Report Title:

General Excise Tax Exemption for Professional Employment Organizations


Exempts from the general excise tax certain amounts paid to professional employment organizations.


S.B. NO.












SECTION 1. Currently, amounts paid to professional employment organizations by clients for leased employees, including the employees' compensation, fringe benefits, workers' compensation, and payroll taxes or assessments, are subject to the State's general excise tax. This bill would exempt such amounts from the general excise tax. A growing trend is for companies, both nationwide and in the State, to use professional employment organizations. The exemption from the general excise tax would improve the climate for small businesses in the State by reducing the costs for businesses who utilize leased employees because the general excise tax, in all likelihood, is passed-on to these businesses. The passed-on tax would be reduced if the tax is imposed on the fee or other taxable activities, rather than the entire amount paid to professional employment organizations. Other states with gross receipts taxes, like the general excise tax, have administratively exempted amounts received by professional employment organizations that are disbursed to leased employees from such taxes.

SECTION 2. Chapter 237, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"237- Professional employment organization payroll cost exemption. (a) This chapter shall not apply to amounts received by a professional employment organization from a client in the course of providing professional employment services, 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 leased employees at a client company.

(b) A client shall be deemed to have satisfied its obligations with respect to its leased employees under any applicable law, including, without limitation, the workers' compensation laws contained in chapter 386, employee insurance coverage laws contained in chapters 383, 385, 392, and 393, and state tax withholding and reporting laws, if and to the extent that those obligations are satisfied by the professional employment organization acting pursuant to a contract to provide professional employment services to the client.

(c) Failure of the professional employment organization to pay any state tax withholding for leased employees assigned to a client for which the professional employment organization is responsible, other than failure of a de minimis nature, shall make the exemption under this section prospectively inapplicable for the specific professional employment organization and client contract. For purposes of this section, the determination of failure to pay any state tax withholding of a non de minimis nature by the department of taxation shall be subject to the rights of appeal provided income taxpayers provided in chapters 232 and 235.

(d) As used in this section:

"Client" means a person or organization that contracts with a professional employment organization for professional employment services and utilizes the services of leased employees.

"Leased employee" means an employee under a professional employment organization arrangement whose work is performed in the State and who is assigned to a client. The term does not include an employee hired to support or supplement a client's work force as temporary help. "Leased employee" means the same as the term "leased employee" as defined in section 414(n) of the Internal Revenue Code, 1986, as amended, without regard to subparagraph (B) of paragraph (2) thereof.

"Professional employment organization" means a person or organization that offers professional employment services.

"Professional employment services" means an arrangement by which leased employees provide services to a client and the employee's work services are 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 temporarily assigns them to a client to support or supplement the client's work force in a special situation of a short-term nature, including:

(1) An employee absence;

(2) A temporary skill shortage;

(3) A seasonal workload; or

(4) A special assignment or project."

SECTION 3. Section 235-61, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) As used in this section:

(1) "Wages" means wages, commissions, fees, salaries, bonuses, and every and all other kinds of remuneration for, or compensation attributable to, services performed by an employee for the employee's employer, including the cash value of all remuneration paid in any medium other than cash and the cost-of-living allowances and other payments included in gross income by section 235-7(b), but excluding income excluded from gross income by section 235-7 or other provisions of this chapter;

(2) "Employee" includes an officer or elected official, or any other employee;

(3) "Employer" means:

(A) [the] The person or government for whom an individual performs or performed any service, of whatever nature, as the employee of such person or government[, and];

(B) [the] The person having control of the payment of the wages if the employer as heretofore defined does not have control thereof, including a professional employment organization as defined in section 237- ; and

(C) [any] Any person subject to the jurisdiction of the State and paying wages on behalf of an employer as heretofore defined if the employer is not subject to the jurisdiction of the State;

provided that the term employer shall not include any government that is not subject to the laws of the State except as, and to the extent that, it consents to the application of sections 235-61 to 235-67 to it."

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, 2004, and shall apply to gross income or gross proceeds received after July 1, 2004.