Report Title:

GET; Exemption; Professional Employment Organization

 

 

Description:

Exempts from the General Excise Tax amounts that a client company pays to a professional employment organization that will be expended to pay the wages, salaries, payroll taxes, and benefits of the employees hired by a client company.  Protects the rights of employees.  (HB317 HD1)

 


HOUSE OF REPRESENTATIVES

H.B. NO.

317

TWENTY-FOURTH LEGISLATURE, 2007

H.D. 1

STATE OF HAWAII

 

 

 

 

 

 

A BILL FOR AN ACT


 

 

RELATING TO PROFESSIONAL EMPLOYMENT ORGANIZATIONS.

 

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 


     SECTION 1.  The purpose of this Act is to eliminate unfair taxation for those Hawaii businesses that may realize added efficiency and cost-effectiveness by contracting payroll and payroll-related functions.  Since the contracting company renders general excise tax payments, it is appropriate to exempt the organization under such contract from further taxation on the same payroll moneys.  The general excise tax would apply to the fee for the performance of the contracted services.  The advantages of this rapidly growing trend on the mainland have not been well used in Hawaii because the taxation on payroll pass-through moneys can be substantially more than the fee for those services.

     This tax exemption has precedent in Hawaii law, such as in the operation of hotels, where management companies are reimbursed by hotels for similar payroll and related functions.

     SECTION 2.  The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"CHAPTER

PROFESSIONAL EMPLOYMENT ORGANIZATIONS

     §   -1  Definitions.  As used in this chapter, unless the context otherwise requires:

     "Assigned employee" means an employee under a professional employment organization arrangement whose work is performed in the state.  The term does not include an employee hired to support or supplement a client company's work force as temporary help.  "Assigned employee" means the same as the term "leased employee" as defined in Section 414(n) of the Internal Revenue Code of 1986, as amended.

     "Client company" means a person that contracts with a professional employment organization and is assigned employees by the professional employment organization under that contract.

     "Professional employment organization" means a business entity that offers to co-employ employees that are assigned to the work sites of its client companies.

     "Professional employment organization services" means an arrangement by which co-employees of a professional employment organization are assigned to work at the client company and such assigned employee's assignment is intended to be of a long-term or continuing nature, rather than temporary.  The term does not include temporary help.

     "Temporary help" means an arrangement by which an organization hires its own employees and assigns them to a client company to support or supplement the client's work force in a special situation, including:

     (1)  An employee absence;

     (2)  A temporary skill shortage;

     (3)  A seasonal workload; or

     (4)  A special assignment or project.

     §   -2  Professional employment organization; employee rights; payroll cost exemption.  (a)  Where any client company of any professional employment organization uses the services of assigned employees or co-employs with a professional employment organization, the client company and the professional employment organization, with respect to such assigned employees, shall not be exempt from the requirements of any federal, state, or county law, including labor or employment laws, collective bargaining rights, anti-discrimination provisions, or other laws with respect to the protection and rights of employees, including chapters 377 and 378, that would apply to such assigned employees if such assigned employees had been employees of the client company instead of co-employees of the professional employment organization.

     These employee rights shall not be abrogated by any contract or agreement between the client company and the professional employment organization, or the professional employment organization and the assigned employee, that contains terms or conditions which could not be lawfully contained in a contract or agreement directly between the client company and the assigned employees, if no professional employment organization was involved.  Any contrary statute, local ordinance, executive order, or regulation notwithstanding, where the laws, rights, and protections referred to in this section define or require a determination of the "employer", the employer shall be deemed to be the client company and not the professional employment organization.  The department of labor and industrial relations shall notify the department of taxation in writing of any violation of this subsection.

     (b)  The client company shall be deemed to have satisfied its obligations with respect to any such assigned employees under any applicable law, including, without limitation, workers' compensation laws, including chapter 386, employee insurance coverage, including chapters 383, 385, 392, and 393, and tax withholding and reporting laws, if and to the extent that those obligations are satisfied by the professional employment organization acting in its capacity as co-employer of such assigned employees.

     (c)  Amounts received by a professional employment organization from a client company in amounts equal to and that are disbursed by the professional employment organization for employee wages, salaries, payroll taxes, insurance premiums, and benefits, including retirement, vacation, sick leave, health benefits, and similar employment benefits with respect to assigned employees at a client company shall not be subject to the general excise tax as provided by section 237-24.7(10).

     (d)  The general excise tax exemption under section 237-24.7(10) shall not apply to the professional employment organization if:

(1)  By or through any contract between the client company and any professional employment organization, or otherwise, employees are excluded from any employee rights or employee benefits required by law to be provided to employees of the client company by the client company; or

(2)  The professional employment organization fails to pay any tax withholding for co-employees or any federal or state taxes for which the professional employment organization is responsible."

     SECTION 3.  Section 237-24.7, Hawaii Revised Statutes, is amended to read as follows:

     "§237-24.7  Additional amounts not taxable.  In addition to the amounts not taxable under section 237-24, this chapter shall not apply to:

     (1)  Amounts received by the operator of a hotel from the owner of the hotel in amounts equal to and which are disbursed by the operator for employee wages, salaries, payroll taxes, insurance premiums, and benefits, including retirement, vacation, sick pay, and health benefits.  As used in this paragraph:

              "Employee" means employees directly engaged in the day-to-day operation of the hotel and employed by the operator.

              "Hotel" means an operation as defined in section 445-90.

              "Operator" means any person who, pursuant to a written contract with the owner of a hotel, operates or manages the hotel for the owner.

              "Owner" means the fee owner or lessee under a recorded lease of a hotel;

     (2)  Amounts received by the operator of a county transportation system operated under an operating contract with a political subdivision, where the political subdivision is the owner of the county transportation system.  As used in this paragraph:

              "County transportation system" means a mass transit system of motorized buses providing regularly scheduled transportation within a county.

              "Operating contract" or "contract" means a contract to operate and manage a political subdivision's county transportation system, which provides that:

              (A)  The political subdivision shall exercise substantial control over all aspects of the operator's operation;

              (B)  The political subdivision controls the development of transit policy, service planning, routes, and fares; and

              (C)  The operator develops in advance a draft budget in the same format as prescribed for agencies of the political subdivision.  The budget must be subject to the same constraints and controls regarding the lawful expenditure of public funds as any public sector agency, and deviations from the budget must be subject to approval by the appropriate political subdivision officials involved in the budgetary process.

              "Operator" means any person who, pursuant to an operating contract with a political subdivision, operates or manages a county transportation system.

              "Owner" means a political subdivision that owns or is the lessee of all the properties and facilities of the county transportation system (including buses, real estate, parking garages, fuel pumps, maintenance equipment, office supplies, etc.), and that owns all revenues derived therefrom;

     (3)  Surcharge taxes on rental motor vehicles imposed by chapter 251 and passed on and collected by persons holding certificates of registration under that chapter;

     (4)  Amounts received by the operator of orchard properties from the owner of the orchard property in amounts equal to and which are disbursed by the operator for employee wages, salaries, payroll taxes, insurance premiums, and benefits, including retirement, vacation, sick pay, and health benefits.  As used in this paragraph:

              "Employee" means an employee directly engaged in the day-to-day operations of the orchard properties and employed by the operator.

              "Operator" means a producer who, pursuant to a written contract with the owner of the orchard property, operates or manages the orchard property for the owner where the property contains an area sufficient to make the undertaking economically feasible.

              "Orchard property" means any real property that is used to raise trees with a production life cycle of fifteen years or more producing fruits or nuts having a normal period of development from the initial planting to the first commercially saleable harvest of not less than three years.

              "Owner" means a fee owner or lessee under a recorded lease of orchard property;

     (5)  Taxes on nursing facility income imposed by chapter 346E and passed on and collected by operators of nursing facilities;

     (6)  Amounts received under property and casualty insurance policies for damage or loss of inventory used in the conduct of a trade or business located within the State or a portion thereof that is declared a natural disaster area by the governor pursuant to section 209-2;

     (7)  Amounts received as compensation by community organizations, school booster clubs, and nonprofit organizations under a contract with the chief election officer for the provision and compensation of precinct officials and other election-related personnel, services, and activities, pursuant to section 11-5;

     (8)  Interest received by a person domiciled outside the State from a trust company (as defined in section 412:8-101) acting as payment agent or trustee on behalf of the issuer or payees of an interest bearing instrument or obligation, if the interest would not have been subject to tax under this chapter if paid directly to the person domiciled outside the State without the use of a paying agent or trustee; provided that if the interest would otherwise be taxable under this chapter if paid directly to the person domiciled outside the State, it shall not be exempt solely because of the use of a Hawaii trust company as a paying agent or trustee;

     (9)  Amounts received by a management company from related entities engaged in the business of selling interstate or foreign common carrier telecommunications services in amounts equal to and which are disbursed by the management company for employee wages, salaries, payroll taxes, insurance premiums, and benefits, including retirement, vacation, sick pay, and health benefits.  As used in this paragraph:

              "Employee" means employees directly engaged in the day-to-day operation of related entities engaged in the business of selling interstate or foreign common carrier telecommunications services and employed by the management company.

              "Management company" means any person who, pursuant to a written contract with a related entity engaged in the business of selling interstate or foreign common carrier telecommunications services, provides managerial or operational services to that entity.

              "Related entities" means:

              (A)  An affiliated group of corporations within the meaning of section 1504 (with respect to affiliated group defined) of the federal Internal Revenue Code of 1986, as amended;

              (B)  A controlled group of corporations within the meaning of section 1563 (with respect to definitions and special rules) of the federal Internal Revenue Code of 1986, as amended;

              (C)  Those entities connected through ownership of at least eighty per cent of the total value and at least eighty per cent of the total voting power of each such entity (or combination thereof), including partnerships, associations, trusts, S corporations, nonprofit corporations, limited liability partnerships, or limited liability companies; and

               (D)  Any group or combination of the entities described in paragraph (C) constituting a unitary business for income tax purposes;

          whether or not the entity is located within or without the State or licensed under this chapter; [and]

(10) Amounts received by a professional employment organization from a client company in amounts equal to and that are disbursed by the professional employment organization for employee wages, salaries, payroll taxes, insurance premiums, and benefits, including retirement, vacation, sick leave, health benefits, and similar employment benefits with respect to assigned employees at a client company; provided that this exemption shall be inapplicable to a professional employment organization upon:

(A)  Written notification by any union or the department of labor and industrial relations of any violation by the professional employment organization of section   -2(a); or

          (B)  Failure of the professional employment organization to pay any tax withholding for assigned employees or any federal or state taxes for which the professional employment organization is responsible.

As used in this paragraph, "professional employment organization", "client company", and "assigned employee" shall have the meanings as provided in section    -1; and

   [(10)] (11)  Amounts received as grants under section 206M-15."

     SECTION 4.  Statutory material to be repealed is bracketed and stricken.  New statutory material is underscored.

     SECTION 5.  This Act shall take effect on July 1, 2007, and shall apply to taxable years beginning after December 31, 2006.