Honorable Robert Bunda

President of the Senate

Twenty-First State Legislature

Regular Session of 2001

State of Hawaii

Sir:

Your Committee on Labor, to which was referred S.B. No. 588 entitled:

begs leave to report as follows:

The purpose of this measure is to exempt from the general excise tax (GET) certain payments received by a professional employment organization (PEO) retroactive to taxable years beginning after December 31, 2000.

Testimony in support of the measure was received from numerous small businesses and PEOs. The Department of Taxation testified that it was not opposed to the measure. The ILWU Local 142 opposed the passage of the measure. The Tax Foundation submitted comments.

Your Committee finds that the measure would exempt amounts received by a PEO from a client company that is disbursed for employee wages and benefits for assigned employees who provide services for the client company. Under the measure, only the management fee paid by the client company to the PEO would be subject to the GET. The Department of Taxation estimated annual revenue loss to the State at $6.7 million.

The ILWU Local 142 raised concern over the linkage of the term "assigned employee" to the term "leased employee" as defined in section 414(n) of the Internal Revenue Code of 1986, as amended. Section 2 of this measure states that the two terms have the same meaning. According to the ILWU, the use of leased employees is problematic in that there is a question as to which company actually employs the assigned worker, and in the case of larger PEOs who maintain places of business in other states, whether federal or home state employment standards apply.

Your Committee recognizes the concerns raised by the ILWU Local 142 as having a practical impact on the application of the GET exemption. However, it also recognizes the merits of providing the GET exemption to PEOs and the benefit to employers, particularly to the small business sector. With these concerns in mind, your Committee is recommending passage of the measure to your Committee on Ways and Means with the understanding that representatives on both sides of the issue will continue to work together to address the concerns raised in the ILWU's testimony.

Your Committee has amended the measure by changing the effective date to July 1, 2001 and by making technical, nonsubstantive amendments for the purpose of clarity and style.

Your Committee amended the effective date to reflect recommended drafting procedure with regard to implementing any exemptions to the GET.

As affirmed by the record of votes of the members of your Committee on Labor that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 588, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 588, S.D. 1, and be referred to the Committee on Ways and Means.