, the

statute in the present matter provides that the insurance

 

commissioner’s assessments “shall bear a reasonable relationship
to the costs of regulating the line or type of insurance,

including any administrative costs associated of the division.”

 

HRS § 431:2-215(d) (3). Accordingly, we do not find Natior
Gable to be instructive in the present matter.

Nor are we swayed by National Cable’s determination
that, under the act at issue, the FCC's fees should have
benefitted the CATV providers. See 415 U.S. at 341. National,
Gable’s position stemmed solely fron the “value to the recipient”
clause of the governing statute and did not overrule the Supreme
Court's foundational regulatory fee decision, Edve v. Robinson,
112 U.S, 580 (2884). See San Juan Cellular, 967 F.2d at 687. In
Edye, the Supreme Court expressly placed the burden of regulatory
funding on those “who make profit out of [the regulated
business),” and recognized that the regulatory fees were used by
the government “for the protection of the citizens.” 112 U.S.
at 596. The California Supreme Court has adopted a similar
concept of regulatory fees, explaining that “regulatory fees in
amounts necessary to carry out the regulation’s purpose are valid
despite the absence of any perceived ‘benefit’ accruing to the
fee payers.” See Sinclair Paint co, v, state ad, of
Equilization, 937 P.2d 1350, 1355 (cal. 1997), These decisions
illustrate all the more why the Medeizos test, which considers
whether the payor of a charge received a benefit, 89 Hawai'i

25
 

FOR PUBLICATION IN WEST'S HANAT'T REFORTS AND PACIFIC REFORTER +++
at 367, 973 P.2d at 742, is properly confined to evaluating
whether the chazge is a user fee or a tex.

In an attempt to batten down every hatch of its
argument, HIC further asserts that the alleged fees at issue in
Medeiros, like the ones at issue in the present case, were
regulatory fees. HIC bases its argument on Emerson College's
definition of regulatory fees, quoted in Medeiros, as

licensing and inspection fees” and being “founded on the police

including

power to regulate particular businesses or activities.” Emerson
Goll., 462 N.E.2d at 1105, quoted in Medeiros, 89 Hawai'i at 366,
973 P.2d at 741. HIC gloms onto the “police power” aspect of the

 

definition in arguing that “Ysdeizos plainly concern{ed) the
tpolice power’ of ‘criminal investigative services,’ not a user
fee as suggested by [the state].” (Citing Medeiros, 89 Hawai'i
at 363, 366, 973 P.2d at 738, 742.

 

HIC’s argument is discordant
with the position taken by the city in Medeiros, unpersuasively,”
that the alleged fees at issue were being charged in return for
the “service” of the “arrest and prosecution” of the convict, a
service that, for instence,

assists persons in preventiog further harm to

theaselves, eapectally in the ease of,o drunk driver

whey if not apprehendsa, could Kill hinael for cthers,

Gna’ ie prevents thea trim haraing others: fopeftliy,

this service also helps co convince the offender to

Cease Ris uniawcl activities and becomes lawsabiging

Sha productive menber of society.
Medeiros, 89 Hawai'i at 368-69, 973 P.2d at 743-44 (brackets

omitted). Medeiros dealt with an alleged service fee, not a

 

 

 

 

> ot only was the srgunent unpersuasive, but its Orwellian nature
elicited an A rages citation to George Orwell's ineteen Eighty-Four.
Meseizes, 69 Mavala at 369 n+8, 973 Pr2d at 748 n.B~

26
si+4 FOR PUBLICATION IN WEST'S HAWAI'T REPORTS AND PACIFIC REPORTER ***
regulatory fee, and modified the Suerson College test to
determine whether the charge at issue was a service fee or 2

tax. In the present matter, the assessments at issue are clearly
of a regulatory nature, having been levied by the commissioner of
the insurance division, the facet of the DCCA that is empowered
to exercise the state’s police power to regulate the insurance
industry. See HRS $$ 431:2-101 and 431:2-102. Accordingly, we
are not bound by our analysis in Medeiros."

 

© our holding in Inte Water Use Permit Applications, 9¢ Havai'i 97, 9
P.3d 409 (2000), this court's only subsequent application of the Medeiros test
Ens published opinion, dees not preclude cur conclusion that the edeizos
ttse Spplies solely tovalleged user fees, 1p ye Water Use dealt with the
GileciBicion of water trom the Walincle Ditch to persons applying for water
Gee pertits, At an expaneive contested case hearing, the Comission on Water
Resource Nenagesent, oh instrunentality of the Department of Land and Natural
Rescurces, announced its plan to setablish technical acvisory committees to)
‘othe implementation of the final decision, determine the feasibility of
created wastewater over potable aquifers, and recommend studies,
Conservation measures, and monitoring plane. id at 118, 9 P.30 at 430. A.
portion of che comasttece’ studies and nonitoring activities were to be paid
Gor by recipients of permits to use the Waishole Ditch, with each recipient's
Eharge calculeced os & pro cata share of the anount of water received. Id.
Certain permittees challenged this portion of the conmission’s decision,
Sileging that the funding requirement constituted an "illegal tax” under
Measles. "Eg. at 185, 3.P.dd-at 497. This coure applied the Medeiros test
Bhe conciuded"that "ehe (cionmission has the generat authority te condition
the permits upon compliance with the snstane funding requirement, which more
properly falls under the cateaory of a cequlatory fee, rather than = land
Snvelognent exaction’” Id. at 186, 9 Pod at 438 (enphasis added)

‘Eithough we seouingly classified the fee in In re Water Use as a
vregulatary fee,” we did so in passing, as the type of fee at issue w
Glspositive of the case, a2 it fs here, “In fact, further review of

Suiveteates that st in fact dealt with “user fees.” The goal of the
Blate Kater Code is to regulate the use of Hawaii's water. Seg HRS
G5 1740-2 [e) 11393) ("Tt 1s recognized that the waters of the Scate are held
for the benefit of the citizens of the State, Tt is declared that the people
Of the State are beneficiaries and have 2 raght to have the waters protected
for their usa.” (emphasis added)) ond 174C-2(c) (1993) ("The state water code
Shell be liberally interpreted to obtain maximum beneficial yse of the waters
St 'the State for purposes such as donestic seg, aquaculture yses, irrigation
Sha other sgricultural uses, power development, ana comercial and industrial

e enphases acded)). this court further explained the sanner in which
Meee enittces’ payment of the fees would benefit their water use, both by
assisting them in marshaling the requisite proof that their use would not
itand in opposition to the public interest and by “allowing then exclusive

(eontinued. ..)

 

 

 

 

 

 

    

 

2
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We now turn to the questicn whether the insurance
division's assessments constituted allowable regulatory fees or
unconstitutional taxes. To answer this question, the State urges
us to look to San Juan Cellular, which distinguished between
regulatory fees and taxes. In San Juan Cellular, the Puerto Rico
Public Service Commission levied a three-percent “periodic fee”
against a private cellular company. 967 F.2d at 648. The
company challenged the fee as unlawful, and the federal district
court granted declaratory relief on the ground that federal
statutes and regulations pre-empted the local government’ s
authority to impose such a charge. Id. The commission appealed,
asserting that the district court did not have jurisdiction in
Light of the federal Tax Injunction Act, which prohibited the
“district court from restraining the assessment or collection of
any tax imposed by the laws of Puerto Rico, 48 U.S.C. § 872,
unless no ‘plain, speedy and efficient’ remedy is available in
the Commonwealth's courts, 28 U.S.C. § 1341." San Juan Cellular,
967 F.2d at 684. The United States Court of Appeals for the
First Circuit, in an opinion by then-Chief Judge Stephen G.
Breyer, held that the act did not divest the district court of
jurisdiction, because the three-percent “periodic fee” was not an

tex, but a regulatory fee. Id, at 685-86, In making that

 

1. -continued)
ae Of public resources” in the interim before a determination of the effects
fo the public of the permittees water use was concluded, in re Water Jae, 3e
Hawet't ‘at 185, 3 P.3d at 497 (enphecis addea). Accordingly, the toes tet
the permittees were assessed wore nore akin to “user fees,” and therefore
Medeitas was correctly applied in the case, See, gigs fant) er

$32 8.W.2d 374, 377 (hy. Ct Appr 1996) Thelatee Thee
ments charged to city for the’ purposes of controlling and conserving

basin water source were user foes, not taxes), sited in Io re Mater Use,

54 Hawai't ae 188, 9 Pda ae 497

 

 

     

 

    

28
‘448 FOR PUBLICATION IN MEST’S HAWAI'T REPORTS AND PACIFIC REPORTER ***
determination, the First Circuit formulated a three-pronged test
to divine whether the assessment was a regulatory fee,
specifically considering whether (1) “{a] regulatory agency
assesses the fee[,]” (2) “(t]he agency places the money in a
special fund{,)” and (3) “[t]he money is not used for a general
purpose 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 (citations and brackets omitted). In
applying the foregoing test, the First Circuit held that the
commission's “periodic fee” was “close to the ‘fee’ end of the

spectrum.” Id

 

The First Circuit was not persuaded by the argument
that because, by statute, the unused revenue generated by the
periodic fees would ultimately revert to the general fund after
five years, the assessment was therefore a tax. The First
Circuit swatted down the argument with the observation that

(perhaps this instruction would make a difference
ere there some evidence in the record that large
Imgunts of the revenue the [assessor] obtains would
Sha up in the general fond. But, nothing in the
Fecord before us, cr in the statute, suggests that the
[assessor] will fail to spend most, or all, (of) the
revenue rained for the specific statutory Cbjectives

 

 

‘Id. at 687 (emphasis added) (citations omitted). The present
matter differs from this aspect of San Juan Cellular in light of
the “large amounts” of the insurance division's revenue,

$3,500,000.00, that was extracted to benef:

 

the state’s general

fund. Furthermore, as we are not presented with a case dealing

29
 

+ FOR PUBLICATION IN WEST'S HAWAI'E REEORTS AND PACIFIC REPORTER +++
with de minimis funds reverting from a regulatory agency to a
general fund, we will not address the issue here.

‘The San Juan Cellular test comports with the foregoing
discussion of regulatory fees, inasmuch as it describes monies
that are collected by a regulatory agency to be used for the
agency’s defined purposes. See Medeiros, 89 Hawai‘i at 366, 973
P.2d at 741 ("‘Regulatory fees are authorized by the state's
police power to regulate particular businesses or activities.'”
(quoting Emerson Coll., 462 N.E.2d at 1105)). Furthermore,
unlike the user fee test adopted in Medeiros, the San Juan
Cellular test recognizes that regulatory fees need not benefit
the regulated payor of the fee in order to be valid. See also
Edue, 112 U.S. at 5967 Sinclair Paint co., 937 P.24 at 1355.
Accordingly, we believe that the San Juan Cellular test is ideal
for determining whether an assessment is a regulatory fee or a
tax, and we will now apply it to the facts of the case at hand.

2. ici f the lan Cel Test

The first prong of the San Juan Cellular test, that is,
whether @ regulatory agency assesses the fee, 967 F.2d at 686, is
satisfied in the present matter because the charges at issue were

 

fed by the commissioner of the insurance division of the
DCCA. The insurance commissioner is vested with the authority to
enforce the Insurance Code, HRS title 24, which regulates the
insurance industry. See HRS § 431:2-201(b) (1993). The second
prong, which asks whether the agency places the money in
special fund, San Juan Celluler, 937 P.2d at 686, is also

satisfied because the assessments were placed into a “special

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FOR PUBLICATION IN WEST'S HAMAT'T REPORTS AND PACIFIC REPORTER +++
fund,” namely, the IRF, by the insurance commissioner; the IRF
later merged into the CRF and was intended to be utilized to
reimburse the insurance division for the cost of regulating the
insurance industry. See HRS § 431:2-215(c)-

The third prong of the San Juan Cellular test requires
a more searching inquiry, Tt evaluates whether “the money is not
used for @ general purpose 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].” 967 F.2d at 686 (brackets omitted); see also Bidart

Bros. Lifor com’n, 73 F.3d 925, 931 (9th Cir. 1996)
(articulating the third prong of the San Juan Cellular test as

“whether the assesenent is expended for general public purposes,
or used for the regulation or benefit of the parties upon whom
the assessment is imposed”). HIC asserts that the insurance
conmissioner’s assessments, as a whole, represent
unconstitutional taxes under Medeiros. In particular, HIC points
to the expenditures by the insurance commissioner for: (1)
general overhead of the insurance division, the DCCA, and the
DBF; (2) the cash reserve accumulated by the insurance division:
and (3) the monies transferred to the general fund as being
violative of the user-fee test in Medeiros. Inasmuch as we are
not applying the Medeiros test here, we will instead review these
expenditures under the third prong of the San Juan Cellular test
to determine whether they were “expended for general public

purposes, or used for the regulation or benefit of the parties

31
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upon whom the assessment is imposed.” See Bidart Bros., 73 F.3d
at 931.
and 08) ead

 

HIC notes that over $4,000,000.00 was transfered from
the IRF to support the overhead of the OCCA and $375,000.00 for
the benefit of the DBF. The State argues that these funds
constituted the insurance division's pro rata share of the DCCA's

and the DBF’s expenses, pursuant to HRS $§ 36-27, 36-30 (Supp.

 

 

2003),"° and 431:2-215(b)." Tt is apparent that, under San Juan
+ HRS, § 36-27, entitled “Transfers from special funds for central service

 

expenses," provides in relevant pare

Except as provided in this section, and notwithstanding any other
law to the contrary, from time to time, the director of fizance,
for the purpose of defraying the prorated eotinate of central
service expenses of government in relation to ail special funds
shall deduct five per cent of ail receipts of ali other
Special funds, which deduction shell be transferred to the general
fond of the State and become general realizations of the stete

 

 

 

 

ws HRS § 36-30, entitled “special fund reimbursements for departmental
administrative expenses,” provides in relevant parts

 

a) Bach special fund . . . shall be responsible for ite
pro rata share of the administrative expenses incurred by che
Gepartaent responsible for the operations supported by the special

(b]" Administrative expenses shall include:

(2) Sataries;

(2) Maintenance of bulidings and grounds;

(3) veitieiesy ana

(4) General office expenses

(c)_ The pro rata share of each special fund shall be that
proportion of the adinistrative expenses of the departnent,
Including these paid fron all special funds aseinisteres by’ the
Gepartmertt, which the expenditures of the special fund bear to the
total expenditures of the department :

 

Rs § 492:2-215(b) provides in relevant pazt

Suns from the compliance resolution fund expended by the
commissioner shali be uses to defray sny administrative costs,
including personnel costs, assoctated with the programs of the
aivision, and costs incurred by supporting offices ane

aivisions.... [T]he commissioner may use the moneys in the fund

32
tee FOR PUBLICATION IN MES?’S HAWAI'T REPORTS AND PACIFIC REPORTER +++

 

Cellular, the monies paid to the DCCA and to the DBF were “used
for the regulation or benefit of the parties upon whom the
assessment is imposed.” See Bidart Sros., 73 F.3d at 931.

return for the insurance division providing its pro rata share of

 

its costs, the DCCA provided the insurance division with, inter
alia, personnel management services, review and processing of the
insurance division's expenditures, the preparation of its annual
operating budget, a forum for contested case hearings, computer
system support, and various administrative services. The Daf
provided the insurance division with, inter alia, oversight of
budget preparation and execution, determination of budgetary
requirements and expenditures, management of employee benefit
programs, management of public debt, and treasury programs. The
aforenentioned services provided by the DCCA and the DBF to the
insurance division assist it in carrying out its regulatory
functions, and, accordingly, the expenditures that the insurance
division was mandated to pay to the DCCA and the DBF do not
constitute taxes under the San Juan Cellulax test.
b. Reserve fund

The insurance division has also maintained a practice
of collecting assessments in excess of its operating costs in
order to develop a reserve fund. The State argues that the

reserve fund was cr

 

ted in order to protect against unforeseen

 

(continued)
‘To vexploy or retein, by contract or otherwise, . . . hearings
Setiers, attorneys, investigators, accountants, examiners, and
Sther necessary professional, techticsl, saninistrativ
Support persone! to implement and carey out the purpor
title 26 :

 

  

33
‘4+ POR PUBLICATION IN WEST'S HAWAI'T REPORTS AND PACIFIC REPORTER +++
emergency situations, such as the unplanned rehabilitation and
Liguidation of insurers or natural disasters, as well as to
cushion the division's operating budget fron yearly fluctuations

in revenue, HIC argues that assessnents for the purpose of

 

creating the reserve do not bear a reasonable relationship to the
costs of regulating the insurance industry, are not authorized by
statute, and must therefore be declared illegal taxes.

In our view, the State’s position that a reserve fund
is essential to the insurance division’s regulatory function is
reasonable in light of the unpredictability of potential
contingencies and fluctuations in the amount of funds available
to the insurance division through assessments and other means.

We are wary of second-guessing a regulatory agency's reasonable
strategy for securing its continued ability to serve its public
function. See Collier v. City & County of San Francisco, 60 Cal.
Rptr. 3d 698, 708 (App. 2007) (“[WJere we to adopt a too narrow
definition of ‘regulatory activities’ . . . , we would risk
depriving municipalities of a reasonable degree of flexibility to
determine whether regulatory fee revenues collected by their
agencies are being spent in furtherance of the purpose for which
those fees were assessed.”); California Ass'n of Prof, scientists
vaDep't of Fish & Game, 94 Cal. Rptr. 2d 535, 545-46 (App. 2000)
("The legislative body charged with enacting laws pursuant to the
police power retains the discretion to apportion the costs of
regulatory programs in a variety of reasonable financing
schemes.) Brydon v. £. Bay Mun, Util, Dist., 29 cal. Rptr. 24

128, 136 (App. 1994) ("(CJost allocations for services provided

34
 

‘10+ YOR PUBLICATION IN WEST'S HAWAI'T REPORTS AND PACIFIC REPORTER,
are to be judged by a standard of reasonableness with sone
flexibility permitted to account for systen-wide complexity.”).
Accordingly, the portion of the assessments that went toward
buttressing the insurance division's reserve fund were “used for
the regulation or benefit of the parties upon whom the assessment
As imposed,” see Bidart Bros., 73 F.3d at 931, and, having
satisfied the third prong of the San Juan Celjular test,
constitute legitimate regulatory fees.
c. Transferred funds

HIC further argues that the assessments at issue fail
the third prong of the San Juan Cellular test, because the
$2,000, 000.00 that was transferred from the IRF in 2002 and the
$1,500, 000.00 that was transferred from the CRF in 2003 (the
transferred funds), in accordance with the legislature's decrees
in 2002 Haw. Sess, &, Act 178, § 40 at 793 and 2003 Haw. Sess.
Laws Act 178, $5 28, 66 at 407, 412 (the transfer bills), were
used for a general purpose by being deposited in the general
fund. In countering HIC’s position, the State asks us to focus
on the fact that the transferred funds at issue were, in the
first instance, solely designated for the insurance division's
use and were shifted to the general fund over the strong
opposition of the insurance commissioner and the director of the
peca.

The State cites Apodaca vs Wilson, 525 P.2d 876 (NM.
1974), in support of its contention that an assessment’s initial
designation should define its character forevermore. In Apadaca,

the Albuquerque City Commission adopted two ordinances, one that

38
‘+ FOR PUBLICATION IN WEST'S HAWAI'I REFORTS AND PACIFIC REFORTER

 

increased sewer and water service charges and another that, inter
alia, indicated that water and sewer revenues had increased and
that a large portion of the revenue increase would therefore be
appropriated to the city’s general fund. Id. at 878. The
plaintiffs sought to enjoin the city from collecting the
increased charges and to invalidate the ordinance increasing the
charges on the ground that the charges were an illegal tax.

1d, at 879. The New Mexico Supreme Court held that, “*{s]ince
the rate charged is not a tax in its inception, ultimate use of
surplus funds derived therefrom for the support of municipal
Government will not convert it into taxes or cause it to assume
the nature of taxes.’” Id. at 885 (quoting City of Niles v.
Union Ice Corp,, 12 .N.E.2d 483, 489 (ohio 1938).

The State’s reliance on Apodaca is misplaced, That
decision dealt with a municipality's ability to collect charges
and then subsume the charges within its own general fund. The
Apodaca decision relied heavily on the fact that the city was
“acting in a business or proprietary capacity rather than in a
governmental capacity.” Jd. at 884, With that in mind, the New

Mexico Supreme Court held that,

 

“‘when engaged in business,’” a
municipality does not tax, but instead charges “'a price at which
and for which the public utility service or product is sold.'”
Ad. at 885 (quoting City of Niles, 12.N.E.2 at 469). This is a
far cry from the insurance division’s role in the present matter,
being neither “engaged in business” nor selling a product for

profit. We are not presently addressing whether a municipality

 

that is engaged in selling a “‘conmodity’” such as water, see id.

36
“+++ FOR PUBLICATION IN MEST’S HANAI'T REPORTS AND PACIFIC REFORTER *++

 

at 886 (quoting Iuitchell v, City of Spokane, 104 ?. 150, 151
(Wash. 1909}), can use the profits as it sees fit. Furthermore,
for reasons discussed below, we do not agree with Apodaca’s
general conclusion that a fee assessment’s initial designation
dictates its character perpetually.

The State also asserts that a levy placed directly into
a general fund may sometimes constitute a valid regulatory f
citing Southview Co-operative Housing Corp, v. Rent Control Board
of Cambridge, 486 N.E.2d 700 (Nass. 1985). Southview Co-
operative involved landlords who brought suit to challenge the

 

rent control board’s ability to assess fees against them in
connection with petitions for rent adjustments. Id. at 701. The
landlords asserted that the assessments constituted impermissible
taxes. id. In concluding thatthe fees were lawful, the

Massachusetts Supreme Judicial Court stated the following, upon

 

which the State relies in the present matter:

‘The plaintiffs are not helped by the fact that the
Collected fees vere deposited in the general fund of
the city, es the iaw requires, or by the fact that the
Challenged fee schedule was ectablished to sake up for
S"ibusgee) short ral

Fegularory agency will reduce the azount
that must come. f¥om general governnent re
thos will substitute for fonds that would otherwise
have to be raised through ta

Such regulatory charges are not taxes

Id. at 706. Southview Co-operative is not applicable to the

present matter for the crucial reason that the rent control board

 

     
 

 

   

was not self-sufficient, whereas the DCCA and its insurance
division are mandated by law to be so. Specifically, in

Southview Co-operative, “[t]he board submitted a budget
with a financing plan in which approximately seventy per cent of

37
‘+ FOR PUBLICATION IN WEST'S HANAI'T REPORTS AND PACIFIC REPORTER *++
the budget would be supported by intergovernmental revenues and
approximately thirty per cent would be supported by charges for
services.” Id, at 702. By contrast, in the present matter, the
DCCA became wholly financially self-sufficient in 1999, receiving
no general fund monies with which to operate. The question
before the court in Southview Co-operative -- whether monies from
@ fund that commingled both assessments and “intergovernmental

which ostensibly were supplied by taxes, could
eventually revert to a general fund -- is simply not before us.
Ne deal solely with the question whether monies from a fund made
up entirely of assessments, fees, fines, penalties, and
reimbursements can be transferred to a general fund,

We blanch at the State’s basic contention that a user
or regulatory fee, if initially assessed as such, can be
transferred to a general fund when the same assessment would have
been invalid had it been assessed initially with the express
understanding that the funds would be transferred to the general
fund, If we adopted such 2 position, seemingly nothing would bar

the legislature from dipping into the fees collected by any state

 

gulatory agency that were deemed to be “in excess of the
requirements of the fund.” See 2002 Haw. Sess. L. Act 178, § 40
at 793. San Juan Cellular speaks clearly on this score, noting
that courts, in distinguishing a regulatory fee from a tax, “have
tended . . . to emphasize the revenue’s ultimate use, asking
whether it provides a general benefit to the public, of a sort
often financed by a general tex, or whether it provides more

narrow benefits to regulated companies or defrays the agency's

38
   

/+ FOR PUBLICATION IN WEST'S HAWAI'I REPORTS AND PACIFIC REPORTER
costs of regulation.” 967 F.2d at 685; see also Robinson
Protective Alarm Co. v. City of Philadelphia, 581 F.2d 371, 376
(34 Cir, 1978) (holding that 2 city-assessed charge to fire and
burglar alarm companies was a “tax” because “moneys collected are
added to the [general fund], rather than applied exclusively to
contractual services owed central alarm station companies”
(emphasis added) ); Bloom v, City of Fort Collins, 784 P.2d 304,
311 (Cole, 1989) (holding that provision of “transportation
utility fee” ordinance that authorized city council to transfer
excess revenues from fee to any other city fund “render[ed) the

. . fee the functional equivalent of a tax”); Health Servs.
Med. Coi vent. New Yor n, 668 N.Y.S.2d 1006,
1009-10 (App. Div. 1998) (holding that a portion of payments
mandated by statute by HMOs to hospitals that were deposited in
the state’s general fund represented an unconstitutional tax):
Radio Common Carriers of New York, Inc, v, New York, 601 .N.¥.S.20
513, 515-16 (N.Y. App. Div. 1993) (holding that a “special fee”
on paging devices enacted by state was a tax because the proceeds
were added to the state’s general fund).

After viewing the transferred funds through the lens of

San_Juan Cellular by “emphasizing [the assessment’s] ultimate
use,” 967 F.2d at 685, while bearing in mind our maxim that "*the
nature of the tax or “charge” that a law imposes is not
determined by the label given to it but by its operating
incidence,’ Medeiros, 89 Hawai'i at 366, 973 P.2d 741 (quoting
Stewarts’ Pharmacies, 43 Haw. at 144) (brackets omitted), for the
reasons stated in the following section, we hold that the

33
‘+4 FOR PUBLICATION IN WEST'S HAWAI'T REPORTS AND PACIFIC REPORTER *#*
regulatory fees were transferred unlawfully, inasmuch as they
were available for general purposes, as if they were derived from
general tax revenues, after being transferred to the general
fund. See San Juan Cellular, 967 F.2d at 686. The State's
argument that the insurance division neither foresaw nor condoned
the legislature’s transfer of its monies to the general fund is
unavailing, because the insurance division's conduct is not at
issue here, Our focus is instead on the legislature's attenpts
via the transfer bills to lateral the transferred funds fron the
insurance division to the general fund, The transfer bills must
be scrutinized for any violation of the separation of powers
doctrine.

3. Separation of powers

“The separation of powers doctrine is not expressly set
forth in any single constitutional provision, ‘but like the
federal government, [Hawaii's government] 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.24 719,
722 (1994) (quoting Trustees of the Office of Hawaiian Affairs v.

Yamasaki, 69 Haw. 154, 170-71, 737 P.2d 446, 456 (1987))
(brackets omitted). ‘The doctrine provides that “‘a department
+ may not exercise powers not so constitutionally granted,
which from their essential nature, do not fall within its
division of governmental functions, unless such powers are
properly incidental to the performance by it of its ow
appropriate functions.’ Id, (quoting Koike v. Bd. of Water
Supply, 44 Haw, 100, 114, 352 2.24 835, 843 (1960). As

40
 

[FoR PUBLICATION IN WEST'S HAWAI'T REPORTS AND PACTFIC REFORTER ¢+*
previously stated, the Hawai'i Constitution mandates that the
“(t]he taxing power shall be reserved to the State, except so
much thereof as may be delegated by the legislature to the
(counties}.” Haw. Const. art. VIII, $ 3; see also Mctandless, 20
How, at 417 (“The power of taxation is essentially a legislative
power. It cannot be delegated except to municipalities which

themselves exercise subordinate legislative powers.”). The

 

executive branch is left only with the power to administer and
enforce the state’s tax laws, not to levy new taxes. See HRS

§ 26-10(b) (1993) (The department [of taxation] shall adninister
and enforce the tax revenue laws of the State and collect all
taxes and other payments payable thereunder."). Accordingly, the
insurance commissioner, as an officer of the executive branch,
see HRS $$ 26-4(5) and 431:2-101, lacks the power to taxz as
discussed at length aupra, the insurance conmissioner’s statutory
authority is Limited to the assessment of regulatory fees.

The legislature’s promulgation of the transfer bills
amounted to an impermissible blurring of the distinction between
the executive power to assess regulatory fees and the legislative
power to tax for general purposes. We therefore hold that the
transfer bille unlawfully sought to transform $3, 500,000.00 of

legitimate regulatory fees into general tax revenue. Courts

 

at oral argusent, the state asserted that, even if it were
Unconstitutional for the legislature to reguire that the funds from the IRF
ns the CRP be tronsferrea co the general fund, HIC could not prove that the
funds were those that its nenbers had paid to the insurance commissioner.
Mes; Oral Argument, Hawai'i Supreme Court, at 6:09 to 6:55 (Nov. €, 2008),

BE hetps//mne,state.hi.ue/ud/oa/08/SC0R, 110608 27840.mp3. Alchough
EARING Uvoied this construct in the background sections of its opening
brief and ita application, it oid not actually advance the point in the
argument section of its opening brief or application. We therefore decline to

(continveds..)

 

     

 

a
‘10+ FOR PUBLICATION IN MEST'S HAWAI'I REPORTS AND PACIFIC REPORTER +++
that have addressed the issue of funds transferred from special
funds so that they could be used for more general purposes have
held that the transferred funds should be returned to the special
funds. See, e.a., Daugherty v, Riley, 34 P.2d 1005, 1011-12
(Cal. 1934) (ordering that funds transferred in a legislative
appropriation from a special fund to the general fund needed to
be returned to the special fund); Clark County Council vy.
Donahue, 873 N.£.2d 1038, 1043 (Ind. 2007) (holding that monies
that the county used from a special fund, which was comprised of
fees that were collected to supplement probation services, for
general court expenses needed to he returned to the special

fund). As such, the $3,500,000.00 that was moved into the
general fund pursuant to the transfer bills must be returned to
the CRF so that they may be used for the regulation or benefit of
the parties upon whom the assessments were imposed. See Bidart
Bros., 73 F.3d at 931. Given that the amount that must be
returned is readily ascertainable, we see no need for an
accounting on remand.

In summary, the portion of the assessments paid by HIC
to the insurance division that ultimately went to support the
overhead of the OCCA and the DBF, along with the portion of the
assessments that the insurance division applied towards creating
a reserve fund, did not amount to unconstitutional taxes. On the
other hand, the legislature was without the power to mandate, via

the transfer bills, that the insurance division remit regulatory

2 (continued)
address the State's argument. ee Hawai'i Rules of Appellate Procedure Rules
280) (4) and (bi (7)

a2
s+ POR PUBLICATION IM WESE'S HAYAI'T REPORTS AND PACTFIC REFORTER ++
fees to the legislature's general fund, as if they were general
tax revenues. Accordingly, the transfer bills violated the
separation of powers doctrine.

B. The ICA Correctly Concluded That The Assessments Did

HIC asserts that the assessments imposed pursuant to
HRS § 431:2-215 offend the equal protection clauses of the
Hawai'i and United States Constitutions, both of which guarantee
that no person shall be denied the equal protection of the laws.
See Haw. Const. art. 1, § $7 U.S. Const. amend. XIV. “[Ujnless
fundamental rights of suspect classifications are implicated, we
will apply the rational basis standard of review in examining a
denial of equal protection claim.” ENG Corp. v. Kim, 107 Hawai't
73, 82, 110 P.3d 397, 406 (2005) (quoting Sandy Beach Def. fund
vs City Council, 70 Haw. 361, 380, 773 F.24 250, 262 (1989))
(emphasis omitted). HIC does not contend that its members’
fundamental rights are implicated by HRS § 431:2-215 or that the

statute draws suspect classifications.”

Its argument is instead
that the statute treats insurers differently than other similarly
situated persons without a rational basis. Under the rational

basis standard of review,

 

‘a party challenging the constitutionality of a
statutery classification on equal protection grounds
has the Burden of showing, with convincing clarsty(.]
that the clasasfication is not rationally related to
the stetutory purpose, or that the challenged
Classification dove not fest upon some ground of
Gifgerence having fair and substantial relation to

 

  

 

2 for a discussion of whether insurance companies are part of » suspect
classification and whether the right to participate in the insurance business

fea fundanental right, see G cal sat
Matual insurance Con, 956 S.W.2a 243, 257 (Mo. 1997).

3
‘+ FOR PUBLICATION IN WEST'S HAWAI'I REPORTS AND PACIFIC REPORTER **+

the object of the legislation, and is therefore act
arbitrary and capricious.”

Id. (quoting Sandy Beach Def, Fund, 70 Haw. at 380, 773 P.2d

at 262). In the present matter, HRS § 431:2-215 permits insurers

 

to be assessed with regulatory fees in order to “defray any
administrative costs” and “costs incurred by supporting offices
and divisions.” HRS § 431:2-218(b). HIC basically maintains
that, even if insurers benefit to some degree from the insurance
division’s regulations, it was arbitrary to impose a
substantial portion of the division’s administrative costs upon
insurers, because the public in general and policyholders in
particular also benefitted fron those regulations.

‘The United States Supreme Court considered 2 similar
contention in Mountain Timber Co. v. Washington, 243 us. 219
(2917), in which employers advanced the argument that, because a
state workers’ compensation law imposed the entire cost of
accident loss upon the industries in which the losses arose, the
law was violative of the equal protection clause of the
fourteenth anendnent to the United States Constitution. id.
at 243. The Supreme Court explained that it was unable to
discern any ground in natural justice or fundamental right that

prevented the state from imposing the entire burden upon the

 

industries that occasioned such losses. Id. The law was
accordingly upheld. Id, In the present matter, the insurance
commissioner has imposed a substantial portion of the

administrative cost of operating the insurance division and its

M The insurance commissioner did not impose all of the insurance
division's costs upon insurers. Sone costs were covered by other revenues
that the division received.

44
 

[FOR PUBLICATION IN WESH'S HAWAI'T REPORTS AND PACIFIC REPORTER ¢+*
supporting offices and divisions upon insurers pursuant to HRS
§ 431:2-215. Like the losses occasioned by the employers in
Mountain Timber Co., 243 U.S. at 243, the insurance division's
regulatory costs in the present matter were necessitated by the
business of insurers. We therefore agree with the ICA that HRS
§ 431:2-225 does not violate the equal protection clause of the
Hawas‘s or United States Constitutions, See Hawaii Insurers
Council, 117 Hawai'i at 462, 184 P.3d at 77.

C. The IGA Correct iy Concluded That The Cixcuit Court Was

Not Divested of subiect-matter Jurisdiction By Virtue
Qf HIC's Members’ Failure To Exhaust Their

‘Admin: =i tenes Remedies.

The State challenges the ICA's determination that the
circuit court was not deprived of subject-matter jurisdiction by
virtue of HIC's menbers’ failure to exhaust their administrative
renedies. 2g id, The requirement that a party exhaust his
adninistrative renedies “cones into play ‘where a claim is
cognizable in the first instance by an adninistrative agency
alone,’ and, in such a case, “‘udicial interference is withheld

until the administrative process has run its course.'” Aged

waiians v. Haws Homes Comm'n, 78 Hawai'i 192, 202 n.18, 891
P.2d 279, 289 n.18 (1995) (quoting Kona Old Hawaiian Trails Group
watLyman, 69 Haw, 61, 93, 734 P.2d 161, 168 (1987)). Yet “*an

aggrieved party need not exhaust administrative remedies where no
effective renedies exist.'” Inxe Interest of Doe Children, 105
Hawai'i 38, 58, 93 P.3d 1145, 1166 (2004) (quoting In the
Interest of Doe Children, 96 Hawai'i 272, 287 n.20, 30 P.3d 878,
893 n.20 (2001)).

45
‘4+ YOR PUBLICATION IN WEST'S HAWAI'T REPORTS AND PACIFIC REPORTER +++

According to the State, administrative remedies were
available to HIC's members under HRS § 431:7-203(a). The statute
Provides in relevant part that,

LAE any person has paid to the (snsurance]
commissioner any tax, fee, of other charge in error or
An excess of that wnich the person ss lawfully
obligated to pay under [the insurance] cade, ‘the
Conmissioner, upon written request made by the person
to the. commissioner yahall authorite 9 refund
thereot out of the (GRE), except that a tax refona
shall be payable ovt of the generel. fund

HRS § 431:7-203(a). Thus, the State appears to argue that, if

 

 

HIC’s members had paid taxes or fees in excess of those which
they were lawfully obligated to pay under the insurance code, HRS
§ 431:7-203 required that they seek a refund from the
conmissioner. The primary reason that KIC has asserted that its
members were not lawfully obligated to pay the fees imposed by
the commissioner pursuant to HRS $ 431:2-215 was that the fees
were, in fact, unconstitutional under the separation of powers
doctrine. Agencies may not, however, pass upon the
constitutionality of statutes. igh Corp, v. Motor Vehicle Indus.
Licensing Bd., Dep't of Comerce & Consumer Affairs, 69 Haw. 135,

141, 736 P.2d 1271, 1275 (1967). As such, had HIC initially
brought this claim before the insurance commissioner, an
administrative officer, gee HRS $$ 26-4, 431:2-101, and

43
he had imposed pursuant to HRS § 431:7-203 unconstitutional or to
provide a refund on that basis. See Hoh Corp,, 69 Haw. at 141,
736 P.2d at 1275. Thus, there were no remedies for HIC's
members’ constitutional claim under HRS $ 431:7-202. See In re

Interest of Doe Children, 105 Hawai'i at 59, 93 P.3d at 1166.

 

-102, he would have been powerless to declare the fees that

46
++ FOR PUBLICATION IN WEST'S HAWAI'T REPORTS AND PACIFIC REPORTER *+*
Accordingly, we agree with the ICA that the circuit court did not
lack subject-matter jurisdiction by virtue of HIC’s members’
failure to exhaust their aduinistrative remedies. See Hawaii

Insurers Council, 117 Hawai'i at 462, 184 P.3d at 777."

IV. CONCLUSION

In light of the foregoing analysis, we affirm the May
5, 2008 judgment of the ICA insofar as it affirmed the February
27, 2006 judgment of the circuit court for the reason that the
transfer bills were unconstitutional. Although the transfer
bills did net assess unconstitutional taxes, they did offend the
separation of powers doctrine because they unlawfully sought to
divert legitimate regulatory fees into the general tax revenue
stream, We reverse the ICA’s judgment inasmuch as it affirmed
the circuit court’s judgment that the assessments levied to
create a reserve fund and to provide overhead expenses for the

DCCA and the DBF represented unconstitutional taxes. In summary,

 

% the State also argues that, if the assesenents were taxes, then
adninistrative remedies were available to HiC’s members under HRS
$ot31:7-204.5 (1993), which provides in relevant part that “any person
Sggrieved by any assessment of the tax for any month or any year may appeal
fide the assesment in the manner and within the time and in sll other
Fespects as provided in (HRS §) 235-114.” In addition, the State maintains
that, if the assessments were taxes, then the ICA erred in concluding that the
circuit court wae not divested of jurisdiction to award declaratory or
Gnjunctive relief in Light of HRS § 632-1. Because we conclude that the
tronsfer Bille did not transform lesitimate regulatory fees into general tax
the Seaters

 

 

 

  

arguments,

7
‘4+ FOR PUBLICATION IN WEST'S HAWAI'I REPORTS AND PACIFIC REPORTER +++

we affirm the ICA's judgment in part and reverse it in part. We

remand this matter to the circuit court for further proceedings

consistent with this opinion.

Lisa Woods Munger
(Gary M. Slovin
and Donna H. Kalama with
her on the briefs),
for the plaintiff-appellee-
respondent Hawaii Insurers
Counes2

 

Mark J. Bennett
(Kimberly Tsumoto Guidry
and James F. Nagle with
him on the briefs),
for the defendants“appellants-
petitioners Linda Lingle,
Georgina K. Kawamura,
Lawrence M. Reifurth,
and J.P. Schmidt

48

BP Rerioer

Bice Cree ree

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Gorm, Duly