STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FLORIDA SURPLUS LINES )

ASSOCIATION, INC., )

)

Petitioner, )

)

vs. ) CASE NO. 93-5242RP

)

DEPARTMENT OF REVENUE, )

)

Respondent. )

)

FINAL ORDER

Pursuant to notice, the above matter was heard before the Division of Administrative Hearings by its duly designated Hearing Officer, Donald R. Alexander, on October 14, 1993, in Tallahassee, Florida.

APPEARANCES

For Petitioner: Steven M. Malono, Esquire

Wendy Russell Weiner, Esquire Post Office Box 11127 Tallahassee, Florida 32302

For Respondent: James F. McAuley, Esquire

Lisa M. Raleigh, Esquire Department of Legal Affairs The Capitol, Tax Section

Tallahassee, Florida 32399-1050 STATEMENT OF THE ISSUE

The issue is whether proposed rule 12B-8.0012 constitutes an invalid exercise of delegated legislative authority.

PRELIMINARY STATEMENT

This matter began on September 10, 1993, when petitioner, Florida Surplus Lines Association, Inc., filed a petition for determination of invalidity of proposed rule wherein it contended that proposed rule 12B-8.0012 was an invalid exercise of delegated legislative authority. More specifically, petitioner contended that respondent, Department of Revenue (DOR), failed to follow the rulemaking procedures in a material respect, and the proposed rule enlarged, modified and contravened the provisions of the enabling statute, was arbitrary and capricious, and exceeded the agency's grant of rulemaking authority. After being reviewed for legal sufficiency, the petition was assigned to the undersigned hearing officer on September 17, 1993.

By notice of hearing dated September 21, 1993, the final hearing was scheduled on October 15, 1993, in Tallahassee, Florida. At respondent's request, the matter was rescheduled to October 14, 1993, at the same location.

At final hearing, respondent presented the testimony of James E. Silvey, a DOR tax law specialist. Also, the parties stipulated into evidence petitioner's exhibits 1-3 and respondent's exhibits 1-9. In addition, they filed a stipulation of facts.

The transcript of hearing was filed on October 26, 1993. Proposed findings of fact and conclusions of law were filed by the parties on November 29, 1993.

A ruling on each proposed finding has been made in the Appendix attached to this Final Order. Finally, a notice of supplemental authority was filed by respondent on December 8, 1993.

FINDINGS OF FACT

Based upon all of the evidence, including the stipulation of facts, the following findings of fact are determined:

1. Petitioner, Florida Surplus Lines Association, Inc. (Association), is a Florida nonprofit corporation organized and maintained for the benefit of its members who include surplus lines agents and insurers and others who place surplus lines insurance. Petitioner's members are licensed or regulated by the Department of Insurance pursuant to Part VIII of Chapter 626, Florida Statutes. The parties have stipulated that petitioner has standing to bring this action on behalf of its members.

   
   

2. Surplus lines insurance is a specialty line of insurance written for certain types of risks that authorized insurance carriers (those holding a certificate of authority) will not or cannot cover. It constitutes a limited, out-of-state insurance market that supplements the "authorized" in-state insurance market. Thus, when Florida residents cannot obtain coverage from authorized Florida insurers, they may seek insurance from out-of-state insurers (not authorized to do business in the state) who "export" the coverage to Florida surplus lines insurers who then handle the placement of the insurance. Under this statutory scheme, petitioner's members are not authorized insurers who hold certificates of authority but rather they are made "eligible" by the Department of Insurance to receive exported business. They do, however, countersign surplus lines policies covering Florida risks.

   
   

3. On April 29, 1993, Chapter 93-128, Laws of Florida, became effective. The new law was the result of the extensive damage caused by Hurricane Andrew, which struck the southeastern coast of Florida in late August 1992. Section 2 of the law created an emergency management, preparedness, and assistance trust fund to be administered by the Department of Community Affairs and funded by the imposition of an annual surcharge of $2.00 on "every homeowner's, mobile homeowner's, tenant homeowner's, and condominium unit owner's policy" and $4.00 on "every commerical fire, commercial multiple peril, and business owner's property insurance policy" issued on or after May 1, 1993. Therefore, the new law applied to all residential and commercial casualty policies issued on or after May 1, 1993. Petitioner's members offer policies that fall within these broad categories. The same section required the surcharge to be paid by the policyholder and collected and remitted by the insurer. Since petitioner's members are engaged in the business of offering insurance policies, and they

   countersign property insurance policies, they are "insurers" as that word is commonly used and understood. Finally, section 2 has been codified as Section 252.372, Florida Statutes (1993).

   
   

4. Section 2 of chapter 93-128 provided further that respondent, Department of Revenue (DOR), "shall collect, administer, audit, and enforce the surcharge pursuant to section 624.5092, Florida Statutes." This meant that DOR would utilize the procedures outlined in section 624.5092 for administering and collecting the newly-imposed tax. That statute prescribes the manner in which taxes should be paid to and collected by DOR. To implement this new responsibility, on August 20, 1993, DOR published notice in the Florida Administrative Weekly of its intent to adopt new rule 12B-8.0012. The proposed rule, which is quite lengthy in text, reads as follows:

   
   

   12BN-8.0012 Insurance Policy Surcharge: Rate and Computation.

   1. Every insurer, including surplus lines and surplus lines agents, must collect a surcharge of $2 and $4 from the policyholders of certain types of property insurance issued or renewed on or after May 1, 1993. The proceeds will be deposited into the Emergency Management, Preparedness, and Assistance Trust Fund.

   2. The $2 surcharge applies to each residential dwelling fire policy, homeowner's, mobile homeowner's, tenant homeowner's, condominium unit owner's, and any other type of insurance coverage on residential property, issued or renewed on or after May 1, 1993.

   3. The $4 surcharge applies to each commercial fire, commercial multiple peril, and business owner's property insurance policy issued or renewed on or after May 1, 1993, including marine policies if the coverage includes real property.

   4. The surcharge does not apply to policies on tangible personal property, except

      multiple peril type policies on residential or commercial property and mobile homes.

   5. For purposes of this rule, the date of issue or renewal shall be the effective date of the policy.

   6. The surcharge applies to all policies issued or renewed even if they are subsequently cancelled. However, if the policy is cancelled back to the effective date, the surcharge shall not apply.

   7. The surcharge must be collected by the insurer from the policyholder and must be remitted in the same manner as the insurance premium tax to the Department of Revenue on Form DR-907, Insurance Premium Tax Quarterly Return, and on Form DR-908, Insurance Premium Tax Return.

   8. The surcharge on surplus lines policies must be remitted by the surplus lines agents, unless the surplus lines insurer collects and remits the surcharge, and must be remitted on Form DR-907 and Form DR-908. The surcharge is required to be remitted by the surplus lines agent for only the surplus lines policies. The authorized insurer is required to collect and remit the surcharge for all other policies. The $250 quarterly and annual filing fees do not apply to either the surplus lines agent or the surplus lines insurer.

   9. The insurance premium tax on surplus lines will continue to be remitted to the Department of Insurance as required.

   10. The surcharge is required to be remitted on the required return for the calendar

       quarter the policy is issued or renewed without regard to the collection of the surcharge from the policyholders.

   11. The insurer is responsible for collecting the surcharge and may cancel the policy for nonpayment of the surcharge.

   12. The first installment on the surcharge was due June 15, 1993, for May and June with the subsequent installment due on October 15 for the calendar quarter ending September 30. A separate line denoting the surcharge is provided on the revised Form DR-907 and the revised Form DR-908, annual return, which is due by March 1.

   13. The estimated payment must be based on at least 90 percent of the actual number of policies subject to the surcharge to avoid penalty and interest as provided in s. 624.5092, F.S.

   14. Penalty and interest may be compromised as provided in s. 213.21, F.S.

   15. The surcharge is not considered to be a part of the premium charge, and is therefore not subject to the insurance premium tax.

   16. The surcharge is imposed on the policy- holder and will not be considered for retaliatory tax purposes whether or not the surcharge is collected from the policyholder.

       
       

       The text of the notice identified Subsection 213.06(1), Florida Statutes, and Chapter 93-128, Laws of Florida, as the specific authority for adopting the rule and Section 624.5092, Florida Statutes, and Chapter 93-128, Laws of Florida, as the laws being implemented. Finally, the notice summarized the new rule as one which "provid(ed) guidance for computing and remitting the $2 and $4 surcharge," and further stated its adoption was "needed to conform the rule to the 1992 and 1993 statutory revisions."

5. Of significance to this controversy are all or parts of sections (1) and (8) of the proposed rule which expressly provide that the surcharge is applicable to surplus lines policies. Petitioner generally contends that surplus lines policies were not specifically referred to in either chapter 93-

   128 or section 624.5092 and thus the surcharge was not intended to apply to that type of transaction. For this reason, among others, it argues that the proposed rule goes beyond the terms of the enabling statutes.

   
   

6. In 1989, Chapter 89-167, Laws of Florida, created Section 624.5092, Florida Statutes, which transferred the responsibility for the administration and collection of all taxes enumerated in subsection 624.5092(3) from the Department of Insurance to DOR. That subsection identifies Sections 624.5091, 624.4425, 624.475, 624.509-624.515, 627.356, 627.357, 629.5011, 637.406, 651.027, and 440.57, Florida Statutes, as the taxing statutes which DOR is obligated to administer. Omitted from this subsection are Section 626.932, Florida Statutes, which imposes a premium receipts tax on surplus lines insurance transactions, and Section 626.933, Florida Statutes, which sets forth the procedure for collecting that tax. Therefore, surplus lines insurance transactions are not identified as being subject to the administration procedures in subsection 624.5092(3).

   
   

7. The parties have stipulated that under section 624.5092 DOR is authorized to administer, collect and enforce insurance taxes prior to 1989 on all open years for all insurers subject to Section 624.509, Florida Statutes. They have also stipulated that DOR has the authority to assess surcharges and tax for all insurers that are subject to Sections 624.509 and 624.5091, Florida Statutes. These two statutes pertain to the payment of a premium tax and retaliatory tax, respectively, by insurers holding a certificate of authority. Surplus lines insurers do not possess such authorization.

   
   

8. Neither chapter 89-167 nor chapter 93-128 amended sections 626.932 or 626.933. As noted earlier, those sections impose a surplus lines tax and the manner for collecting the same, respectively. Also, they did not amend subsection 624.5092(3) to include any tax imposed by Part VIII of chapter 626, the state surplus lines act.

   
   

9. Section 4 of chapter 93-128 amended subsection 624.5092(1) by adding the underscored language below:

   
   

   1. The Department of Revenue shall administer, audit and enforce the assessment and collection of those taxes to which this section is applicable. The Department of Insurance is authorized to share information with the Department of Revenue as necessary to verify premium tax or other tax liability arising under such taxes and credits which may apply thereto.

      
      

10. Besides the substantive contentions, petitioner also contends the rule's economic impact statement (EIS) is inadequate because DOR did not consider the rule's impact on small businesses. In making that assessment, DOR utilized the provisions of Subsection 120.54(2)(a)1.-5., Florida Statutes, and found the impact on small businesses to be minimal, that is, affected persons need only file a two page form on a quarterly basis reflecting the number of surplus lines policies issued or renewed during the preceding quarter. Given these minimal statutory requirements, DOR could not consolidate or simplify the

    reporting requirements, exempt small businesses, establish less stringent schedules, establish alternative performance standards, or create less stringent reporting requirements. Finally, copies of the proposed rule were sent to the minority business sections of the Department of Commerce and Department of Management Services, and DOR did not receive any reply or comment from those agencies.

    
    

11. DOR did not receive a request for an economic impact statement from any affected person. Also, it received no information regarding any economic impact on any businesses affected by the proposed rule or on the size of businesses affected by the proposed rule prior to the initiation of this proceeding.

    
    

12. Although some of petitioner's members qualify as small businesses as that term is defined within Section 288.703, Florida Statutes, and petitioner advised DOR of its position regarding the invalidity of the proposed surcharge, there is nothing of record to indicate that petitioner, or any of its members individually, specifically requested preparation of an EIS or provided information sufficient to make DOR aware of specific concerns regarding the economic impact of the proposed rule.

    
    

    CONCLUSIONS OF LAW

    
    

13. The Division of Administrative Hearings has jurisdiction over the subject matter and the parties hereto pursuant to Subsections 120.54(4) and 120.57(1), Florida Statutes.

    
    

14. Subsection 120.52(8), Florida Statutes, defines an invalid exercise of delegated legislative authority as follows:

    
    

    1. "Invalid exercise of delegated legislative authority" means action which goes beyond the powers, functions, and duties delegated by the Legislature. A proposed or existing rule is an invalid exercise of delegated legislative authority if any one or more of the following apply:

       1. The agency has materially failed to follow the applicable rulemaking procedures set forth in s. 120.54;

       2. The agency has exceeded its grant of rulemaking authority, citation to which is required by s. 120.54(7);

       3. The rule enlarges, modifies, or contravenes the specific provisions of law implemented, citation to which is required by s. 120.54(7);

       4. The rule is vague, fails to establish adequate standards for agency decisions, or vests unbridled discretion in the agency; or

       5. The rule is arbitrary or capricious.

    
    

    Petitioner contends that the proposed rule violates paragraphs (a), (b), (c) and

    (e) of the foregoing statute. As to each of these contentions, petitioner bears the burden of proving by a preponderance of the evidence that such infirmities

    exist. Finally, it contends that the rule is unconstitutional under the due process clause of the United States Constitution. These arguments will be considered separately below.

    
    

15. Petitioner first contends that DOR has violated paragraph 120.52(8)(a) by failing to comply with Subsection 120.54(2)(a), Florida Statutes, which mandates that prior to the adoption of any rule, the agency shall consider the impact of the proposed action on small businesses. Before a person has standing to make such a claim, however, it is incumbent on the challenging party to "request preparation of an economic impact statement" or "provide the agency with information sufficient to make the agency aware of specific concerns regarding the economic impact of the proposed rule." Subsection 120.54(2)(d),

    F. S. (1993). Here, neither requirement was met. This being so, the contention must necessarily fail. Assuming arguendo that petitioner has standing to complain that the EIS is deficient, the statute imposing the tax falls equally upon large and small businesses, and DOR was without authority to exempt small businesses from the tax or provide for less stringent reporting requirements for one segment of the affected insurers. See, e. g., Family Arcade Alliance v. Department of Revenue, 14 F.A.L.R. 1417, 1431 (DOAH, March 17, 1992).

    Therefore, no special accommodation could be made for petitioner's small business members.

    
    

16. Petitioner next contends that DOR has violated paragraph 120.52(8)(b) by exceeding its grant of rulemaking authority. To have violated this statute, the proposed rule would have to go beyond the terms of the statutes cited by DOR as its authority to engage in rulemaking. In this respect, the proposed rule cites subsection 213.06(1) and chapter 93-128 (now codified in part as s. 252.372, F. S.) as the specific authority for its adoption. The former statute authorizes DOR to adopt such rules as may be necessary to "carry out the intent and purposes of . . . revenue laws administered by the department" while chapter 93-128 imposes an annual surcharge on all casualty policies, requires the insurer to "collect the surcharge and remit it to (DOR)," and authorizes DOR to "collect, administer, audit, and enforce the surcharge pursuant to section 624.5092, Florida Statutes." Since the taxing statute (s. 252.372) authorizes DOR to collect the surcharge from all insurers, without limitation, and to use the procedures prescribed in section 624.5092 for doing so, the proposed rule simply carries out this legislative duty. Therefore, it cannot be said that DOR has exceeded its grant of rulemaking authority as proscribed by paragraph 120.52(8)(b).

    
    

17. Petitioner next contends that the rule is invalid because it impermissibly enlarges, modifies or contravenes section 624.5092. Here, DOR has cited section 624.5092 and chapter 93-128 as the specific laws implemented. For the reasons given in the preceding paragraph, it must be concluded that the rule does not contravene the specific provisions of law being implemented. In so ruling, the undersigned has determined that chapter 93-128 is the taxing statute, and not section 624.5092. That is to say, chapter 93-128 imposes the tax and provides that the administration and enforcement of the tax shall be accomplished using the procedures outlined in section 624.5092. Thus, contrary to petitioner's assertion, chapter 93-128 is the controlling statute for resolving this dispute. Since chapter 93-128 expressly provides that the surcharge shall be applicable to all residential and commercial casualty transactions, without any limitation whatsoever, the proposed rule does not contravene the law being implemented. While admittedly it would have been helpful in terms of clarity for the legislature to have amended subsection 624.5092(3) to add new section 252.472 or existing section 626.932 to the list

    of taxing statutes contained therein, this omission has no significance since the authority to levy and enforce the surcharge is found in chapter 93-128, and not section 624.5092.

    
    

18. Petitioner also contends that the rule is arbitrary and capricious within the meaning of paragraph 120.52(8)(e). To be arbitrary, the proposed rule would not be supported by fact or logic. The rule would be capricious if it was proposed for adoption without thought or reason. Dravo Basic Materials Co., Inc. v. State, Department of Transportation, 602 So.2d 632 (Fla. 2nd DCA 1992). Here, the rule cannot be said to lack the necessary factual predicate or logic given the clear statutory authority for adopting the same. Likewise, the agency has obviously sought to promulgate the rule with thought and reason.

    This being so, the proposed rule does not contravene paragraph 120.52(8)(e).

    
    

19. Finally, in determining that the proposed rule is a valid exercise of delegated authority, the undersigned has rejected petitioner's contention that because its members do not hold certificates of authority from the Department of Insurance, they cannot be considered "insurers" within the meaning of the taxing statute. The word "insurer" is defined in Section 624.03, Florida Statutes, as "every person engaged . . . in the business of entering into contracts of insurance." Since petitioner's members offer surplus lines insurance policies to members of the public, and they countersign property insurance policies covering Florida risks, one must logically conclude that they are insurers as that term is defined by statute. Cf. Continental Janitorial Corporation v. Nationwide Underwriters, Inc., 368 So.2d 112, 113 (Fla. 4th DCA 1979). The fact that they do not hold certificates of authority is immaterial to this determination. The remaining contentions, including a claim that the proposed rule is unconstitutional, are deemed to be without merit.

Based on the foregoing Findings of Fact and Conclusions of Law, it is ORDERED that the petition for determination of invalidity of proposed rule

12B-8.0012 be DENIED.

DONE AND ENTERED this 10th day of January, 1994, in Tallahassee, Florida.

DONALD R. ALEXANDER

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, FL 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 10th day of January, 1994.

APPENDIX TO FINAL ORDER, CASE NO. 93-5242RP

Petitioner:

Respondent:

Note - Where a proposed finding of fact has been partially accepted, the remainder has been rejected as being irrelevant, unnecessary, cumulative, not supported by the evidence, or a conclusion of law.

COPIES FURNISHED:

Steven M. Malono, Esquire

P. O. Box 11127 Tallahassee, Florida 32302

Lisa M. Raleigh, Esquire Department of Legal Affairs The Capitol, Tax Section

Tallahassee, Florida 32399-1050

Carroll Webb, Executive Director

Joint Administrative Procedures Committee Holland Building, Room 120

Tallahassee, FL 32399-1300

Liz Cloud, Chief

Bureau of Administrative Code The Elliott Building Tallahassee, FL 32399-0250

NOTICE OF RIGHT TO JUDICIAL REVIEW

A party who is adversely affected by this Final Order is entitled to judicial review pursuant to Section 120.68, Florida Statutes. Review proceedings are governed by the Florida Rules of Appellate procedure. Such proceedings are commenced by filing one copy of a notice of appeal with the agency clerk of the Division of Administative Hearings and a second copy, accompanied by filing fees prescribed by law, with the District Court of Appeal, First District, or with the district court of appeal in the appellate district where the party resides. The notice of appeal must be filed within 30 days of rendition of the order to be reviewed.

================================================================= DISTRICT COURT ORDER DISMISSING APPEAL

=================================================================

DISTRICT COURT OF APPEAL, FIRST DISTRICT

Tallahassee, Florida 32399

Telephone No. (904)488-6151

April 8, 1994

CASE NO: 94-00475

L.T. CASE NO. 93-5242RP

Florida Surplus Lines v. State of Florida, Association Department of Revenue

Appellant(s), Appellee(s).

BY ORDER OF THE COURT:

Appeal dismissed pursuant to Rule 9.350(b), Fla.R.App.P.

I HEREBY CERTIFY that the foregoing is (a true copy of) the original court order.

JON S. WHEELER, CLERK

By: Deputy Clerk

Copies:

Steven M. Malono Douglas A. Mang Lisa M. Raleigh James F. McAuley Deanna Hartford

Docket for Case No: 93-005242RP

Orders for Case No: 93-005242RP