Get the Facts About SUTA Dumping
SUTA (State Unemployment Tax Act) dumping is the intentional manipulation of company structure, subsidiary or acquired companies to avoid unemployment insurance (UI) experience rating and higher UI tax rates. It is also called state unemployment tax avoidance or tax rate manipulation.
SUTA dumping is fraud and is prohibited by Maine and Federal Laws. Violators may be charged with a Class D crime and face significant financial penalties. The Maine Department of Labor has developed programs and procedures to detect SUTA dumping. You can also report fraud anonymously by contacting the Maine Department of Labor at (207) 621-5120.
How does SUTA dumping work?
The Maine UI tax system is based on experience rating, which is designed to tax employers at rates that are commensurate with their claims activities, such as number and frequency of layoffs, payment history.
Employers with higher tax rates pay higher tax than lower rated employers, who are rewarded for their strong claims history.
Some of the ways that SUTA dumping is done:
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 corporate is registered and a small payroll is reported each year until a low rate is achieved. Once the low rate is achieved, large payroll from a related company is transferred into this account.
For example, SUTA dumping would mean that an employer would set up a shell company and get the new employer rate of 1.78%. The employer would then shift its old payroll to the new company. The employer would then “dump” the original entity with the higher rate.
Effects of SUTA dumping
SUTA dumping shifts costs to other employers who don’t deserve to pay more. It costs the system money. It eliminates incentive for employers to avoid layoffs.
A 2003 GAO study stated that three out of four accounting firms encouraged clients to engage in SUTA dumping. The study stated that 14 states had identified widespread use of SUTA dumping tactics at a cost of $120 million lost tax revenue.
The study cited employee leasing companies, followed by hospitality and construction companies, as having the highest rate of SUTA dumping practices.
The Law in Maine
Enacted in 2005, as a result of federal law, “SUTA Dumping Prevention Act of 2004,” which required states to enact legislation that prohibits SUTA-dumping and impose “meaningful” penalties to companies and advisors who engage in it.
Prior to enactment of the SUTA dumping provision, cited below, the Employment Security Act relied on the successorship language found in 26 M.R.S.A. § 1221(5) to pass through the experience rating to a company that acquired the business of another employer “in toto.”
The new statute, 26 M.R.S.A. § 1221(5-A), sets forth a more involved process for passing the rate through to the new entity.
The SUTA dumping provision reads, in full:
Transfers of experience and assignment of rates. Notwithstanding subsection 5, the following applies to the assignment of rates and transfers of experience:
(1) An employer transfers its trade or business, or a portion of its trade or business, to another employer and, at the time of the transfer, there is substantially common ownership, management or control of the 2 employers, then the unemployment experience attributable to the transferred trade or business is transferred to the employer to whom the business is transferred. The rates of both employers must be recalculated and made effective immediately upon the date of the transfer of the trade or business. The transfer of some or all of an employer’s workforce to another employer shall be considered a transfer of trade or business when, as the result of such transfer, the transferring employer no longer performs trade or business with respect to the transferred workforce, and such trade or business is performed by the employer to whom the workforce is transferred; and
(2) Following a transfer of experience under subparagraph (1), the commissioner determines that the purpose of the transfer of trade or business was to obtain a reduced liability for contributions, then the experience rating accounts of the employers involved must be combined into a single account and a single rate assigned to such account.
B. Whenever a person who is not an employer under this chapter acquires the trade or business of an employer, the unemployment experience of this acquired trade or budiness is not transferred to that person if the commissioner finds that the person acquired the trade or business solely or primarily for the purpose of obtaining a lower rate of contributions. In such circumstances, the person acquiring the trade or business is assigned the applicable new employer rate under subsection 4-A. In determining whether the trade or business was acquired solely or primarily for the purpose of obtaining a lower rate of contributions, the commissioner shall consider objective factors that may include the cost of acquiring the trade or business, whether the person continued the business enterprise of the acquired trade or business, how long the business enterprise was continued or whether a substantial number of new employees were hired for performance of duties unrelated to the business activity conducted prior to acquisition.
C. If the person knowingly violates or attempts to violate paragraph A or B or any other provision of this chapter related to determining the assignment of a contribution rate or if a person knowingly advises another person in a way that results in a violation of such a provision, the person commits a Class D crime. In addition, the person is subject to the following:
If the person is an employer, then that employer is assigned the highest rate assignable under this chapter for the rate year during which the violation or attempted violation occurred and for the 3 rate years immediately following that rate year, except that, if the person’s business is already at the highest rate for any year or if the amount of increase in the person’s rate would be less than 2% for such year, then a penalty rate of contributions of 2% of taxable wages is imposed for that year; and
If the person is not an employer, that person is subject to a fine of not more than $5,000, which must be deposited in a Special Administrative Expense Fund established under section 1164.
As used in this subsection, unless the context otherwise indicates, the following terms have the following meanings:
“Knowingly” means having actual knowledge of or acting with deliberate ignorance or reckless disregard for the prohibition involved.
“Person” has the meaning given that term by Section 7701(a)(1) of the Internal Revenue Code of 1986.
“Trade or business” includes the employer’s workforce.
“Violates or attempts to violate” includes, but is not limited to, intent to evade, misrepresentation or willful nondisclosure.
The commissioner shall adopt rules to identify the transfer or acquisition of a business for purposes of this subsection. Rules adopted pursuant to this paragraph are routine technical rules as defined in Title 5, chapter 375, subchapter 2-A.
This subsection must be interpreted and applied in such a manner as to meet the minimum requirements contained in any guidance or regulations issued by the United States Department of Labor.
If you have any questions please call the Maine Department of Labor at 621-5120.