June 5, 2001
Contact: Rep. Barbara Marumoto
Tel.: 586-6310


On June 5, the second day of the 2001 Special Session of the Legislature, the House Republican Caucus introduced a bill that would exempt unfair taxes for Hawaii businesses that contract out payroll and payroll-related functions. Senate Republicans introduced a similar measure on June 4.

Many small businesses can realize added efficiency and cost-effectiveness by contracting out labor related functions to Professional Employee Organizations (PEO) - companies that specialize in handling wages, salaries, payroll taxes, insurance premiums, employee benefits including retirement, vacation sick leave, health benefits and other employee benefits. Under the present system businesses are required to pay the 4% general excise tax (GET) on all monies that are received by, or move through, PEO's. This is in effect an excise tax on payroll and more. Though some PEO’s are paying the full tax, the state Tax Department is not fully enforcing this law. Total enforcement would drive PEOs out of business and leave client companies to fend for themselves. Small businesses, in particular, do not have the expertise and staff to deal with the complexities of these functions.

In addition to dealing with these ongoing and necessary functions, PEO’s assist employers by locating affordable business and health insurance policies. The Republicans believe the imposition of this tax would be an unreasonable cost to businesses and believe the GET should be applied only to the fees the PEO's charge for the contracted service.

Republicans also note that exempting the GET from payroll and payroll related functions have precedence under Hawaii law. Hotels management companies, such as Sheraton, are exempt from the GET for handling funds for hotel owners.

In introducing the HB 4, Rep. Barbara Marumoto (R-Waialae, Kahala) said, "the imposition of this tax on all amounts is insanity, and the only sane policy is to grant an exemption to PEO’s. Our small businesses need us to go to bat for them. Taxing a business for paying people is about as anti-business as you can get!"