BILL ANALYSIS                                                                                                                                                                                                    Ó




                                                                  AB 2734
                                                                  Page A
          Date of Hearing:  April 28, 2014


                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Raul Bocanegra, Chair

            AB 2734 (Committee on Insurance) - As Amended:  March 18, 2014


          Majority vote.  Fiscal committee.  
           
          SUBJECT  :  Insurance:  omnibus

           SUMMARY  :  Contains numerous technical and noncontroversial  
          provisions related to insurance law.  Specifically, the  
          tax-related provisions of  this bill  :  

          1)Raise, from $5,000 to $20,000, the annual tax threshold that  
            triggers an obligation on the part of a surplus line broker to  
            make monthly installment payments.  Specifically, every  
            surplus line broker whose annual tax for the preceding  
            calendar year was $20,000 or more (instead of $5,000 or more)  
            shall be required to make monthly installment payments on  
            account of the annual tax on business done during the current  
            calendar year.  

          2)Make a conforming threshold change to the provisions  
            authorizing the Insurance Commissioner (Commissioner) to  
            relieve a surplus line broker of his or her obligation to make  
            monthly payments.  Specifically, such relief may be granted if  
            the broker establishes to the Commissioner's satisfaction that  
            either the broker has ceased to transact business in this  
            state, or that his or her annual tax for the current year will  
            be less than $20,000 (instead of $5,000 per current law).  

          3)Raise, from $5,000 to $20,000, the annual tax threshold that  
            triggers an obligation on the part of insurers transacting  
            insurance in this state to make prepayments of the annual tax  
            for the current calendar year.  Specifically, every insurer  
            transacting insurance in this state whose annual tax for the  
            preceding calendar year was $20,000 or more (instead of $5,000  
            or more) shall make prepayments of the annual tax for the  
            current calendar year.  

          4)Make a conforming threshold change to the provisions  









                                                                  AB 2734
                                                                  Page B
            authorizing the Commissioner to relieve an insurer of its  
            obligation to make prepayments.  Specifically, such relief may  
            be granted if the insurer establishes to the Commissioner's  
            satisfaction that either the insurer has ceased to transact  
            insurance in this state, or that the insurer's annual tax for  
            the current year will be less than $20,000 (instead of $5,000  
            per current law).  

           EXISTING LAW  :

          1)Requires every surplus line<1> broker to pay a tax of 3% of  
            the gross premiums charged, less return premiums upon business  
            done under the authority of his or her license during the  
            preceding calendar year, as specified.  

          2)Requires every surplus line broker whose annual tax for the  
            preceding calendar year was $5,000 or more to make monthly  
            installment payments on account of the annual tax on business  
            done during the calendar year. 

          3)Authorizes the Commissioner to relieve a surplus line broker  
            of his or her obligation to make monthly payments if the  
            broker establishes to the Commissioner's satisfaction that he  
            or she has ceased to transact business in this state, or that  
            his or her annual tax for the current year will be less than  
            $5,000.  

          4)Imposes an annual tax on each insurer doing business in this  
            state.  The tax rate applied to the basis of the annual tax is  
            2.35%.  The tax imposed on insurers is in lieu of all other  
            taxes and licenses, except as specified.  

          5)Requires insurers transacting insurance in this state whose  
            annual tax for the preceding calendar year was $5,000 or more  
            to make prepayments of the annual tax for the current calendar  
            year, as specified. 

          6)Authorizes the Commissioner to relieve an insurer of its  
            obligation to make prepayments if the insurer establishes to  
            the Commissioner's satisfaction that either the insurer has  
            ceased to transact insurance in this state, or that the  
          ---------------------------
          <1> According to the California Department of Insurance, a  
          "surplus line broker" is a person who places insurance with  
          non-admitted insurers, covering risks other than aircraft and  
          certain marine and transportation risks.  








                                                                  AB 2734
                                                                  Page C
            insurer's annual tax for the current year will be less than  
            $5,000.  

           FISCAL EFFECT  :  The California Department of Insurance (CDI)  
          estimates annual revenue losses of slightly more than $40,000  
          attributable to this bill's tax-related provisions.  

           COMMENTS  :   

          1)The Assembly Committee on Insurance notes, "This bill remedies  
            several issues identified and vetted by CDI to clarify and  
            [clean up] various Insurance Code sections."

          2)This bill is sponsored by Insurance Commissioner Dave Jones,  
            who notes the following with respect to this bill's tax  
            provisions:

               CDI's Premium Tax Audit Bureau performs tax collection,  
               accounting, and tax audits of insurance companies and  
               surplus lines brokers.  This includes reviewing and  
               granting relief from penalties and collecting prepayments.   
               Additionally, they assist the Board of Equalization and the  
               State Controller's Office with various refunds,  
               assessments, and accounting matters relative to various  
               taxpayers.  This proposal increases efficiency by making  
               the monthly, quarterly, and Electronic Fund Transfer  
               requirements for Surplus Lines Brokers and Insurers at the  
               same amount of $20,000.  The current situation causes  
               confusion resulting in an increased workload for CDI, the  
               State Controller, and taxpayers.  The number of surplus  
               line brokers and insurers below the $20,000 threshold is  
               small and the amount of penalty and interest collected does  
               not cover the costs associated with collecting, reviewing,  
               and processing payments and granting relief from penalties.  


          3)Committee Staff Comments:

              a)   Cleaning up the code  :  For the sake of administrative  
               efficiency, this bill increases the tax threshold that  
               triggers surplus line brokers to make monthly installment  
               payments.  Specifically, this bill changes the $5,000  
               threshold contained in Insurance Code Section 1775.1 to  
               $20,000.  Nevertheless, for reasons unknown to Committee  
               Staff, this bill retains the language in Insurance Code  









                                                                  AB 2734
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               Section 1775.1 that makes its provisions applicable to  
               calendar year 1995 and each calendar year thereafter.  

               This bill makes a similar threshold change to Revenue and  
               Taxation Code Section 12251, which governs the prepayment  
               obligations of insurers. CDI staff notes that this change  
               is being undertaken for the sake of internal consistency.   
               This statutory section, however, makes reference to  
               calendar year 1970 and each calendar year thereafter.  

               Absent a compelling justification to the contrary, the  
               Committee on Insurance may wish to take appropriate  
               amendments deleting these now-antiquated references to  
               prior calendar years.  

              b)   Double-referral  :  This bill was heard by the Committee  
               on Insurance on April 2, 2014, and passed out of that  
               committee by a vote of 12 to 0.  For additional discussion  
               of this bill's provisions, please refer to that committee's  
               analysis.      


           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          Insurance Commissioner Dave Jones

           Opposition 
           
          None on file
           
          Analysis Prepared by  :  M. David Ruff / REV. & TAX. / (916)  
          319-2098