Director of Taxation v. Medical Underwriter

• Decision Date: 30 August 2007
• Docket Number: No. 27023.,27023.
• Parties: In the Matter of the TAX APPEAL OF DIRECTOR OF TAXATION, State of Hawai`I, Appellant/Cross-Appellee, v. MEDICAL UNDERWRITERS OF CALIFORNIA, Taxpayer-Appellee/Cross-Appellant.
• Court: Hawaii Supreme Court

166 P.3d 353

In the Matter of the TAX APPEAL OF DIRECTOR OF TAXATION, State of Hawai`I, Appellant/Cross-Appellee, v. MEDICAL UNDERWRITERS OF CALIFORNIA, Taxpayer-Appellee/Cross-Appellant.

No. 27023.

Supreme Court of Hawai`i.

August 30, 2007.

Hugh R. Jones and Damien A. Elefante, Deputy Attorneys General, on the briefs, for appellant/cross-appellee.

Russell L. Ching and Randall I. Morikawa of Ching, Yuen & Morikawa, Honolulu, and Roy Y. Yempuku of the law offices of Roy Y. Yempuku, on the briefs, for taxpayer-appellee/cross-appellant.

MOON C.J., LEVINSON, NAKAYAMA, ACOBA, and DUFFY, JJ.

Opinion of the Court by NAKAYAMA, J.

Appellant/Cross-Appellee, director of taxation, State of Hawai`i ("director"), appeals from the following orders and judgment of the tax appeal court:<sup>1</sup> (1) the April 1, 2004 "Order Regarding Director of Taxation, State of Hawaii's Motion for Summary Judgment"; (2) the September 13, 2004 "Order Granting Appellee Medical Underwriters of California's Motion for Partial Summary Judgment Filed August 10, 2004"; (3) the September 13, 2004 "Final Judgment"; and (4) the January 18, 2005 order denying the director's motion for reconsideration. On appeal, the director asserts that the tax appeal court erred by (1) sua sponte determining that Medical Underwriters of California ("MUC") was subject to the .15 percent general excise tax rate imposed by Hawai`i Revised Statutes ("HRS") § 237-13(7) when it is undisputed that MUC was not licensed as an insurance solicitor or agent, and (2) denying his motion for reconsideration.

Appellee/Cross-Appellant, MUC, cross-appeals from the following judgment and orders of the tax appeal court: (1) the September 13, 2004 "Final Judgment"; (2) the December 20, 2004 "Order Denying Appellee Medical Underwriters of California's Motion for Attorney's Fees and Costs Filed September 27, 2004"; and (3) the December 20, 2004 "Order Denying Appellee Medical Underwriters of California's Motion for Leave to File Amended Answer to Appellant Director of Taxation, State of Hawaii's Notice of Appeal to the Tax Appeal Court Filed July 6, 2000 and to Alter or Amend Final Judgment[.]" On appeal, MUC presents the following points of error: (1) the tax appeal court erred by failing to exempt MUC from the payment of general excise taxes pursuant to HRS § 237-29.7 inasmuch as MUC is an insurance company authorized to do business under HRS chapter 431; (2) the tax appeal court improperly denied MUC's motion for leave to file an amended answer to director's notice of appeal, filed on July 6, 2000, and to alter or amend the final judgment filed September 23, 2004; and (3) the tax appeal court improperly denied MUC's motion for attorneys' fees and costs.

For the reasons that follow, we resolve the director's appeal as follows: (1) the tax appeal court erred by applying the .15 percent tax rate imposed by HRS § 237-13(7) inasmuch as it is reserved for licensed general agents, subagents, and solicitors; and (2) the tax appeal court did not err by denying the director's motion for reconsideration. With respect to MUC's cross-appeal, we hold that: (1) MUC is not an insurance company

exempt from the payment of general excise taxes; (2) MUC's argument that the tax appeal court erred by denying its motion for leave to file an amended answer to the director's notice of appeal, and to alter or amend the final judgment filed September 23, 2004 is moot; and (3) the tax appeal court did not err by denying MUC's motion for attorneys' fees and costs. We therefore partially vacate the tax appeal court's judgment and remand with instructions to enter judgment in favor of the director in the amount of $105,172.04.

I. BACKGROUND

It is undisputed that MUC manages the Hawai`i-based insurance operations for Medical Insurance Exchange of California ("MIEC") and Claremont Liability Insurance Company ("CLIC"), foreign insurers authorized to do business in Hawai`i. Inasmuch as MUC's activities essentially constituted the transaction of insurance business, the insurance division of the Department of Commerce and Consumer Affairs, State of Hawai`i, has consistently construed MUC as an insurer for licensing purposes under HRS chapter 431. As such, MUC has taken the position that it is an "insurance company" exempted from general excise taxes under HRS § 237-29.7. Based upon the perceived exemption, MUC did not file general excise tax returns with respect to, and did not pay general excise taxes on, funds received in exchange for its services rendered to MIEC and CLIC.

In 1999, the director assessed general excise taxes against MUC at a rate of four percent for unreported income received from 1985 through 1999. MUC prepaid and appealed $160,258.45 of the director's assessments for the time period from January 1, 1992 to January 31, 1999 to the Board of Review, First Taxation District ("Board").² On June 7, 2000, the Board found that MUC's tax liability was $19,460.36.

On July 6, 2000, the director filed a notice of appeal in the tax appeal court.³

1. The parties' motions for summary judgment

On August 24, 2001, the director filed a motion for summary judgment. Therein, the director alleged the following facts. MUC is the attorney-in-fact for MIEC and the managing agent of CLIC. MUC provides management services to MIEC and CLIC, including selling insurance, making investments, and adjusting, settling, and paying claims. To execute those services, MUC maintains an office located at 1360 South Beretania Street, Suite 405, Honolulu, Hawai`i and employs three persons in its claims department. MUC receives a percentage of the premiums it collects on behalf of MIEC and CLIC as compensation for its services. Although MIEC and CLIC were licensed in this jurisdiction as foreign insurers, MUC was not licensed as an insurer under HRS § 431:3-201. MUC was also not licensed as an insurance general agent, subagent, solicitor, or adjuster under HRS § 431:9-201. During the time period in question, MUC did not file any general excise tax returns and paid no general excise tax. Based upon the foregoing factual allegations, the director argued that (1) MUC's income from management services provided to MIEC and CLIC was subject to Hawai`i's general excise tax at a rate of four percent, (2) MUC was not an insurance company authorized to do business under the Hawaii Insurance Code and was thus not exempt from paying general excise taxes under HRS § 237-29.7, and (3) MUC did not qualify for the reduced .15 percent general excise tax rate available to licensed insurance general agents, subagents, solicitors, or adjusters.

On September 10, 2001, MUC filed a memorandum in opposition. Therein, MUC disputed the director's characterization of MUC, MIEC, and CLIC as separate entities. Rather, MUC claimed that (1) it is the attorney-in-fact for MIEC, a reciprocal insurance exchange, (2) that CLIC is a wholly owned subsidiary of MIEC, and (3) in every tax year since 1981, the insurance commissioner has treated MUC and MIEC as a single enterprise or entity. MUC asserted that the MIEC entity payed gross premium insurance taxes to the director of finance, pursuant to HRS § 431:7-202, and that MUC, as part of the MIEC entity, was not subject to an additional general excise tax. MUC argued further that it should be included within the definition of "insurer" for purposes of the general excise tax exemption by virtue of its status as a constituent of the MIEC entity.⁴

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

1. [MUC's] business activity most closely approximates that of an insurance solicitor or general agent.

2. Hawaii Revised Statutes ("HRS") section 237-13(7) provides that, "Upon every person engaged as a licensed solicitor, general agent, or subagent pursuant to [HRS] chapter 431, there is hereby levied and shall be assessed and collected a tax equal to .15 per cent of the commissions due to such activity."

3. [MUC] is taxable at the reduced general excise tax rate of .15% on its commissions or compensation for services rendered as the attorney-in-fact.

4. The Court is not ignoring the licensing requirement in HRS § 237-13(7), but believes that the statutory requirements of attorneys-in-fact contained in HRS chapter 431, in effect, satisfy the statutory licensure requirements of HRS § 237-13(7).

5. A determination of the exact dollar amount of tax liability is not adjudicated by this order.

(Some brackets added and some in original.)

On August 10, 2004, MUC filed a motion for partial summary judgment. MUC argued that since the court decided that MUC is subject to a .15 percent tax rate, the only remaining issue is the exact dollar amount, which MUC calculated to be $3,943.95. On August 19, 2004, the director filed a response to MUC's motion for partial summary judgment. Therein, the director did not oppose MUC's calculation of its tax liability in the amount of $3,943.95. Rather, the director clarified that he continued to object to the court's refusal to uphold the assessment at a tax rate of four percent.

On September 13, 2004, the court filed an order granting MUC's motion for partial summary judgment. The court also filed a "Final Judgment," stating as follows:

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

2. Appellee Medical Underwriters of California is taxable at the reduced general excise tax rate of 0.15% (Fifteen hundredths of one percent) on its commissions or compensation for services rendered as the attorney-in-fact for Medical Insurance Exchange of California;

3. Appellee Medical Underwriters of California's liability for general excise tax for the period January 1, 1992 through January 31, 1999 is $3,943.95 (Three Thousand Nine...