James F. Mahoney, Attorney

November 2010

Mind the (Tax) Gap

Independent contractor reclassification and the trucking industry: State and
federal agencies seek new taxes by modifying trucking business models

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With a nod to the free market in each of their measured introductory statements, a host of governmental and regulatory arms are reaching out to embrace the trucking industry with tax and operational bear hugs. While acknowledging that independent contractors provide flexibility and needed capacity to our industry and to the labor market in general, the degree of scrutiny over independent contractor usage is gaining in intensity across the country.

The Internal Revenue Service, both Houses of Congress, the U.S. Department of Labor, the National Conference of Insurance Legislators, the International Association of Industrial Accident Boards and Commissions, the National Association of Insurance Commissioners and, at last count, sixteen states have introduced legislation, passed laws, lobbied for, initiated administrative action items, wrote protocols, or otherwise voiced specific intentions to correct the “misclassification” of independent contractors, all in the name of increased revenue, social justice, broadening access to mandated leave and benefits and, of course, job security.

The Treasury’s Inspector General’s Tax Administration Agency issued a report aptly entitled “While Actions Have Been Taken To Address Worker Misclassification, an Agency-Wide Employment Tax Program and Better Data Are Needed.” In it, the agency estimates that the IRS has a “net tax gap” of more than $290 billion because of employee misclassification alone.

The National Association of Insurance Commissioners, in a joint effort with the Legislative Affairs Committee of the National Conference of Insurance Legislators, are actively promoting model state legislation entitled “Proposed Trucking and Messenger Courier Industries Workers’ Compensation Model Act,” in an effort to “establish clear criteria to determine employee and independent contractor status for Workers’ Compensation coverage purposes.”

Unlike federal employment tax law, and distinct from private insurance carriers who may wish to maximize and preserve premium, state unemployment compensation statutes are written with the goal of including as many workers as reasonably possible within the definition of “employee.” The 50 states generally use either of two standards to determine whether a worker is an employee. These rules are the “ABC” rule and the common law rule. More state agencies and administrative law judges are presuming that workers are employees and that increasingly requires businesses to meet a substantial burden of evidential proof to the contrary.

Section 530 of the Revenue Act of 1978 and as extended indefinitely in 1982 by the Tax Equity and Fiscal Responsibility Act, was created to establish a “safe harbor” allowing a business to treat workers as independent contractors regardless of the common law test. It is now challenged by two branches of government in more than a few efforts.

Two bills have been introduced in Congress this year that would not only discourage businesses from issuing legitimate Form 1099s to contractors, but would require businesses to specifically inform workers how to challenge their independent contractor classification. With the change in Washington this November, we might think Congress will not report these bills out of committee, but the overall tenor of a Congress searching for revenue resonates among competing party affiliations. The Administration’s 2011 Budget proposed to “increase certainty with respect to worker classifications” by modifications of Section 530.

On the litigation front, marquee lawsuits in so many states against the large couriers and others only heighten the public’s perception that businesses are avoiding proper tax assessments. FedEx recently was able to sidestep an assessment of $319 million by use of Section 530 “safe harbor.” If the safe harbor rule goes, we can expect heightened attention from both federal and state entities that would look to rush into the vacuum.

The Future – Immediate Considerations

As members of The Arizona Trucking Association - an organization dedicated to preserve and grow the trucking industry in our home state and region - we have a golden opportunity to direct our future. First we must hone the message we deliver to our elected and appointed state and national officials. Our independent contractor model is ingrained in our operations and figures strongly in our revenues. The Great Recession was a time when we utilized the contractor system to best advantage, which enabled us to remain flexible, conserving capital and, ultimately, to survive. We have to better explain and underscore that message. We know it works, but even we give it only lip service with anecdotal evidence of just why.

Our independent contractor system has given many of us the chance to grow and succeed as real-life American success stories here in our home town. Almost all trucking businesses are run by entrepreneurs nurturing and expanding their horizons with a truck and an account here and there. They are eager to encourage and foster others to do the same.

There are business practices we can implement individually and together as a state-wide organization to preserve the system:

  • We need to look at the lanes we run where owner-operators would best fit and consider competitive bidding for these lanes; or bidding perhaps for certain customers.

  • We must develop and nurture their entrepreneurial spirit by expanding our ATA programs and services tailored to owner-operator needs that will also serve to give us flexible capacity.

  • We need to provide an alternative to “in-house” lease financing; which has become an issue for regulators ready to use the financing as evidence of control.

An effort to preserve our model can dovetail nicely with our record of safety and regulatory compliance. As a tight-knit and well run state association, we have the power and focus to define the future.