Opinion ID: 2634942
Heading Depth: 1
Heading Rank: 5

Heading: Medeiros is distinguishable.

Text: In the present matter, the State argues that the assessments via HRS § 431:2-215 are properly characterized as fees that the insurance commissioner has the authority to 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`i 361, 973 P.2d 736. On the one hand, this court has defined the term tax as follows: Taxes are the enforced proportional contributions from persons and property, levied by the state by virtue of its sovereignty for the support of government, and for all public needs. Taxes are generally defined as burdens or charges imposed by legislative authority on persons or property to raise money for public purposes, or, more briefly, an imposition for the supply of the public treasury. The word taxes is very comprehensive, and properly includes, as indicated in the foregoing definition, all burdens, charges and impositions 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 (8th ed.2004); see also San Juan Cellular, 967 F.2d at 685 (The classic `tax' is imposed by a legislature upon many, or all, citizens. It 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 rights of the entity as a proprietor of the instrumentalities used, or regulatory fees (including licensing and inspection fees), founded on the police power to regulate particular businesses or activities. 89 Hawai`i at 366, 973 P.2d at 741 (quoting Emerson Coll. v. City of Boston, 391 Mass. 415, 462 N.E.2d 1098, 1105 (1984)). Thus, as noted, a user fee is `based on the rights of the entity as a proprietor of the instrumentalities used.' Id. at 366, 973 P.2d at 741 (quoting Emerson 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.2d 661, 668 (Fla.Dist.Ct. App.2006), charges for sewer hookups, Contractors & Builders Ass'n of Pinellas 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 S.W.2d 615, 622-25 (Mo.Ct.App.1997). By contrast, [t]he classic regulatory fee is imposed by an agency upon those subject to its regulation. It may serve regulatory purposes directly by, for example, deliberately discouraging particular conduct by making it more expensive. Or, it may serve such purposes indirectly by, for example, raising money placed in a special fund to help defray the agency's regulation-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`i 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 v. Ewing, 81 Hawai`i 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 provide a fund for the protection of policyholders of insolvent insurers and to support their orderly rehabilitation or liquidation, Principal Life Ins. Co. v. United States, 70 Fed.Cl. 144, 170 (2006), a $3.00 transaction fee for each pawn shop transaction report filed with the police department, Jachimek v. State, 205 Ariz. 632, 74 P.3d 944, 949 (Ct.App.2003), and fees assessed by a city against telecommunication service providers, including permit, registration, application, license, and franchise fees, Pac. Bell Tel. Co. v. City of Hawthorne, 188 F.Supp.2d 1169, 1177 (C.D.Cal.2001). In the case at hand, the ICA relied on this court's holding in Medeiros 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 a motor vehicle filed a 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 n. 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 to assess. Id. at 363-64, 973 P.2d at 738-39. On appeal, the city argued that the assessment was a fee authorized by HRS § 46-1.5(8) (1993). [5] In affirming the decision of the circuit court, this court noted that, although ROCCH § 6-52.2 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 a 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 a 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 Emerson College: [F]ees share common traits that distinguish them from taxes: they are charged in exchange for a particular governmental service which benefits the party paying the fee in a manner not shared by other members of a society,' National Cable Television Ass'n v. United States, 415 U.S. 336, 341[, 94 S.Ct. 1146, 39 L.Ed.2d 370] ... (1974)[,] they are paid by choice, in that the party paying the fee has the option of not utilizing the governmental service and thereby avoiding the charge, and the charges are collected not to raise revenues but to compensate the governmental entity providing the services for its expenses. Medeiros, 89 Hawai`i at 366, 973 P.2d at 741 (quoting Emerson Coll., 462 N.E.2d at 1105 (citation omitted)). We deviated from Emerson College by declining to adopt its voluntariness element because, [s]ubsequent to its opinion in Emerson College, the Massachusetts Supreme Judicial Court has weakened its adherence to the second identifying factor described in Emerson College  voluntary receipt of the service  holding that the element of choice is not a compelling consideration which can be used to invalidate an otherwise 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.2d 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, [6] while the present case involves an 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, Medeiros employs a three-pronged test in order to determine whether a 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: Fees imposed by a governmental entity tend to fall into one of two principal categories: user fees, based on the rights of the entity as a proprietor of the instrumentalities used, or regulatory fees (including licensing and inspection fees), founded on the police power to regulate particular businesses or activities. Such fees share common traits that distinguish them from taxes: they are charged in exchange for a particular governmental service which benefits the party paying the fee in a manner `not shared by other members of a society,' National Cable Television Ass'n v. United States, 415 U.S. 336, 341[, 94 S.Ct. 1146, 39 L.Ed.2d 370] ... (1974); ... and the charges are collected not to raise revenues but to compensate the governmental entity providing the services for its expenses.  Medeiros, 89 Hawai`i at 366, 973 P.2d at 741 (quoting Emerson Coll., 462 N.E.2d at 1105) (emphases added). Accordingly, HIC contends that we should apply the Medeiros test to the present matter regardless of the type of fee that is allegedly at issue. 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'l Union of N. Am. v. 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, a regulatory fee is authorized by the state's police power to prescribe regulations for the promotion of public safety, health, and welfare, Ewing, 81 Hawai`i at 164, 914 P.2d at 557. In Medeiros, following our review of Emerson College's test, we adopted a modified Emerson College test for determining whether a charge is a fee or a tax, in which we analyze whether the charge (1) applies to the direct beneficiary of a particular service, (2) is allocated directly to defraying the costs of providing the service, and (3) is reasonably proportionate to the benefit received. 89 Hawai`i at 367, 973 P.2d at 742 (emphases added). Like the test developed in Emerson College, a decision that, like Medeiros, dealt with an alleged service fee, see Emerson 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), our modified test focused on elements of service, namely whether the payor was a beneficiary of a service and whether the funds defrayed the costs of the provider of the payor's service. Consequently, the Medeiros test was and is intended to distinguish between taxes and service fees, not regulatory fees. HIC contends that National Cable, 415 U.S. 336, 94 S.Ct. 1146, a decision cited in Emerson College and consequently in Medeiros, 89 Hawai`i at 366, 973 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 community antenna television (CATV) systems, challenged assessments by the Federal Communications Commission (FCC), which was authorized to regulate the CATV systems. 415 U.S. at 337-38, 94 S.Ct. 1146. The regulatory fees were imposed pursuant to [t]he Independent Offices Appropriation Act, 1952, Tit. 5, 65 Stat. 290, 31 U.S.C. s 483a, which provided in relevant part: It is the sense of the Congress that any work, service ... benefit, ... license, ... or similar thing of value or utility performed, furnished, provided, granted ... by any Federal agency ... to or for any person (including ... corporations ...) ... shall be self-sustaining to the full extent possible, and the head of each Federal agency is authorized by regulation ... to prescribe therefor ... such fee, charge, or price, if any, as he shall determine ... to be fair and equitable taking into consideration direct and indirect cost to the Government, value to the recipient, public policy or interest served, and other pertinent facts .... Id. at 337, 94 S.Ct. 1146 (ellipses in original) (emphasis added). The United States Supreme Court reviewed this statute and concluded that [a] fee connotes a benefit and the Act by its use of the standard value to the recipient carries that connotation. The addition of public policy or interest served, and other pertinent facts, if read literally, carries an agency far from its customary orbit and puts it in search of revenue in the manner of an Appropriations Committee of the House. Id. at 341, 94 S.Ct. 1146. Thus, when analyzing whether the fees were lawful, the Supreme Court focused on the value to the recipient clause of the statute. It concluded that CATV systems should only pay regulatory fees equivalent to the value of services received, stating that, [w]hile those who operate CATV's may receive special benefits, we cannot be sure that the [c]ommission used the correct standard in setting the fee. It is not enough to figure the total cost (direct and indirect) to the [c]ommission for operating a CATV unit of supervision and then to contrive a formula that reimburses the [c]ommission for that amount. Certainly some of the costs inured to the benefit of the public, unless the entire regulatory scheme is a failure, which we refuse to assume. Id. at 343, 94 S.Ct. 1146. As a result, the Supreme 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 Supreme Court has subsequently explained that National Cable st[oo]d 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 `fees' or `taxes,' on those parties. Skinner v. Mid-America Pipeline, 490 U.S. 212, 213-14, 109 S.Ct. 1726, 104 L.Ed.2d 250 (1989) (emphasis added); see also 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' in a 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 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 National Cable 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, 94 S.Ct. 1146. National Cable's position stemmed solely from the value to the recipient clause of the governing statute and did not overrule the Supreme Court's foundational regulatory fee decision, Edye v. Robertson, 112 U.S. 580, 5 S.Ct. 247, 28 L.Ed. 798 (1884). 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, 5 S.Ct. 247. 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 Bd. of Equilization, 15 Cal.4th 866, 64 Cal. Rptr.2d 447, 937 P.2d 1350, 1355 (1997). These decisions illustrate all the more why the Medeiros test, which considers whether the payor of a charge received a benefit, 89 Hawai`i at 367, 973 P.2d at 742, is properly confined to evaluating whether the charge is a user fee or a tax. 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 including licensing and inspection fees and being founded on the police power to regulate particular businesses or activities. Emerson Coll., 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  Medeiros plainly concern[ed] the `police 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, 741.) HIC's argument is discordant with the position taken by the city in Medeiros, unpersuasively, [7] 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 instance, assists persons in preventing further harm to themselves, especially in the case of a drunk driver who, if not apprehended, could kill himself or others, and it prevents them from harming others. Hopefully, this service also helps to convince the offender to cease his unlawful activities and become a law-abiding and productive member 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 regulatory fee, and modified the Emerson College test to determine whether the charge at issue was a service fee or a 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. [8] We now turn to the question 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 684. 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 tax, but a regulatory fee. Id. at 685-86. In making that 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 [p]erhaps this instruction would make a difference were there some evidence in the record that large amounts of the revenue the [assessor] obtains would end up in the general fund. But, nothing in the record before us, or in the statute, suggests that the [assessor] will fail to spend most, or all, [of] the revenue raised for the specific statutory objectives. 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 benefit the state's general fund. Furthermore, as we are not presented with a case dealing 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 Edye, 112 U.S. at 596, 5 S.Ct. 247; Sinclair Paint Co., 64 Cal.Rptr.2d 447, 937 P.2d 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.