Unemployment Tax Cheats on States' Radar


States are beginning to crack down on employers who avoid paying their full share of unemployment taxes through bogus schemes that often leave other employers making up the difference.

Four states Arkansas, Maine, North Carolina and Washington passed legislation in 2003 that imposes heftier fines on employers who manipulate state unemployment rates to lower their unemployment taxes. The problem is known as SUTA dumping. SUTA is the acronym for the State Unemployment Tax Acts (SUTA), a measure that spells out state responsibilities in the nationwide system that provides cash benefits to laid-off workers.

Fourteen states lost more than $120 million in the past three years from employers guilty of SUTA dumping, according to a 2003 report from the General Accounting Office, the congressional watchdog office.

"Half of the problem is already solved," said Gerri Madrid-Davis, senior committee director for the National Conference of State Legislatures' labor and workforce development committee, since 29 states have anti-SUTA dumping laws on the books. Bringing the remaining states up to speed will go a long way to remedy the problem, she said.

SUTA dumping usually comes from a company with a large number of unemployment claims since a high unemployment rate means a higher tax rate. SUTA dumping typically occurs in two ways. A business with a large number of unemployment claims forms a new company to get a lower unemployment tax rate or a company will buy an existing firm with a low number of unemployment claims and use the second firm's lower rate. Either way, the company is "dumping" its original high tax rate.

Some three-fifths of the state unemployment insurance administrators told federal investigators that their state laws fall short in preventing SUTA dumping, Robert J. Cramer, managing director of GAO's office of special investigations, told a congressional hearing on the topic.

North Carolina was first to act, responding to complaints from employers who received flyers and calls from consultants pitching SUTA dumping techniques, according to David Clegg, a spokesman for the North Carolina Employment Security Commission.

The N.C. SUTA dumping law makes it a felony for any person to try to SUTA dump or for a tax advisor to help a company SUTA dump. Clegg said Arkansas, Maine and Washington modeled their state laws after North Carolina's law and that officials from Oklahoma, South Carolina and Virginia expressed interest in following suit.

With the new law in place in May 2003, North Carolina has netted nearly $1 million from six employers the state contacted raising SUTA dumping concerns, Clegg said. The state suspects 50 other employers of SUTA dumping. The cases are part of ongoing investigations. "Rampant SUTA dumping is obvious," Clegg told Stateline.org.

Kelly Services, the second largest staffing services company in the United States, estimates it could have avoided paying $26 million in taxes in 2003 if it used SUTA dumping schemes. The company wants Congress to pass legislation requiring states that already have SUTA dumping laws to enforce them and states that lack such laws to enact them.

A measure in Congress (HR 3463) from Rep. Wally Herger (R-Calif.) would require states to change their unemployment tax acts to address SUTA dumping and to provide penalties on employers and tax advisors who attempt or encourage the practice. Herger chairs the House Ways and Means Subcommittee on Human Resources that held a hearing on SUTA dumping in the summer of 2003. 


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