Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-First State Legislature

Regular Session of 2001

State of Hawaii

Sir:

Your Committee on Economic Development and Business Concerns, to which was referred H.B. No. 502 entitled:

begs leave to report as follows:

The purpose of this bill is to grant an exemption from the general excise tax (GET) for the transfer of payroll moneys associated with worker benefits between employers and organizations defined as professional employment organization.

JMP Services, Altres, Inc., Environmental Biotech of Hawaii, Leeward Petroleum, Inc., A-Cut Above Roofing, GMB Vinyl, Inc., JS Services, Inc., ProService Hawaii, Inn at Schofield Barracks, Kama'aina Metals, C. Tomita Painting And Wallcovering, Singer Sewing Center, Discount Fabric Warehouse, McClain Auctions, Plastow And Associates, Matsu & Clapperton, Law Office of Mark T. Shklov, Closet Systems of Hawaii, Action Rehab, Allstate, Equipment Team Hawaii, R.D. Bridges Renovations, Spectrum Engineering Hawaii, High Class, Island Pool & Spa Supply, Honolulu Landscape Maintenance, Abe' Auto Recyclers, Inc., Squeaky Clean, Can Clean Hawaii, Furukawa Custom Builders, Sail & Surf Hawaii, Austin Island Maintenance, Royal Food Brokers, Four Star Mortgage, Maika'I Loa Remodeling, Cafe 808, Nature Adventures & Outfitters, Travel Hawaii, Kilakila Employment Services, Hawaiian Parcel Service, Clean-N-Rooter, Waiakapu Corporation, Hawaii Health Foundation, Pitzer Built Construction, LLC, Lokelani Construction, Inc., Niho Mano, MacMurray Construction, Inc., Akamai Employment Agency, Hawaiian Repair and Remodeling, Inc., the Willows, Scientific Consultant Services, Inc., Vuich Environmental Consultants, AmeriSpec Home Inspection Service, Maui School of Therapeutic Massage, Pacific Medical Administrative Group, Leeward Petroleum, Inc., Courier Corporation of Hawaii, Hinchcliff Janitorial Service, Carats & Karats, Yamamoto & Associates, Molly's Smokehouse, Ridge Way Motors, Pacific Appraisal Services, Inc., Interior Designs, Geo Metrician, Security One, Inc., and numerous individuals testified in support of this measure.

The Department of Taxation and the Tax Foundation of Hawaii commented on this measure.

Professional employment organizations, known as PEO's, contract with employers, particularly small employers, to distribute payroll to the employers' employees as well as to take responsibility for making all other worker-related payments, including but not limited to temporary disability insurance, unemployment insurance, workers' compensation, union dues, health benefit fees, etc. Professional employment organizations also provide a wide range of services that, based on the testimony presented before the committee, substantially aids small businesses to meet their legal obligations to the government as well as to their employees.

Your Committee finds that the transfer of payroll is essentially a pass through. The PEO cannot use these funds but merely distributes them. The GET on these funds would be, in most cases, far in excess of the charge the PEO makes for the services it provides. Your Committee finds that it is not a good policy to impose the tax on the transfer of payroll and payroll-related funds between an employer and a PEO.

Your Committee also concludes that the bill is, in reality, a tax measure as opposed to a labor measure. No testimony was presented to demonstrate that the professional employment organization industry creates unique management labor issues. On the contrary, it appears that the industry works well with both union and nonunion companies through the timely and organized payment of employee-related costs and benefits.

Your Committee understands that the growth of the PEO industry is a benefit to both small businesses and workers.

Your Committee has amended this bill by removing the language in subsections (c) through (f) of the bill which provides specific protections for employees of employers who enter into relationships with PEO's. Your Committee strongly believes that a worker's right should not be diminished in any way as a result of the worker's employer entering into a relationship with a PEO.

Your Committee would be amenable to restoring the language set out in subsections (c), (d), and (e) in the original bill. However, your Committee has strong reservations about section (f) regarding sanctions. Your Committee finds that this subsection is complex and not warranted at this time.

As affirmed by the record of votes of the members of your Committee on Economic Development and Business Concerns that is attached to this report, your Committee is in accord with the intent and purpose of H.B. No. 502, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 502, H.D. 1, and be referred to the Committee on Finance.