Employment tax issues affect newspaper circulation departments.

• Author: Heikkinen, Debra L.

The IRS has identified the employment classification of "home delivery agents" and "rack agents" working in the newspaper industry as a significant issue for its Industry Specialization Program (ISP). Many newspaper publishers treat these workers as independent contractors, and planning opportunities exist for continued treatment as such. However, the Service has intensified its employment tax examinations, with the general view that newspaper publishers should treat carriers and rack agents as employees.

Traditionally, newspaper delivery systems have been either buy-sell arrangements or delivery-for-fee systems. In buy-sell arrangements, home delivery agents purchase and take title to newspapers from the publisher and, in turn, sell them to consumers. The agents in a buy-sell system earn their profit by retaining the excess of the retail price over the wholesale price of the newspapers, less selling expenses. In a delivery-for-fee system, delivery agents earn their profit based on the number of units delivered. Today, many hybrid variations of these systems exist.

As early as the 1940s, Congress recognized the variety of delivery systems and that some did not involve an employment relationship between the newspaper publisher and delivery agents. Consequently, Congress created two statutory exceptions from the definition of employment covering newspaper sales arrangements. Sec. 3121(b)(14)(A) states that newspaper delivery services performed by individuals under the age of 18 are not included in the definition of employment. Sec. 3121(b)(14)(B) generally provides that services performed by individuals in and at the time of sale to the ultimate consumer, in which that individual's compensation is determined by retaining the excess of the sales price over the wholesale price, do not constitute employment. The IRS has sought to limit sharply the availability of this latter exception.

The Service has argued that a newspaper publisher sells newspapers prior to their delivery if the publisher solicits sales and collects subscriber payments. Delivery agents, the IRS asserts, merely deliver newspapers. Consequently, the Service analogizes the home delivery agent's services to those performed by a delivery person who delivers merchandise and is compensated on a "piecework" basis for each package delivered. As a result, the IRS contends the exemption provided by Sec. 3121(b)(14)(B) is not available, since the delivery agent's services are not being...