House Bill 1743, Expanding Employee Ownership (Washington, 2023 Regular Session)

Summary

House Bill 1743 of the 68th Legislature, 2023 Regular Session, State of Washington, an act relating to expanding employee ownership, sponsored by Representatives Doglio, Volz, Schmidt, Reed, Walen, Ormsby, and Pollet. It was read first time on February 3, 2023 and referred to the Committee on Innovation, Community & Economic Development, & Veterans. The bill adds new sections to chapter 43.330 RCW and a new section to chapter 82.04 RCW. Section 1 sets out legislative findings on employee ownership and states that the legislature desires to provide a dedicated program to educate businesses on employee ownership. Section 7 states that certain sections take effect July 1, 2024, and Section 8 gives the short title expanding employee ownership act.

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Full text

     H-0921.1

                                HOUSE BILL 1743


     State of Washington       68th Legislature       2023 Regular Session

     By Representatives Doglio, Volz, Schmidt, Reed, Walen, Ormsby, and
     Pollet

     Read first time 02/03/23.      Referred to Committee   on   Innovation,
     Community & Economic Development, & Veterans.




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;
14       (vii) Create an inventory of employee-owned businesses in the
15   state including employee stock ownership plans, worker cooperatives,
16   and employee ownership trusts; and
17       (viii) Subject to the successful award of federal funding for
18   this purpose, establish a revolving loan program to assist existing
19   small businesses to finance a transition to employee ownership.
20       (b) Loans offered by the revolving loan program must be used to
21   help facilitate the purchase of an interest in an employee stock
22   ownership plan or worker-owned cooperative from the owner or owners
23   of a qualified business, provided that:
24       (i) The transaction results in the employee stock ownership plan
25   or worker cooperative holding a majority interest in the business, on
26   a fully diluted basis; and
27       (ii) If used to assist in the purchase of an interest in an
28   employee stock ownership plan, the employee stock ownership plan: (A)
29   Has appointed an independent trustee; or (B) has, as a trustee,
30   person, or entity, completed education on best practices for employee
31   stock ownership plans.
32       (c) Loans financing the sale of an interest to a worker
33   cooperative shall be extended based on repayment ability and shall
34   not require a personal or entity guarantee. In meeting the
35   requirement in (b) of this subsection, lending guidelines must be
36   established for worker cooperatives not based on any personal or
37   entity guarantees provided by the member owners or the selling
38   business owner. These guidelines may include but are not limited to
39   cash flow-based underwriting, character-based lending, and reliance
40   on business assets.
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 1       (d) In order to support the revolving loan program, the director
 2   or   the   director's  designee  must   apply   for  federal   funding
 3   opportunities that:
 4       (i) Support capitalization of state revolving loan programs; and
 5       (ii) Support businesses that seek to transition to employee
 6   ownership.
 7       (e) Amounts from the repayment of loans offered by the revolving
 8   loan program must be deposited in the employee ownership revolving
 9   loan program account established in section 6 of this act.
10       (3) The director or the director's designee may contract with
11   consultants, agents, or advisors necessary to further the purposes of
12   this section.
13       (4) By December 1st each year, the department must submit a
14   report to the appropriate committees of the legislature on program
15   activities and the number of employee-owned businesses and employee-
16   owned trusts in the state, including recommendations for improvement
17   and barriers for businesses considering employee ownership structures
18   in Washington state. The first report must include rules and
19   guidelines for the administration of the program, as established by
20   the Washington employee ownership commission.
21       (5) For the purposes of this section:
22       (a) "Employee-owned business" means:
23       (i) An employee cooperative established under chapter 23.78,
24   23.86, 23.100, or 24.06 RCW that has at least 50 percent of its board
25   of directors consisting of, and elected by, its employees; or
26       (ii) An entity owned in whole or in part by employee stock
27   ownership plans as defined in 26 U.S.C. Sec. 4975(e)(7).
28       (b) "Qualified business" means a person subject to tax under
29   Title 82 RCW, including but not limited to a C corporation, S
30   corporation,   limited   liability   company,   partnership,   limited
31   liability partnership, sole proprietorship, or other similar pass-
32   through entity, that is not owned in whole or in part by an employee
33   ownership trust, that does not have an employee stock ownership plan,
34   or that is not, in whole or in part, a worker-owned cooperative.
35       (6) Program support shall only be made available to businesses
36   headquartered in Washington state. For the purposes of this section,
37   "headquartered in Washington state" means that Washington state is
38   its principal place of business or the state where it is
39   incorporated.


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 1       (7) The director shall adopt rules as necessary to implement this
 2   section.


 3       NEW SECTION. Sec. 3. A new section is added to chapter 43.330
 4   RCW to read as follows:
 5       (1) The Washington employee ownership commission is hereby
 6   created to exercise the powers in developing and supervising the
 7   program created in section 2 of this act.
 8       (2) The commission shall consist of:
 9       (a) One member from each of the two major caucuses of the house
10   of representatives to be appointed by the speaker of the house and
11   one member from each of the two major caucuses of the senate to be
12   appointed by the president of the senate. The initial term shall be
13   two years; and
14       (b) The following members appointed by the governor:
15       (i) Five members who represent the private sector or professional
16   organizations as follows:
17       (A) One representative of a small business utilizing employee
18   ownership structures. The initial term shall be four years;
19       (B) One representative of a large business utilizing employee
20   ownership structures. The initial term shall be four years;
21       (C) One representative from a statewide business association. The
22   initial term shall be two years;
23       (D) One economic development expert, from the private sector,
24   with employee ownership knowledge and experience. The initial term
25   shall be four years; and
26       (E) One representative from a financial institution with
27   expertise in assisting businesses transitioning into an employee
28   ownership structure. The initial term shall be two years; and
29       (ii) Two members who represent the public sector as follows:
30       (A) One economic development expert, from the public sector. The
31   initial term shall be four years; and
32       (B) One representative from the department of commerce, who will
33   chair the first meeting prior to the election of the chair. The
34   initial term shall be four years.
35       (3) After the initial term of appointment, all members shall
36   serve terms of four years and shall hold office until successors are
37   appointed.
38       (4) The commission shall be led by a chair selected and voted on
39   by members of the commission. The chair shall serve a one-year term
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 1   but may serve more than one term if selected to do so by members of
 2   the commission.
 3        (5) The commission shall develop, in consultation with the
 4   director, rules and guidelines to administer the program. Rules and
 5   guidelines for the administration of the program must be included in
 6   the first report to the legislature required in section 2 of this
 7   act.
 8        (6) Before making any appointments to the commission, the
 9   governor must seek nominations from recognized organizations that
10   represent the entities or interests identified in this section. The
11   governor   must  select   appointees  to  represent   private  sector
12   industries from a list of three nominations provided by the trade
13   associations representing the industry, unless no names are put forth
14   by the trade associations.
15       (7) The commission shall conduct market research for the purposes
16   of, or to support, a future application to the federal government for
17   a program to assist in the purchase of an interest in an employee
18   stock ownership plan qualifying under section 401 of the internal
19   revenue code, worker cooperative, or related broad-based employee
20   ownership vehicle.
21       (8) For purposes of this section, a "professional organization"
22   includes an entity whose members are engaged in a particular lawful
23   vocation, occupation, or field of activity of a specialized nature
24   including, but not limited to, associations, boards, educational
25   institutions, and nonprofit organizations.


26       NEW SECTION.   Sec. 4.   (1) This section is the tax preference
27   performance statement for the tax preference contained in section 5,
28   chapter . . ., Laws of 2023 (section 5 of this act). This performance
29   statement is only intended to be used for subsequent evaluation of
30   the tax preference. It is not intended to create a private right of
31   action by any party or be used to determine eligibility for
32   preferential tax treatment.
33       (2) The legislature categorizes this tax preference as one
34   intended to induce certain designated behavior by taxpayers, as
35   indicated in RCW 82.32.808(2)(a).
36       (3) It is the legislature's specific public policy objective to
37   encourage business owners to create an employee stock ownership plan
38   or employee ownership trust, or to convert to a worker-owned


                                     p. 6                          HB 1743
 1   cooperative, that allows the company to share ownership with their
 2   employees without requiring employees to invest their own money.
 3       (4) If a review finds that the number of businesses in this state
 4   offering employee stock ownership plans, employee ownership trusts,
 5   or ones that have converted to a worker-owned cooperative, has
 6   increased because of the tax credit under this act, then the
 7   legislature intends for the legislative auditor to recommend
 8   extending the expiration date of the tax preference.
 9       (5) In order to obtain the data necessary to perform the review
10   in subsection (4) of this section, the joint legislative audit and
11   review committee may access and use any relevant data collected by
12   the state.

13       NEW SECTION.   Sec. 5.   A new section is added to chapter 82.04
14   RCW to read as follows:
15       (1) Beginning July 1, 2024, in computing the tax imposed under
16   this chapter, a credit is allowed for costs related to converting a
17   qualifying business to a worker-owned cooperative, employee ownership
18   trust, or an employee stock ownership plan, as provided in this
19   section.
20       (2) The credit is equal to:
21       (a) Up to 50 percent of the conversion costs, not to exceed
22   $25,000, incurred by a qualified business for converting the
23   qualified business to a worker-owned cooperative or an employee
24   ownership trust; or
25       (b) Up to 50 percent of the conversion costs, not to exceed
26   $100,000, incurred by a qualified business for converting the
27   qualified business to an employee stock ownership plan.
28       (3)(a) Credit under this section is earned, and claimed against
29   taxes due under this chapter, for the tax reporting period in which
30   the conversion to a worker-owned cooperative, employee ownership
31   trust, or an employee stock ownership plan is complete, or subsequent
32   tax reporting periods as provided in (c) of this subsection.
33       (b) The credit must not exceed the tax otherwise due under this
34   chapter for the tax reporting period.
35       (c) Unused credit may be carried over and used in subsequent tax
36   reporting periods, except that no credit may be claimed more than 12
37   months from the end of the tax reporting period in which the credit
38   was earned.
39       (d) No refunds may be granted for credits under this section.
                                     p. 7                          HB 1743
 1       (4)(a) The total amount of credits authorized under this section
 2   may not exceed an annual statewide limit of $2,000,000.
 3       (b) Credits must be authorized on a first-in-time basis.
 4       (c) No credit may be earned, during any calendar year, on or
 5   after the last day of the calendar month immediately following the
 6   month the department has determined that $2,000,000 in credit has
 7   been earned.
 8       (5)(a) The department may require persons claiming a credit under
 9   this section to provide appropriate documentation, in a manner as
10   determined by the department, for the purposes of determining
11   eligibility under this section.
12       (b) Every person claiming a credit under this section must
13   preserve, for a period of five years, any documentation to
14   substantiate the amount of credit claimed.
15       (6) For the purposes of this section:
16       (a) "Conversion costs" means professional services, including
17   accounting, legal, and business advisory services, as detailed in the
18   guidelines issued by the department, for: (i) A feasibility study or
19   other preliminary assessments regarding a transition of a business to
20   an employee stock ownership plan, a worker-owned cooperative, or an
21   employee ownership trust; or (ii) the transition of a business to an
22   employee stock ownership plan, a worker-owned cooperative, or an
23   employee ownership trust.
24       (b) "Employee ownership trust" means an indirect form of employee
25   ownership in which a trust holds a controlling stake in a qualified
26   business and benefits all employees on an equal basis.
27       (c) "Employee stock ownership plan" has the same meaning as set
28   forth in 26 U.S.C. Sec. 4975(e)(7), as of the effective date of this
29   section.
30       (d) "Qualified business" means a person subject to tax under this
31   chapter, including but not limited to a C corporation, S corporation,
32   limited    liability   company,    partnership,   limited   liability
33   partnership, sole proprietorship, or other similar pass-through
34   entity, that is not owned in whole or in part by an employee
35   ownership trust, that does not have an employee stock ownership plan,
36   or that is not, in whole or in part, a worker-owned cooperative, and
37   that is approved by the department for the tax credit in this
38   section.
39       (e) "Worker-owned cooperative" has the same meaning as set forth
40   in 26 U.S.C. Sec. 1042(c)(2), as amended.
                                     p. 8                          HB 1743
 1       (7) Credits allowed under this section can be earned for tax
 2   reporting periods starting on or before June 30, 2029. No credits can
 3   be claimed on returns filed for tax periods starting on or after July
 4   1, 2030.
 5       (8) This section expires July 1, 2030.


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


18       NEW SECTION.   Sec. 7.   Sections 4 and 5 of this act take effect
19   July 1, 2024.


20       NEW SECTION.   Sec. 8.   This act may be known and cited as the
21   expanding employee ownership act.

                                   --- END ---




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