BILL ANALYSIS
By: Ritter
BACKGROUND AND PURPOSE
States use an "experience rating" system to assign tax rates to a business based on its history of unemployment insurance claims; generally a business with a large number of unemployment claims will have a high experience rating and a correspondingly high tax rate. Employers engage in State Unemployment Tax Act (SUTA) dumping when they try to lower the amount of tax they pay by altering their experience ratings. Some employers lower their experience ratings using a variety of methods, which include the following, among others:
! Purchased shell transactions. Purchased shell transactions occur
when a newly formed company purchases an existing business that has
a low experience rating and, therefore, a lower tax rate than the newly
formed company would have. Under some state laws dealing with
employer succession, the existing business's low experience rating
would be transferred to the newly formed company.
! Affiliated shell transactions. Affiliated shell transactions occur when
an existing business with a high experience rating forms a number of
additional corporations, transfers a small number of employees to those
corporations, and pays unemployment taxes on their wages until the
additional corporations earn a minimum tax rate. Subsequently, major
portions of the original company's employees are moved to one or more
of the new companies to take advantage of the lower unemployment tax
rate, thereby "dumping" the original company's high tax rate.
In 2004, Congress acted on the President’s proposal to end the abusive practice known as SUTA dumping by which some employers pay less than their fair share of state unemployment taxes.
In August of 2004, President Bush signed federal legislation (P.L. 108-295) which requires states to have laws against SUTA dumping in place by 2006, and to impose penalties for violation of the state law provisions on both employers and on tax advisors. The purpose of this legislation is to amend the Texas Unemployment Compensation Act to incorporate federal provisions so that the state remains in conformity with federal law. The penalty for being out of conformity is a greatly increased Federal Unemployment Tax rate for the state’s employers.
SUTA dumping is largely due to advice by tax advisors; the proposed legislation calls for penalties for those who advise businesses to violate state laws.
U.S. Department of Labor recommends that SUTA dumping firms be subject to the maximum tax rate (or a 2% increase, whichever is higher) for 4 years. The proposed legislation incorporates a 2% tax rate increase for violators for 4 years.
RULEMAKING AUTHORITY
Rulemaking authority is granted to the Texas Workforce Commission in SECTION 7, Subchapter E, Section 204.088, Labor Code, PROCEDURES TO IDENTIFY EXPERIENCE-RATING TRANSFERS. This section grants rulemaking authority for establishing a procedure to identify transfers or acquisitions of business.
ANALYSIS
SECTION 1. Amends Section 201.022, Labor Code, EFFECT OF BUSINESS ACQUISITION. The term "employer" is expanded to include all variations in which an individual or employer obtains a business.
SECTION 2. Amends Section 204.081, Labor Code, DEFINITIONS. Creates definitions dividing them by subsections. (1) is delineated as "Compensation experience." (2) Adds the definition of "Person" by specifying the entity involved. (3) Adds the definition of "Substantially common management or control" states specifically the conditions that apply after the acquisition of the organization, trade, or business to make up "substantially common management or control." (4) "Substantially common ownership" is added to define the specific circumstances for having "substantially common ownership."
SECTION 3. Amends Section 204.083, Labor Code, ACQUISITION OF ALL OF EXPERIENCE-RATED ORGANIZATION, TRADE OR BUSINESS AND ADDS "TRANSFER OF COMPENSATION EXPERIENCE" to the title. The amended section now covers acquisitions of all or part of an experience-rated organization, trade or business and sets forth conditions under which the commission shall deny a transfer of compensation experience.
SECTION 4. Renames Section 204.084, Labor Code, ACQUISITION OF PART OF EXPERIENCE-RATED ORGANIZATION, TRADE OR BUSINESS; APPROVAL OF TRANSFER OF COMPENSATION EXPERIENCE WITHOUT SUBSTANTIALLY COMMON MANAGEMENT OR CONTROL OR SUBSTANTIALLY COMMON OWNERSHIP; CONTRIBUTION RATE. The heading states that the section now addresses approval of compensation experience for acquisitions of business that do not have substantially common management, control or ownership.
SECTION 5. Amends Section 204.084, Labor Code, by amending Subsections (a) and (d) and adding Subsections (e) and (f). It sets forth the conditions under which the businesses involved in acquisitions may apply for a transfer of compensation experience and the conditions under which the commission shall deny such a transfer. The section also lays out how the successor employing unit’s contribution rate shall be calculated for both experience-rated and non-experience rated successor employers.
SECTION 6. Amends Section 204.085, Labor Code, CONTRIBUTION RATE FOR SUCCESSOR EMPLOYERS WHEN SUBSTANTIALLY COMMON MANAGEMENT OR CONTROL OR SUBSTANTIALLY COMMON OWNERSHIP EXISTS; CERTAIN PARTIAL ACQUISITIONS . The section now addresses the contribution rate for successor employers when there is substantially common management, control or common ownership, and certain partial acquisitions. A new subsection (a) lays out the computation of an experience rate for a partial acquisition when the compensation experience for the acquisition can be identified and computed. Subsection (b) now clarifies when a new computation of experience rate shall take effect for the successor employing unit with an experience rate. The new subsection (c) parallels (b), but for successor employing units that doesn’t have an existing experience rate. A new subsection (d) sets the contribution rate for a successor engaging in an acquisition solely to obtain a lower contribution rate at the initial contribution rate in Section 204.006.
SECTION 7. Adds four new sections to Subchapter E, Chapter 204, Labor Code by adding Sections 204.0851, 204.087, 204.088 and 204.089
Section 204.0851 CONTRIBUTION RATE FOR SUCCESSOR EMPLOYERS WHEN SUBSTANTIALLY COMMON MANAGEMENT OR CONTROL OR SUBSTANTIALLY COMMON OWNERSHIP EXISTS; OTHER ACQUISITIONS. Sets the computation for a compensation rate for successor employers when substantially common management; control or common ownership exists. According to the new provision (b), the acquiring business shall pay a contribution rate, through the end of the calendar year that takes into account the combined experience rate of both businesses for the prior 36 months. In (c), a successor without an experience rating shall pay at the highest rate of the acquisition(s) through the end of the calendar year. New Subsection (d) lays out the contribution rate calculation for businesses after the end of the first calendar year through the next three years. It also addresses the computation of the predecessor employing unit’s contribution rate.
Section 204.087 OFFENSE; CRIMINAL AND CIVIL PENALTIES. Defines an offense and sets the penalties for persons that advise others to violate the provisions of this subchapter, or commit violations of the subchapter. Violations are Class A Misdemeanors.
Section 204.088 PROCEDURES TO IDENTIFY EXPERIENCE-RATING TRANSFERS. Charges the commission with adopting a rule that establishes procedures for identifying the transfer or acquisition of a business.
Section 204.089 CONFORMITY WITH FEDERAL REGULATIONS. Requires that the commission administer this subchapter in conformity with federal regulations prescribed by the United States Secretary of Labor.
SECTION 8. States that this law only affects acquisitions that occur after the effective date of the Act.
SECTION 9. Provides the effective date of this Act.
EFFECTIVE DATE
Upon passage, or, if the Act does not receive the necessary vote, the Act takes effect September 1, 2005.
The committee amendment puts the Texas Workforce Commission in conformity with the federal government with regard to SUDA dumping. The amendment also makes the bill revenue neutral.
The revision would remove the language which limited the mandatory transfer of experience provision and would therefore meet the Federal requirement that the transfer of experience is mandatory whenever there is substantially common ownership, management or control of the predecessor and the successor, and there is a transfer of trade or business.
Second, the proposed revision to the bill would add the following definition of “knowingly”: The definition would therefore mirror the language used in Section 303(k)(2)(E) of the Social Security Act to define “knowingly” and would therefore conform the bill to Federal law.