No more dumping: State Unemployment Tax Avoidance needs to stop.

• Author: Allen, Bruce C.
• Position: GovernmentRelations

SUTA dumping, or State Unemployment Tax Avoidance, typically involves the creation of a new business entity and the transfer of payroll between the old and new entities to reduce unemployment insurance rates.

President Bush recently signed H.R. 3463, the SUTA Dumping Prevention Act of 2004, which is designed to discourage SUTA dumping. The new law requires states to conform as soon as possible and it's likely California will conform sooner, rather than later.

H.R. 3463 creates safeguards to prevent employers from transferring or acquiring businesses simply to avoid higher unemployment insurance rates.

Businesses that engage in SUTA dumping--or attempt to--can expect "meaningful civil and criminal penalties" to be imposed. These penalties also will apply to individuals or businesses who advise others to engage--or attempt to engage--in the manipulation of unemployment insurance rates.

According to U.S. Labor Secretary Elaine L. Chao, "America's unemployed workers and the integrity of the system depend on all employers paying their fair share of unemployment taxes. It's simply not fair to workers, or to the vast majority of employers who play by the rules, for a few unscrupulous employers to set up shell companies to avoid paying their fair share."

How it Works

California's Experience Rating System determines each employer's tax rate by accounting for direct benefit charges; contributions paid in; average size of payroll; and any non-charged benefits or socialized costs.

The California Unemployment Insurance Code prohibits an employer from obtaining a new Employment Development Department account number or using another employer's account number to get a lower rate.

The EDD estimates that underpayments to the state's UI fund due to SUTA dumping are in excess of $100 million.

According to Carl Camden, president of Kelly Services, states borrowing from the federal Unemployment Trust Fund has resulted in a steady depletion of the $52 billion fund balance in 2000 to $17.4 billion today.

EDD Springs into Action

The EDD is aggressively pursuing the identification and review of businesses suspected of UI rate manipulation. Schemes on their radar screen include:

Purchased Shell Transaction -- A business with a large payroll and high UI rate purchases a corporate shell with a low UI rate and transfers its payroll to the purchased entity.

Affiliated Shell Transaction -- A new corporation is registered and a small payroll is reported each year until a...