This article was originally published in The State and Local Tax Lawyer, Volume 11, 2006. The article was authored by Charles C. Kearns, and is 24 pages in length.
ABA Editorial Board: Editor in Chief -- Gregory A. Nowak; Managing Editor -- Debra Silverman Herman; Primary Editors -- Brandee Tilman, Jeffrey C. Glickman
Georgetown Student Editorial Board: Managing Editor -- Nathan C. Brunette; Publications Editor -- Kelly Scindian
Note: The following is an excerpt from the introduction to the article as published in The State and Local Tax Lawyer.
In August 2004, President Bush signed the SUTA Dumping Prevention Act 1 ("the Act") with the objective of preventing unemployment compensation tax avoidance through employer manipulation of state unemployment tax acts (SUTAs). SUTA dumping is a tax planning technique whereby a business -- usually one with high employee turnover -- uses the state unemployment insurance (UI) program's experience rating system to reduce the business's UI tax liability. Although SUTA dumping as a planning tool has been around for some time, recent corporate scandals and state fiscal crises may have given rise to an immediate desire to curb the practice. Interestingly, the initial push for federal anti-SUTA dumping legislation pitted employer against employer and tax advisor against tax advisor (in addition to the expected state administrator combatants) because of the private sector's varying degrees of willingness to engage in these transactions.
Not only have SUTA dumping transactions had an effect on the integrity of the federal and state UI systems, the transactions have adversely affected the national and state economies. According to a General Accounting Office report, which helped advance the Act's passage, these transactions have deprived states' UI trust funds of hundreds of millions of dollars. Further, the Congressional Budget Office estimates the Act's long-term effects will increase UI trust fund revenues by $429 million over an 8-year period.
Although some states passed legislation targeted at SUTA dumping prior to the Act 10 and the United States Department of Labor (DOL) increased efforts to curb the practice as well, these actions alone did not sufficiently address the problem caused by SUTA dumps. Federal legislation was necessary.
Part I of this Article provides a brief overview of the federal unemployment compensation program's requirements and the states' role in implementing such requirements. Part II explains the common forms of SUTA dumping transactions and provides several state-specific examples. Part III provides a general overview of the Act, relevant guidance thereon, and analysis of the model statute. Part IV provides a survey of state implementation legislation. The Article ends with a conclusion on the overall efficacy and fairness of the Act, including advice to employers and legislators for dealing with the Act.