Senate Bill 5096 — Expanding Employee Ownership (Washington, 2023)

Summary

Senate Bill 5096, State of Washington, 68th Legislature, 2023 Regular Session, by Senators Padden, Pedersen, Hasegawa, and Schoesler, prefiled 12/23/22, read first time 01/09/23 and referred to the Committee on Business, Financial Services, Gaming & Trade. The act relates to expanding employee ownership and adds new sections to chapter 43.330 RCW and a new section to chapter 82.04 RCW. Section 2 creates the Washington employee ownership program, administered by the department and overseen by the Washington employee ownership commission, and Section 3 creates that commission. Section 8 provides a July 1, 2024 effective date for listed sections, and Section 9 states that the act may be known and cited as the expanding employee ownership act.

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Full text

     S-0200.3

                               SENATE BILL 5096


     State of Washington       68th Legislature       2023 Regular Session

     By Senators Padden, Pedersen, Hasegawa, and Schoesler

     Prefiled 12/23/22. Read first time 01/09/23. Referred to Committee
     on Business, Financial Services, Gaming & Trade.




1        AN ACT Relating to expanding employee ownership; adding new
2    sections to chapter 43.330 RCW; adding a new section to chapter 82.04
3    RCW; creating new sections; providing an effective date; and
4    providing an expiration date.


 5   BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:


 6        NEW SECTION. Sec. 1. The legislature finds that:
 7        Employee ownership in companies provides numerous benefits to
 8   both businesses and workers across all industries. Research from the
 9   national center for employee ownership found that one such structure,
10   employee stock ownership plans, had better workforce retention,
11   benefits    and  retirement   security,   and  firm performance   than
12   nonemployee stock ownership plans companies in the same industry. In
13   addition, the Rutgers school of management and labor relations found
14   that    employee-owned    companies    outperformed  nonemployee-owned
15   companies in job retention, pay, and workplace health safety
16   throughout the COVID-19 pandemic. At their core, employee ownership
17   structures allow employees to gain ownership stake in a business,
18   increasing their personal wealth without the risks related to
19   starting or purchasing their own company.
20       States throughout the nation have moved to provide support for
21   employee ownership structures. The Colorado employee ownership office
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 1   has operated since 2019 to create a network of technical support and
 2   service   providers   considering   employee   ownership  structures.
 3   Recently, both California and Massachusetts passed legislation to
 4   establish their own dedicated employee ownership support programs.
 5   Other states, such as Iowa, provide tax benefits and upfront costs to
 6   businesses interested in employee ownership.
 7       Further, the federal government has recognized the benefit broad-
 8   based employee ownership structures provide to communities. The
 9   American rescue plan act included $10,000,000,000 for the state small
10   business credit initiative. Through that act congress also directed
11   the treasury department to allow state small business credit
12   initiative funding to be used for transitions to employee ownership,
13   when state small business credit initiative funding has not been
14   historically available for business transactions.
15       The legislature desires to provide a dedicated program to educate
16   businesses on employee ownership, assist both owners and workers in
17   navigating available resources, reduce barriers to transitioning to
18   employee-owned structures, and provide tax support for businesses
19   that transition to an employee ownership structure.
20       Therefore, it is the intent of the legislature to encourage the
21   growth of employee ownership structures through this expanding
22   employee ownership act.


23       NEW SECTION. Sec. 2. A new section is added to chapter 43.330
24   RCW to read as follows:
25       (1) The Washington employee ownership program is created to
26   support the efforts of businesses considering a sale to an employee
27   ownership structure. The Washington employee ownership program must
28   be administered by the department and overseen by the Washington
29   employee ownership commission established in section 3 of this act.
30       (2)(a) In implementing the Washington employee ownership program,
31   the director must:
32       (i) Create a network of technical support and service providers
33   for businesses considering employee ownership structures;
34       (ii) Work with state agencies whose regulations and programs
35   affect employee-owned businesses, and businesses with the potential
36   to become employee owned, to enhance opportunities and reduce
37   barriers;
38       (iii) Partner with relevant private, nonprofit, and public
39   organizations including, but not limited to, professional and trade
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 1   associations,   financial   institutions,   unions,   small   business
 2   development    centers,    economic    and    workforce    development
 3   organizations, and nonprofit entities to promote employee ownership
 4   benefits and succession models;
 5       (iv) Develop and make available materials regarding employee
 6   ownership benefits and succession models;
 7       (v) Provide a referral service to help qualified business owners
 8   find appropriate legal, financial, and technical employee ownership
 9   resources and services;
10       (vi) Work with the department of financial institutions and
11   appropriate state, private, and nonprofit entities to shape and
12   implement guidance on lending to broad-based employee ownership
13   vehicles; and
14       (vii) Subject to the successful award of federal funding for this
15   purpose, establish a revolving loan program to assist existing small
16   businesses to finance a transition to employee ownership.
17       (b) Loans offered by the revolving loan program must be used to
18   help facilitate the purchase of an interest in an employee stock
19   ownership plan or worker-owned cooperative from the owner or owners
20   of a qualified business, provided that:
21       (i) The transaction results in the employee stock ownership plan
22   or worker cooperative holding a majority interest in the business, on
23   a fully diluted basis; and
24       (ii) If used to assist in the purchase of an interest in an
25   employee stock ownership plan, the employee stock ownership plan: (A)
26   Has appointed an independent trustee; or (B) has, as a trustee,
27   person, or entity, completed education on best practices for employee
28   stock ownership plans.
29       (c) Loans financing the sale of an interest to a worker
30   cooperative shall be extended based on repayment ability and shall
31   not require a personal or entity guarantee. In meeting the
32   requirement in (b) of this subsection, lending guidelines must be
33   established for worker cooperatives not based on any personal or
34   entity guarantees provided by the member owners or the selling
35   business owner. These guidelines may include but are not limited to
36   cash flow-based underwriting, character-based lending, and reliance
37   on business assets.
38       (d) In order to support the revolving loan program, the director
39   or   the  director's   designee  must   apply  for   federal  funding
40   opportunities that:
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 1       (i) Support capitalization of state revolving loan programs; and
 2       (ii) Support businesses that seek to transition to employee
 3   ownership.
 4       (e) Amounts from the repayment of loans offered by the revolving
 5   loan program must be deposited in the employee ownership revolving
 6   loan program account established in section 7 of this act.
 7       (3) The director or the director's designee may contract with
 8   consultants, agents, or advisors necessary to further the purposes of
 9   this section.
10       (4) By December 1st each year, the department must submit a
11   report to the appropriate committees of the legislature on program
12   activities, including recommendations for improvement and barriers
13   for   businesses   considering  employee   ownership   structures   in
14   Washington state. The first report must include rules and guidelines
15   for the administration of the program, as established by the
16   Washington employee ownership commission.
17       (5) For the purposes of this section:
18       (a) "Employee-owned business" means an employee cooperative
19   established under chapter 23.78 RCW and an entity owned in whole or
20   in part by employee stock ownership plans as defined in 26 U.S.C.
21   Sec. 4975(e)(7).
22       (b) "Qualified business" means a person subject to tax under
23   Title 82 RCW, including but not limited to a C corporation, S
24   corporation,   limited   liability   company,   partnership,   limited
25   liability partnership, sole proprietorship, or other similar pass-
26   through entity, that is not owned in whole or in part by an employee
27   ownership trust, that does not have an employee stock ownership plan,
28   or that is not, in whole or in part, a worker-owned cooperative.
29       (6) Program support shall only be made available to businesses
30   headquartered in Washington state. For the purposes of this section,
31   "headquartered in Washington state" means that Washington state is
32   its principal place of business or the state where it is
33   incorporated.
34       (7) The director shall adopt rules as necessary to implement this
35   section.


36       NEW SECTION. Sec. 3.    A new section is added to chapter 43.330
37   RCW to read as follows:



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 1       (1) The Washington employee ownership commission is hereby
 2   created to exercise the powers in developing and supervising the
 3   program created in section 2 of this act.
 4       (2) The commission shall consist of:
 5       (a) One member from each of the two major caucuses of the house
 6   of representatives to be appointed by the speaker of the house and
 7   one member from each of the two major caucuses of the senate to be
 8   appointed by the president of the senate. The initial term shall be
 9   two years; and
10       (b) The following members appointed by the governor:
11       (i) Five members who represent the private sector or professional
12   organizations as follows:
13       (A) One representative of a small business utilizing employee
14   ownership structures. The initial term shall be four years;
15       (B) One representative of a large business utilizing employee
16   ownership structures. The initial term shall be four years;
17       (C) One representative from a statewide business association. The
18   initial term shall be two years;
19       (D) One economic development expert, from the private sector. The
20   initial term shall be four years; and
21       (E) One representative from a financial institution with
22   expertise in assisting businesses transitioning into an employee
23   ownership structure. The initial term shall be two years; and
24       (ii) Two members who represent the public sector as follows:
25       (A) One economic development expert, from the public sector. The
26   initial term shall be four years; and
27       (B) One representative from the department of commerce, who will
28   chair the first meeting prior to the election of the chair. The
29   initial term shall be four years.
30       (3) After the initial term of appointment, all members shall
31   serve terms of four years and shall hold office until successors are
32   appointed.
33       (4) The commission shall be led by a chair selected and voted on
34   by members of the commission. The chair shall serve a one-year term
35   but may serve more than one term if selected to do so by members of
36   the commission.
37       (5) The commission shall develop, in consultation with the
38   director, rules and guidelines to administer the program. Rules and
39   guidelines for the administration of the program must be included in


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 1   the first report to the legislature required in section 2 of this
 2   act.
 3       (6) Before making any appointments to the commission, the
 4   governor must seek nominations from recognized organizations that
 5   represent the entities or interests identified in this section. The
 6   governor   must  select   appointees  to   represent  private  sector
 7   industries from a list of three nominations provided by the trade
 8   associations representing the industry, unless no names are put forth
 9   by the trade associations.
10        (7) For purposes of this section, a "professional organization"
11   includes an entity whose members are engaged in a particular lawful
12   vocation, occupation, or field of activity of a specialized nature
13   including, but not limited to, associations, boards, educational
14   institutions, and nonprofit organizations.


15       NEW SECTION.   Sec. 4.   (1) This section is the tax preference
16   performance statement for the tax preference contained in section 5,
17   chapter . . ., Laws of 2023 (section 5 of this act). This performance
18   statement is only intended to be used for subsequent evaluation of
19   the tax preference. It is not intended to create a private right of
20   action by any party or be used to determine eligibility for
21   preferential tax treatment.
22       (2) The legislature categorizes this tax preference as one
23   intended to induce certain designated behavior by taxpayers, as
24   indicated in RCW 82.32.808(2)(a).
25       (3) It is the legislature's specific public policy objective to
26   encourage business owners to create an employee stock ownership plan
27   or employee ownership trust, or to convert to a worker-owned
28   cooperative, that allows the company to share ownership with their
29   employees without requiring employees to invest their own money.
30       (4) If a review finds that the number of businesses in this state
31   offering employee stock ownership plans, employee ownership trusts,
32   or ones that have converted to a worker-owned cooperative, has
33   increased because of the tax credit under this act, then the
34   legislature intends for the legislative auditor to recommend
35   extending the expiration date of the tax preference.
36       (5) In order to obtain the data necessary to perform the review
37   in subsection (4) of this section, the joint legislative audit and
38   review committee may access and use any relevant data collected by
39   the state.
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 1       NEW SECTION.   Sec. 5.   A new section is added to chapter 82.04
 2   RCW to read as follows:
 3       (1) Beginning July 1, 2024, in computing the tax imposed under
 4   this chapter, a credit is allowed for costs related to converting a
 5   qualifying business to a worker-owned cooperative, employee ownership
 6   trust, or an employee stock ownership plan, as provided in this
 7   section.
 8       (2) The credit is equal to:
 9       (a) Up to 50 percent of the conversion costs, not to exceed
10   $25,000, incurred by a qualified business for converting the
11   qualified business to a worker-owned cooperative or an employee
12   ownership trust; or
13       (b) Up to 50 percent of the conversion costs, not to exceed
14   $100,000, incurred by a qualified business for converting the
15   qualified business to an employee stock ownership plan.
16       (3)(a) Credit under this section is earned, and claimed against
17   taxes due under this chapter, for the tax reporting period in which
18   the conversion to a worker-owned cooperative, employee ownership
19   trust, or an employee stock ownership plan is complete, or subsequent
20   tax reporting periods as provided in (c) of this subsection.
21       (b) The credit must not exceed the tax otherwise due under this
22   chapter for the tax reporting period.
23       (c) Unused credit may be carried over and used in subsequent tax
24   reporting periods, except that no credit may be claimed more than 12
25   months from the end of the tax reporting period in which the credit
26   was earned.
27       (d) No refunds may be granted for credits under this section.
28       (4)(a) The total amount of credits authorized under this section
29   may not exceed an annual statewide limit of $2,000,000.
30       (b) Credits must be authorized on a first-in-time basis.
31       (c) No credit may be earned, during any calendar year, on or
32   after the last day of the calendar month immediately following the
33   month the department has determined that $2,000,000 in credit has
34   been earned.
35       (5)(a) The department may require persons claiming a credit under
36   this section to provide appropriate documentation, in a manner as
37   determined by the department, for the purposes of determining
38   eligibility under this section.



                                     p. 7                          SB 5096
 1       (b) Every person claiming a credit under this section must
 2   preserve, for a period of five years, any documentation to
 3   substantiate the amount of credit claimed.
 4       (6) For the purposes of this section:
 5       (a) "Conversion costs" means professional services, including
 6   accounting, legal, and business advisory services, as detailed in the
 7   guidelines issued by the department, for: (i) A feasibility study or
 8   other preliminary assessments regarding a transition of a business to
 9   an employee stock ownership plan, a worker-owned cooperative, or an
10   employee ownership trust; or (ii) the transition of a business to an
11   employee stock ownership plan, a worker-owned cooperative, or an
12   employee ownership trust.
13       (b) "Employee ownership trust" means an indirect form of employee
14   ownership in which a trust holds a controlling stake in a qualified
15   business and benefits all employees on an equal basis.
16       (c) "Employee stock ownership plan" has the same meaning as set
17   forth in 26 U.S.C. Sec. 4975(e)(7), as amended.
18       (d) "Qualified business" means a person subject to tax under this
19   chapter, including but not limited to a C corporation, S corporation,
20   limited    liability   company,    partnership,   limited   liability
21   partnership, sole proprietorship, or other similar pass-through
22   entity, that is not owned in whole or in part by an employee
23   ownership trust, that does not have an employee stock ownership plan,
24   or that is not, in whole or in part, a worker-owned cooperative, and
25   that is approved by the department for the tax credit in this
26   section.
27       (e) "Worker-owned cooperative" has the same meaning as set forth
28   in 26 U.S.C. Sec. 1042(c)(2), as amended.
29       (7) Credits allowed under this section can be earned for tax
30   reporting periods starting on or before June 30, 2029. No credits can
31   be claimed on returns filed for tax periods starting on or after July
32   1, 2030.
33       (8) This section expires July 1, 2030.


34       NEW SECTION.  Sec. 6.   Subject to the availability of funding,
35   the small business collateral support program administered by the
36   Washington state department of commerce as part of the state small
37   business credit initiative program must include program eligibility
38   for the purchase of an interest in an employee stock ownership plan
39   qualifying under section 401 of the internal revenue code, worker
                                     p. 8                          SB 5096
 1   cooperative, or related broad-based employee ownership vehicle,
 2   provided that the transaction results in the employee stock ownership
 3   plan or other employee-owned entity holding a majority interest, on a
 4   fully diluted basis, in the business.


 5       NEW SECTION. Sec. 7. A new section is added to chapter 43.330
 6   RCW to read as follows:
 7       The employee ownership revolving loan program account is created
 8   in   the  custody   of  the   state  treasury.   All  transfers   and
 9   appropriations by the legislature, repayments of loans, private
10   contributions, and all other sources must be deposited into the
11   account. Expenditures from the account may be used only for the
12   purposes of the Washington employee ownership program created in
13   section 2 of this act. Only the director or the director's designee
14   may authorize expenditures from the account. The account is subject
15   to allotment procedures under chapter 43.88 RCW, but an appropriation
16   is not required for expenditures.


17       NEW SECTION.   Sec. 8.   Sections 4 and 5 of this act take effect
18   July 1, 2024.


19       NEW SECTION.   Sec. 9.   This act may be known and cited as the
20   expanding employee ownership act.

                                   --- END ---




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