1. What is SUTA dumping?

1. 1. What is SUTA dumping? SUTA (State Unemployment Tax Act) dumping is a tax avoidance plan used by some employers to change their unemployment insurance tax rate, and thereby, pay less tax. As a result, these employers pass along their proper tax liability to all other employers in the state.

2. 2. What are the penalties for SUTA dumping? HB443 (signed into law on 06/29/2005 with an 08/15/2005 effective date)provides that if a person knowingly violates or attempts to violate any part of the 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 provision, the person shall be subject to the following penalties:

3. Employers who participate in SUTA dumping may be fined up to $10,000 for each incident and may be imprisoned for up to six months.  Individuals who are not employers but participate in this practice (accountants, attorneys, etc.) may be fined up to $10,000 for each incident and may be imprisoned for up to six months.

4. In addition: (1)    if the person is an employer, then such employer shall be assigned the highest rate assignable under this Chapter for the rate year during which such violation or attempted violation occurred and the three years immediately following this rate year. However, if the person’s business is already at the highest rate for any year in which the violation occurred, or if the amount of increase in the person’s rate would be less than two percent for each year, then a penalty rate of contribution of up to two percent of taxable wages shall be imposed for such year. (2)    If the person is not an employer, such person shall be subject to a civil money penalty of not more than five thousand dollars per violation.

5. 3. Does LWC know who is SUTA dumping? Louisiana Workforce Commission has developed several methods to uncover this type of avoidance. In addition, the agency has begun using an automated detection software package.

6. 4. How do employers engage in SUTA dumping to avoid paying the correct amount of taxes? By illegally shifting employees from one entity to another for the purpose of obtaining a lower UI tax rate. This can be done by several methods.

7. Examples of SUTA dumping schemes: 1. Purchased Shell Transaction A business with a large payroll and a high UI rate purchases a corporate shell with a low UI rate and transfers its payroll to the purchased entity.  2.  Affiliated Shell Transaction A new corporation is registered, and a small payroll is reported each year until a low or minimum UI rate is achieved. Once the low rate is achieved, large payroll amounts from another related corporation are transferred into this account.

8. 3. New Employer Rate An employer with a high UI rate files a registration form requesting a new employer account number, which has a lower rate, then the payroll is transferred to the new account. 4. Reporting Under a Client’s Employer Account Number An employee leasing company or professional employer organization (PEO) with a high UI rate shifts its payroll to the account number of one of its clients with a lower UI rate.

9. 5. High Plus High Equals Low A high UI rate account with a large payroll is transferred into another high UI rate account with a small payroll at the beginning of the year. Since the calculation of the average base payroll is on a calendar year basis, only the small payroll is considered. However, the taxes from the large payroll are added to the reserve account balance as of June 30, resulting in a very low UI rate being established for the next year. 6.  Payroll Parking For a fee, two unrelated businesses negotiate to have all or part of the payroll of the higher-rated employer “parked” in the lower-rated employer’s payroll.

10. 5. How can I report SUTA dumping? SUTA dumping hurts all Louisiana employers. For more information, or to report suspected schemes, contact the toll free Business Hotline at 1-800-408-9762.