TheWeekInCongress.com

Week Ending July 16, 2004

HR 3463 SUTA Dumping Prevention Act of 2003

BRIEF

   The bill aims to stop businesses and business advisors manipulating their corporate structure to avoid paying their fair share of State unemployment taxes, a practice known as (State Unemployment Tax Assessment) SUTA dumping. In brief the activity involves manipulating employee files to avoid paying State unemployment taxes.

  Congress acted on the conclusion that $120 million has been lost in taxes from only 14 States over the past three years. Other estimates conclude that California alone, where over 150 companies are being investigated for the violation, lost $100 million in unemployment taxes were lost due to SUTA dumping by corporations there.

   The technique of SUTA dumping, the benefit to the companies and how this bill will help was explained by bill supporter Rep. Cardin. “Unemployment tax payments are determined in part by a company's experience rating, meaning their experience with laying off workers. Companies whose employees receive fewer unemployment benefits have lower tax rates, while those employers whose workers receive benefits more frequently have higher tax rates. To artificially reduce their unemployment taxes, some companies engage in a practice known as State Unemployment Tax Assessment dumping, or SUTA dumping, which allows them to lower their experience rating.”

   “Examples of this practice include the transfer of a company's employees to a fake shell company which has a new and lower tax rate,” Rep. Cardin said. “As a result of this practice, the State loses millions of dollars in proper tax payments and, therefore, has to increase the tax rates on the vast majority of employers who are playing according to the rules. In fact, the Department of Labor has said SUTA dumping eliminates the incentive for employers to keep employees working and returning claimants to work as soon as possible, and it unfairly shifts costs to other employers.”

   “Mr. Speaker,” Rep. Cardin continued, “according to a General Accounting Office survey, three-fifths of the States believe their laws are insufficient to prevent SUTA dumping. That is the reason, Mr. Speaker, we need to act. Fourteen States have reported they have identified specific SUTA dumping cases within the last 3 years, with losses from these cases exceeding $120 million. H.R. 3463 would require States to impose meaningful penalties on employers that engage in SUTA dumping by shifting employees from one shell company to another. More specifically, the bill would require that a company's experience ratings for unemployment taxes follow that portion of the business that is transferred to another company if both corporate entities are ``under substantially common ownership, management or control.'' Additionally, the bill would require penalties be imposed on financial consultants who market SUTA dumping as a tax shelter. Finally, the bill includes a provision allowing State unemployment agencies access to the National Directory of New Hires, which is used to track employment for the purposes of collecting child support. State agencies would use this information to prevent fraud, such as individuals both working and claiming unemployment benefits.”

Sponsor: Representative Wally Herger (R-CA-2^nd)

Vote: Passed House by voice vote (July 14, 2004).

Cost to the taxpayers: Estimates on known cases of dumping total approximately $.5 billion in lost revenue. ## All Rights Reserved. No reproduction or distribution without written permission from TheWeekInCongress.com.