Honorable Robert Bunda

President of the Senate

Twenty-Second State Legislature

Regular Session of 2004

State of Hawaii

Sir:

Your Committee on Commerce, Consumer Protection and Housing, to which was referred S.B. No. 2242 entitled:

begs leave to report as follows:

The purpose of this measure is to create an exemption from the general excise tax for any management company that contracts to provide managerial and operational services to related companies that engage in the provision of medical services in order to facilitate the creation of an employee stock ownership plan (ESOP).

Testimony in support of this measure was submitted by the Legislative Information Services of Hawaii and the Clinical Laboratories of Hawaii, LLP. Testimony in opposition to this measure was submitted by the Department of Taxation. The Tax Foundation of Hawaii also offered comments on the measure.

An ESOP is an organized employee benefit plan operating through a trust that accepts tax-deductible contributions from the company to accumulate company stock, which is then allocated to accounts for individual employees. Establishing an ESOP benefits the company and the economy by giving employees a financial and psychological stake in the company, which makes them more likely to perceive that their work impacts the company and, therefore, their own personal interests.

Your Committee finds that under the current law, amounts received by a management company from related entities providing medical services for wages, salaries, payroll taxes, insurance premiums, and benefits are not exempt from the general excise tax. Accordingly, a medical corporation that cannot distribute shares of the company to all employees, because the shares can only be owned by licensed physicians, but could establish an ESOP and transfer its employees to a related entity and then lease back those employees to the medical corporation, would be subject to the general excise tax for employee wages, salaries, taxes, and benefits. Therefore, such entities are discouraged from establishing ESOPs because of the increased tax burden that can result, which inures to the detriment of the employees.

Your Committee determines that the exemption from this tax burden will promote the utilization of ESOPs which can in turn spur increased productivity, shareholder returns, and innovation. Furthermore, your Committee notes that revenues to the State will not be adversely affected as a result of this measure in that previously entities were being deterred from establishing ESOPs, and thus they were not currently paying any ensuing general excise tax on employee wages, salaries, taxes, or benefits.

As affirmed by the record of votes of the members of your Committee on Commerce, Consumer Protection and Housing that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 2242 and recommends that it pass Second Reading and be referred to the Committee on Ways and Means.