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 Page D 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