Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2003

State of Hawaii

Sir:

Your Committee on Economic Development and Business Concerns, to which was referred H.B. No. 429 entitled:

begs leave to report as follows:

The purpose of this bill is to clarify that professional employment organizations (PEOs) are exempt from the general excise tax on payroll and benefit moneys that they receive from their clients and then disburse to the employees.

The Chamber of Commerce of Hawaii, ALTRES, Inc., and many business organizations submitted testimony in support of this bill.

The Department of Taxation, ILWU Local 142, and Tax Foundation of Hawaii offered comments.

Your Committee finds that many small businesses do not have the resources to take care of the timely payment of payroll and other benefits that are paid as part of maintaining a workforce. By taking over payroll management, PEOs enable small businesses to concentrate on managing their businesses and employees instead of having to worry that payroll checks and other benefit payments are paid on time.

PEOs provide a unique service that has grown to be widely used in most of the country, but is held back in Hawaii because of the Department of Taxation's interpretation of the general excise tax. Because of this interpretation of the law, in certain instances the amount of the general excise tax on the payroll may exceed the charge for the service itself.

Your Committee finds that this bill addresses this situation, while ensuring that the employment rights of employees are protected. ILWU Local 142 suggested further clarification in this regard. Specifically, a PEO should not be able to take the payroll tax exemption if any of the employment rights of the employee is violated.

Accordingly, your Committee has amended this bill by incorporating the recommendations of ALTRES, Inc., and ILWU Local 142. Other technical, nonsubstantive amendments were made for purposes of style and clarity.

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. 429, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 429, H.D. 1, and be referred to the Committee on Finance.